Japan’s construction market
EDITOR’S NOTE: This article is based on several reports prepared by commercial officers of the U.S. and Foreign Commercial Service, at the Commerce Department’s office in Tokyo. The authors’ original wording was edited as little as possible, to avoid accidental distortions in meaning. For further information on the U.S.-Japan Major Projects Arrangement (MPA), see the feature article in the July/August Construction Review.
Japan’s construction market, including opportunities for architectural design, consulting, construction work, and building supplies offers particularly good opportunities for U.S. firms at this time.
Market Size
The total value of Japan’s construction market in 1991 is estimated at 618 billion U.S. dollars, including both public and private construction investments. The public fixed capital formation (PECF) consists of 90 percent public construction investment (PCI) and 10 percent general machinery procurement. Plant and facilities investment for private sectors (PFIP) consists of non-residential investment (NRI) and private civil engineering investment (PCI). Of the total private nonresidential fixed investment, structures usually constitute 30 percent of expenditures. The remaining 70 percent is general machinery procurement.
Table 1 provides data from 1987 to 1991 (estimated) on construction investment. Of the two, building construction has outpaced non-building construction (civil work) considerably between those years, 48.5 percent compared to 29.4 percent. And within the building sector, non-residential building construction far surpasses residential construction (79.6 percent compared to 26 percent).
Growth, however, in all categories of construction investment fell off considerably from 1990 to 1991, compared with earlier years. As shown in Table 2, this largely was due to a drastic decline in private investment, beginning in 1991.
In the 1989-91 period, the construction investment portion of Japan’s gross national product rose well above that of 1985-86. According to the Annual Report on National Economy Calculation, construction investment as a percentage of GNP rose from 15.4 percent in 1985 to 18.8 percent in 1991. (See Table 3.)
Market Assessment
Public Investment
In accordance with “The Fourth National Development Plan” published by the National Land Agency in 1987, public fixed capital formation, including national infrastructure investments, will reach an total of 1,000 trillion yen ($US 7.14 trillion) by 2000.
According to the final report issued by the U.S. Government (USG) and the Government of Japan (GO J) in September 1990 on the Structural Impediments Initiative (SII), the GOJ will launch the “Basic Plan for the Public Investment,” in which an aggregate investment expenditure of about 430 trillion yen (US$3 trillion) will be made for the decade from JFY 1991 to JFY 2000.
In May 1988, the USG and GOJ agreed that the GOJ should implement special measures to familiarize American firms with Japan’s construction market. In an official exchange of letters, which are referred to as the “Major Project Arrangements” (MPA 1988), 14 major public and private projects were designated as the “Special Measure” projects. The value of these 14 designated projects amounts to approximately US$17 billion.
In June 1991, the USG and GOJ reviewed the results of the 1988 MPA, and the two governments agreed to add another 17 projects to the “special measure” project list (MPA 1991). The value of these newly-added projects will amount to US$6.3 billion. As of April 1991, 75 percent of the possible tenders for the MPA 1988 projects remain. The current value of the 31 designated projects is approximately US$19 billion.
In Japan’s Fiscal Year (JFY) 1991 National Budget, the portion portions of the public investment have been allocated to public housing, living environment, land development and maintenance, and development of roads, transportation, and telecommunications. The major commissioning authorities for public works are (1) National Government and public corporations, (2) prefectural government agencies, (3) municipalities, and (4) third sectors (quasi-government sectors). Japanese public works can be divided into four categories: (1) preliminary studies and basic planning, (2) architectural design work, (3) construction works, and (4) procurement of materials and equipment.
These public commissioning authorities usually conduct preliminary studies, basic planning and architectural design work on their own through their in-house engineers, but if a monumental building is to be built, they place tenders for design work or conduct a “design competition.”
Japan’s public investment market will grow steadily, offering U.S. construction and related industries remarkable market opportunities, particularly through the term of MPA 1988 and 1991.
Private Investment
Total private construction investments in 1990 are estimated at US$600 billion. In Japan, public works represent about 33 percent of construction investment, whereas private works represent 67 percent. When the economy stagnates, public works takes a larger share of the market, as they did in the 1980’s, exceeding 40 percent.
Roughly 90 percent of private investment is in building construction, while 80 percent of public works is in civil engineering projects. (See Table 2.) As regards the geographical location where private investment is implemented, approximately 60 percent has been carried out in the three major industrial areas, Kanto (Tokyo-centered area), Chubu (Nagoya-centered area), and Kinki (Osaka-centered area). See Table 4 for geographic data.
According to the “Ministry of Construction Order Survey,” conducted among 50 major general contractors, orders placed by public authorities increased 10.4 percent, compared with the figures between 1985 and 1988, while private organizations showed a remarkable growth of 80.7 percent during the same period. Above all, the private sector’s orders offered by commercial, tertiary, and financial industries increased their orders by 32.1 percent, and similarly, real estate developers’ orders rose by 22.1 percent.
According to a survey conducted by the Japan Federation of Construction Contractors (JFCC), respondents to the survey (51 JFCC members) predicted that the increase in orders by non-manufacturing firms will exceed those of manufacturing companies. The construction work to be ordered by non-manufacturing firms will be office buildings, shopping facilities, warehouses, and physical distribution facilities, while manufacturing firms will place such construction orders for factories, company housing, and employee recreational facilities, according to the survey.
A short-term demand analysis conducted by the JFCC predicts a possible downturn for the next one to two years, because of elimination of the so-called “bubble factor” (extremely easy financial positions attributed to low interest rates and rapid growth of loaning capacities of private firms due to skyrocketing land and stock prices). The JFCC forecasts that “The current slowing of demand is, however, only cyclical and factors such as the ripple effect of scheduled public investment of 430 trillion yen over the next 10 years should be enough to ensure the maintenance of a steady growth of construction demands.” The JFCC also believes “…as the building stock increases over the longer term, so we may also expect increasing demands for management and maintenance services and for renovation works.”
Best Sales Prospects
Japanese public commissioning authorities are reported to place more than 330,000 tenders a year. There are no statistical data on tenders offered by private authorities, but the U.S. & Foreign Commercial Service in Tokyo (USFCS) estimates that they placed 10 times as many tenders as those of public organizations; this figure includes private housing projects.
Table 5 is a list of 31 designated projects for MPA 1988 and 1991. The USFCS believes that these projects can be regarded as the “Best Sales Prospects” because special measures for enhancing U.S. firms’ participation are applied.
Market Share of U.S. Firms
No official statistical data on the market share held by the United States or other foreign competitors are available. In terms of the designated projects in MPA 1988, however, the Ministry of Construction estimated in April 1991 that U.S. architectural design, consulting, and general contractors won about 44 billion yen (US$314 million), including goods and machinery procurement for the MPA-1988 designated projects for the period between JFY 1988 and 1990. Apart from these designated projects, U.S. firms obtained 16 billion yen ($114 million) in contracts from private organizations. No data are available regarding total imports of construction services and products.
Even though little quantitative information exists to establish foreign market shares of Japan’s construction sector, competitive factors can be analyzed qualitatively. First of all, U.S. architectural design, consulting and construction companies (hereafter referred to as “U.S. construction firms”) have more experience than their Japanese counterparts in building design and construction.
Second, U.S, construction firms have accumulated expertise in grand and conceptual design of large-scale projects such as development, redevelopment, resort, commercial-zone, and housing projects.
Third, U.S. construction firms have developed a high degree of advanced technology.
Fourth, U.S. construction firms have established advanced management systems for construction projects. Although these methodologies are highlighted by Japanese construction firms, such concepts have not taken root in Japan’s conventional procurement procedures. In the near future, such expertise will be required to cope with labor shortages and rising construction costs in Japan.
U.S. construction firms should develop marketing strategies to demonstrate their unique expertise and techniques with regard to specific projects. To cope with the diversifed needs of contract-letting authorities, U.S. firms need to obtain early information on projects. This can be done by establishing good will with these authorities.
In setting up effective information collection networks, U.S. construction firms should consider the priority areas of construction projects to participate in, such as conceptual design of large buildings, consulting services for advanced civil engineering work, interior design for office buildings, construction work for offices, and commercial, academic, and plant buildings and facilities. Since a national-scale project tends to have many areas of development, U.S. firms should set up target areas with appropriate contact people.
In conducting sales activities, visual aids are very important. U.S. firms should bring as many photos as possible to appeal to clients visually.
The U.S. Foreign and Commercial Service recommends that U.S. firms visit each Major Project Office according to the location of the project in which they are interested, namely the American Consulate General and Embassy in Hokkaido, Tokyo, Nagoya, Osaka, and Fukuoka, to receive counseling services on how to create a tailormade strategy for the project.
Market Access
License Requirements
Firms which wish to do construction work must obtain a construction license in accordance with the Construction Business Law in Japan. U.S. firms can obtain licenses either as a branch office or subsidiary company. Firms which perform survey or design services as a subcontractor for a licensed firm in Japan are not required to obtain construction licenses. Firms which conduct design services as a prime contractor or consortium firm, however, are required to obtain an architect license under the Architect Law in Japan.
To obtain licenses, foreign firms are required to register their company at the Legal Bureau before applying for licenses. Since some technical matters are involved in filling out application forms, U.S. firms should first consult with USFCS/Japan. An informative booklet titled “From Obtaining Construction Licenses to Winning Contracts” is available at the contact point of the Minstry of Construction.
There are 28 kinds of construction licenses in Japan. Licenses are needed for civil engineering work, architecture, electrical work, steel structural work, glass work, and lanscaping. Generally, to obtain a contractors license, a company must satisfy the following requirements: (1) employ qualified managers and qualified full-time engineers and (2) demonstrate credibility in executing contracts and financial reliability. Concerning the qualifications of managers and fulltime engineers, employees whose experiences were gained abroad or whose licenses were granted in the United States can serve as qualified managers or fulltime engineers in Japan when the Ministry of Construction so authorizes, based upon a review of the application.
Consultants Licenses
No license is required for construction consultants in Japan. The Minister of Construction, however, has a registration system for construction consulting firms.
Architectural Licenses
In Japan, architectural designers and construction supervisors are required to obtain the license of a first-class architect, second-class architect, or wooden building architect, in accordance with the use, scale, and type of structure involved. When a person or a corporation engages in architectural design or construction supervision, registration as an architect is required.
Business Practices
Procurement procedures of construction services can be divided into two categories: procurement by the private sector and procurement by public commissioning entities.
Firms in the private sector usually employ either the “discretionary contract method” or the “comparison cost estimate system.” In the case of the former, a private sector organization selects a suitable firm to do the work, based upon the type of construction involved. Under the latter system, several firms which are considered to be suitable for the work are invited to submit estimates, and the firm whose estimate is declare the most reasonable will be selected.
Most contracts for public works in Japan are under the jurisdiction of the Ministry of Construction are awared through “designated competitive bidding” (DCB). Other public agencies, such as the Ministry of Transport, the Ministry of Education, and the Ministry of Health and Welfare, follow DCB procedures in principle similar to those of the Ministry of Construction.
In conducting DCB, generally, a commissioning authority selects several firms that are thought to be suitable as candidates for the work to be bid on in terms of the candidate firms’ financial strength, credit, operational capacity, and other relevant factors.
DCB is controlled by “Accounting Law” in Japan, and detailed designation procedures are stipulated in a tender notice for MPA projects. For non-MPA projects, foreign firms are encouraged to go over the procedures with each public commissioning authority.
Special Measures
“Special measures” (SPM’s) are arrangements agreed to between the USG and the GOJ so that U.S. construction-related companies, such as design firms, consultants, construction companies, and building materials suppliers may become familiar wd)ith Japanese bidding procedures for major public works. SPM were stipulated in the U.S.-Japan Major Project Arrangement (MPA) in May 1988. In June 1991, the contents of MPA were reviewed, and the USG and the GOJ agreed to amend some parts of MPA 1988 in the revised form of MPA 1991.
The functions of the SPM can be divided into three elements:
(1) The “ranking process,” in which the public commissioning authorities screen candidate-designated firms for a public works project for the aforementioned “Designated Competitive Bidding.” The authorities consider the past performance and work records compiled by U.S. firms outside of Japan as equal to the performance achieved in Japan. In other words, for public works to which the SPS is not applied, U.S. firms’ achievement in overseas countries are not officially counted as the firms’ actual past experience in conducting public construction work in Japan.
Since, in Japan, conventional past performance is one of the most crucial factors to evaluate the credibility of construction firms, U.S. firms tend to suffer from significant disadvantages in such conventional practices. The conventional practice is a “Catch 22” for U.S. firms undertaking public works in Japan, but the SPM has improved this problem in those cases where it has been employed.
(2) The SPM has extended the duration between the tender periods, so that U.S. firms may have sufficient preparation time for bidding. The SPM stipulates that the period from an official tender notice to designation should be 30 days, from the designation to the bid conference should be 40 days for public construction work.
Despite SPM, the rules and content of tenders still differ, even for MPA projects. All U,S. firms should seek counseling and advice on the individual nature of each project from USFCS, the appropriate contact in the GO J, and non-governmental sources such as the American Chamber of Commerce in Japan.
(3) SPS provides special avenues for expressing complaints and grievances concerning the public tender process in Japan’s construction market. Since there are other factors stipulated in the MPA, U.S. firms are encouraged to receive briefings at USFCS to fully utilize advantages they offer.
Research and Development
The Japanese construction industry places great importance on research and development. The contractors’ emphasis on research and development is a reflection of the view of Japanese society as a whole, which sees R&D as a commitment to the future.
Construction research and development in Japan is concentrated in the major contractors. According to a leading construction journal, the six largest firms, Shimizu, Kajima, Taisei, Takenaka, Ohbayashi, and Kumagai Gumi, accounted for over one-third of total construction research and development expenditures in 1988. This came to slightly under 55 billion yen (US$398.6 at mid-1991 exchange rates) out of a total of 148 billion yen (US$1.07 billion). As of August 1991, according to the Asian Wall Street Journal, Japanese contractors now spend about $US2 billion a year on research.
The construction companies in turn seek partnerships with academia, government bodies, and other Japanese or foreign private industry representatives for specific projects.
U.S. Building Materials and Products
Likely to Sell in Japan
In conjunction with the Global Business Partnership Program and the Presidential visit in January 1992, the U.S. Embassy requested that the Ministry of Construction (MOC) take action to promote imports of U,S. building products by Japanese general contractors, The USFCS/Japan and OIMP jointly prepared a list of 47 building materials to be promoted in Japan and delivered it to the MOC, which surveyed Japanese general contractors regarding these items and submitted its results to USFCS/Japan.
The survey was conducted in February and March 1992 among 16 general contractors which belong to the Building Materials Subcommittee of the Building Contractors Society. The intent was to investigate opinions on the 47 building products referenced above. The questionnaire for this survey consisted of these four parts: (1) medium- and long-range views regarding use of foreign-made building materials (FBM), (2) present applications of FBM, (3) evaluation of the 47 items, and (4) requests to U.S. building materials suppliers. Major findings of the Survey:
1. Medium- and long-range views regarding use of FBM. Fifteen firms responded to this question. Five firms stated that they will expand their use of FBM, and six firms replied that if FBM can satisfy their requirements, they will use them.
2. Present applications of FBM. There are two channels through which FBM are imported into Japan: (a) direct import by general contractors and (b) import through Japanese trading companies. In general, the import amounts of the latter substantially exceed the former. However, since it is difficult for the MOC to survey many diverse trading firms, this survey was conducted only on the former. Therefore, absolute values in this survey do not represent the total FBM import, but the qualitative findings of this survey can represent the general perceptions of Japanese general contractors on imported FBM.
The total value of FBM imported and sold by general contractors amounted to 16.6 billion yen (US$126 million at US$=130 yen in 1990). Of the total value of FBM, stone products, kitchen equipment, machinery/equipment installed in buildings, and wood products amounted to 56.4, 4.9, 4.6, and 3.8 percent, respectively. Countries from where FBM are imported were the European Community countries (49.4 percent), USA (14.9 percent), and Southeast Asia (12.6 percent),
3. General evaluation of the 47 items: Respondents stated that they find some advantages to U.S. building materials and products as follows: (a) stone products and glass: U.S. products have good variety; (b) kitchen systems: U.S. products are superior in terms of design and function to those made in Japan.
4. Disadvantages in using U.S. products, as expressed by the respondents:
(a) Distribution and information on U.S. building materials
Some building materials must be delivered to construction sites directly by contractors which use the material. (Note: this practice is called “goods procurement cum installation work (GPCI).” If a U.S. building material belongs in the category of the GPCI, either U.S. exporters must come to Japan and install their products, or the U.S. exporter has to link up with a Japanese installation contractor.
There are few Japanese trading companies which handle U.S.-made building materials, and very limited information on U.S.-made building materials is available in Japan. There are few U.S. agents and distributors for U.S.-made building products.
Quality of U.S. building materials
U.S. product quality tends to be inferior to that of Japanese products. Even when the same types of U.S. products are imported in large quantity, there have been cases where quality was inconsistent.
The quality consciousness of U.S. suppliers seems to be low. There are U.S. suppliers which are not able to cope with the quality requirements of Japanese users. This tendency is particularly noticeable on stone materials. For example, Japanese users strongly require consistent patterns and colors on stone products. Also, U.S. firms tend not to provide comprehensive quality warranty/assurance.
After-sales service
U.S. firms tend not to provide comprehensive after-sales service.
Delivery
Delivery time for U.S. building materials is much longer than that of Japanese suppliers. There are U.S. suppliers which do not observe the delivery time.
Price
When U.S.-made products are used, buyers must purchase extra products for contingency. When products are purchased from a Japanese supplier, it can deliver additional amounts on the spot. U.S. products’ price, therefore, tends to be high, compared with that of Japanese products. Moreover, importers must bear foreign exchange risks.
Other disadvantages
The format of U.S. drawings are different from those of Japanese drawings. It takes time for users to check the applicability of U.S. products in a U.S. drawing.
When the design is changed in the middle of construction, it takes more time for U.S. firms to adjust shipment of different products. U.S. firms tend to request orders in large lots. It takes time for users to check the quality of U.S. products.
Size indications of foreign-made pipes and wires based upon ASTM, DIN, BS, etc. tend to be different from JIS indications.
5. Specific comments on U.S. building materials. Japanese users cannot use U.S. products which do not satisfy the following conditions:
Foreign-made building supplies in general: when design specifications require JIS- or JAS-standard products, contractors cannot use U.S. products which have not obtained such certification.
Interior building supplies: there are not specific requirements, in general, on interior building materials used in a residence or small office. U.S. interior building supplies, therefore, can be used without particular limitations. However, when U.S. ceiling and wail materials are used in special facilities, such as theaters or department stores, noncombustible certification is required. U.S. products which have not obtained this certification will not be used.
Exterior building supplies: exterior building supplies used in the following areas must be certified as having “anti-fire structure” or “fireprevention structure” in accordance with Japanese building codes. U.S. building products which have not obtained this certification cannot be used.
Steel scaffolding: U.S. products which have not obtained certification in accordance with Japan’s Industrial Safety and Health Law will not be used.
Lighting equipment: U.S. products which have not obtained certification in accordance with Japan’s Electric Appliance and Material Law will not be used.
Building supplies for skyscrapers: curtains and carpets to be used in skyscrapers, which have not submitted test results to the Japan Disaster Prevention Association, will not be used. Requests to U.S. building materials suppliers Establish sales channels and maintenance service systems in Japan. U.S. firms need to be able to adjust to design changes even in the middle of construction, although it may call for unexpected adjustment of shipment. U.S. firms should establish comprehensive service activities for quality warranty, delivery, and maintenance, repair services for damages occurring during shipment, grievance procedures, and comprehensive after-sales procedures.
Make efforts to clear standards requirements in Japan. Obtain the JIS.
Observation of delivery time is critical.
Sales promotion activities: U.S. firms should set up Japanese offices or agents/distributors and conduct sales promotion activities to general contractors, design firms, and commissioning entities.
Sufficient preparation to participate in Japanese market: U.S. firms should develop products which are suitable to the Japanese climate and customers’ inclinations. U.S. firms should prepare product brochures, catalogs, and specifications in Japanese since most Japanese customers do not speak English. U.S. firms should employ a person who speaks Japanese. U,S. firms should study standards and legal requirements before marketing products in Japan. To market products, U.S. firms should understand the sales and distribution channels of the same line of products in Japan.
Contacts for further information:
Interested businesses should not contact U.S. commercial officers in Japan until after they have consulted with Commerce Department trade specialists in the United States. In addition to the staff of local Department of Commerce district offices, the following experts can be contacted.
1. The Japan Export Information Center is the primary contact point in the Commerce Department for business counseling and information necessary for U.S, firms to succeed in Japan. The Center’s publication, Destination Japan:/1 Business Guide for the ’90s,is recognized as one of the best introductions to doing business in Japan. For further information contact:
Edward Leslie, Deputy Director
Cynthia Campbell
Allan Christian
Eric Kennedy
U.S. DEPARTMENT OF COMMERCE
Japan Export Information Center Room 2318
Constitution Ave. & 14th St., NW
Washington, D.C. 20230
202-482-2425
2. The International Major Projects Division is especially helpful for U.S. businesses wishing to take advantage of the U,S.-Japan Major Projects Arrangement. Contact:
Walter Haraguchi International Major Projects Division Room H4045 U.S. Department of Commerce Washington, D.C. 20230 202-482-5226
3. For U.S. companies wishing to export building materials, contact:
Franklin E. Williams
Forest Products and Building Materials Division Room H4043 U.S. Department of Commerce Washington, D.C. 20230 202-482-0133
COPYRIGHT 1992 U.S. Department of Commerce
COPYRIGHT 2004 Gale Group
