An Overview of the Japanese Distribution System: The Case of the Automobile Industry

An Overview of the Japanese Distribution System: The Case of the
Automobile Industry by Sayuri Shirai

The Japanese distribution system has been considered as one of the
structural impediments inhibiting market penetration by foreign
manufacturers. The system, characterized by a large number of retailers
with a multilayered wholesale structure, has also been criticized for
lowering social welfare in Japan, as it is inefficient and imported products
have high prices. This paper surveys the recent literature on the Japanese
distribution system and considers two propositions: first, that the system
is inefficient, and second, that prices of imported products tend to be
higher in Japan than in other markets. The paper observes that most of the
literature demonstrates that the Japanese distribution system is as
efficient as that of other developed countries.

The efficiency of the system has not necessarily resulted in high
social welfare, however, as consumers have had limited access to various
product lines. In fact, some studies show that the prices of a number of
imported products have been substantially higher in Japan than in other
developed countries. It has also been pointed out that the sales-
distribution keiretsu system, as well as the sole representative import
system, might have significantly affected such price differentials. In the
sales-distribution keiretsu system, domestic manufacturers control dealers
with exclusive dealership arrangements, territorial restrictions,
complicated rebate systems, and resale price maintenance systems. As for
the sole representative import system, foreign manufacturers sell their
products to importers who distribute the products by obtaining exclusive
sales rights.

As a case study, the paper examines the distribution system in the
Japanese automobile industry, where it has experienced a small amount of
import penetration and substantial net exports. The paper concludes that
the sales-distribution system limited foreign manufacturers' access to the
dealers owned by domestic manufacturers. Because of the high initial set-up
costs to establish new dealer networks, foreign manufacturers depended
heavily on the sole representative importers. This dependence may have
provided retail price-setting power to these importers, which probably
increased distribution margins. The high distribution margins set by
importers or their dealers can partly explain the high prices of imported
automobiles. Also, this paper predicts that the recent increase in parallel
imports will help lower distribution margins through intense intra-brand
competition and thus, will reduce price differentials.