Determining Your Business Model

As indicated earlier, here are some of the popular business models used for subsidiaries of foreign companies:

Cost–plus model

Under this arrangement, the subsidiary’s primary purpose is to provide support services on behalf of the parent. The subsidiary would periodically bill the parent for the costs incurred, plus a reasonable markup depending on the nature of service(s) provided. The primary purpose of the subsidiary’s services is to support the parent, therefore activities of the subsidiary will be restricted. Normally, to implement this successfully, relationships with domestic distributors are necessary to consummate a sale.

Commissionaire model

Under this arrangement, subsidiary’s primary purpose is to act as a sales agent on behalf of the parent. Local distributors and customers will buy goods and/or services from the parent and then remit the appropriate funds to the parent directly. However, sales activities, which were prohibited in the previous model, are permitted in this model. The subsidiary would periodically bill a certain percentage of its sales as a sales commission for its services rendered.

Buy-sell model

Under this arrangement, subsidiary will accept orders from distributors and customers. If the subsidiary carries inventory, the goods will be shipped and subsequently billed directly to the local customer. If the entity does not carry inventory, a purchase order is placed with the parent or affiliate and the goods will then be shipped to the customer/distributor. The subsidiary generates profits from the profit margins of buying and subsequent selling. The cost–plus model is generally popular for companies that have fewer than five employees and have a distributor(s) to support its sales activities. The buy–sell model will become feasible once the subsidiary has sufficient orders to carry inventory and has the capability to make timely deliveries.

The cost–plus model is generally popular for companies that have fewer than five employees and have a distributor(s) to support its sales activities in Japan. The Buy–sell model will become feasible once the JPCO has sufficient orders to carry inventory and has the capability to make timely deliveries.

See more at Doing Business in Japan (Kreston Internartional) >>