Doing Business in Michigan for Japanese Companies

Published By

Warner Norcross & Judd LLP

TABLE OF CONTENTS

Introduction................................................................................................................................... 1 I. Michigan Overview .......................................................................................................... 2

Michigan Facts ................................................................................................................... 2 Economic Indicators........................................................................................................... 2 Welcoming Climate for Non-U.S. Business....................................................................... 2 Industries ............................................................................................................................ 3 Cost of Living and Doing Business.................................................................................... 4 Strategic Location and Logistics ........................................................................................ 4 Strong Labor Force............................................................................................................. 4 Higher Education................................................................................................................ 5 Abundant Resources........................................................................................................... 5 Lifestyle.............................................................................................................................. 5 Tourism .............................................................................................................................. 5

II. Doing Business in the U.S. ............................................................................................... 6 Minimal Regulation of Foreign Investment ....................................................................... 6 Regulation of Foreign Investment ...................................................................................... 6 Site Selection and Incentives.............................................................................................. 7 Facilities/Real Estate .......................................................................................................... 7 Immigration ........................................................................................................................ 8 Labor and Employment ...................................................................................................... 9 Financing Operations in Michigan ................................................................................... 10 Buying and Selling Products/Services.............................................................................. 11 Taxation............................................................................................................................ 11 Import/Export Regulations ............................................................................................... 12 Risk Management............................................................................................................. 13

III. Entry to North American and Global Markets (via Michigan) ................................. 14 Sales Representatives, Distributors and Licensed Manufacturers.................................... 14 Establishing a Wholly-Owned Subsidiary ....................................................................... 15 Investing in and Joint Ventures with existing Michigan Businesses ............................... 16 Joint Ventures / Strategic Alliances ................................................................................. 16 Investing in a U.S. Company............................................................................................ 16 Acquiring a U.S. Company .............................................................................................. 17

IV. Business and Cultural Environment............................................................................. 18 Japan-related Associations in Michigan........................................................................... 19

V. Getting Started / Available Resources.......................................................................... 20 Economic Development Organizations............................................................................ 20 U.S. Commercial Service ................................................................................................. 20 Financial Institutions ........................................................................................................ 20 Business Advisors, Consultants and Brokers ................................................................... 21 Trade Associations ........................................................................................................... 22

About Warner Norcross ............................................................................................................. 22 Disclaimer .................................................................................................................................... 23

Introduction

Thank you for taking the time to read this publication, “Doing Business in Michigan: A Manual for Japanese companies.” You have opened this manual for a variety of personal and professional reasons. Most of you are businesspeople looking for more information on doing business in the United States. You may be in the process of strategizing on how to enter the U.S. market, finding ways to grow your share of the U.S. market, and/or seeking to set up U.S. operations via a sales office or subsidiary, a joint venture, strategic alliance or acquiring an existing U.S. company. This manual provides you with practical information on launching your U.S. operations. Our objective is to ensure your success in the U.S. Written by WN&J’s business lawyers, one of Michigan’s leading corporate law firms, this manual will persuade you to choose Michigan as your investment destination and the launching pad for your North American operations. Although there is a Michigan focus, this manual will identify key issues and provide insights that will apply wherever you decide to locate your business. As you continue to evaluate your business plan and growth strategy for your U.S. operations, we invite you to consider Michigan. The following are just a few of the many reasons for you to be located in our state:

• Key industries include automotive, plastics, office furniture, life sciences (research, pharmaceuticals and medical devices), agriculture, alternative energy and homeland security.

• Strategic location in the central United States with efficient and convenient connections to anywhere in the U.S. and the world.

• Nurturing communities where foreign expatriates (including 10,000 Japanese nationals) and immigrants from around the globe have thrived and prospered, as shown by our vibrant Japanese cultural and business associations, including the Japan Business Society of Detroit, the Japan-America Society of Greater Detroit and Windsor, and the Japan America Society of Western Michigan.

• Low cost of living and doing business. • Skilled workforce that now exceeds 5.4 million. • Research and educational capabilities and resources made possible by

internationally renowned, world class universities and institutes, including the University of Michigan, Michigan State University, Wayne State University and the Van Andel Research Institute.

We are excited that you are exploring business opportunities in the U.S., in general, and in Michigan, in particular. Our goal is to help Japanese business enterprises in every way possible. We hope to have an opportunity to welcome you in Michigan and we wish you prosperity and success!

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I. Michigan Overview Outside the United States, Michigan is best known for Detroit (otherwise known as the Motor City), its internationally known universities (such as the University of Michigan and Michigan State University), and its global brands (such as General Motors, Ford, Chrysler, Amway, Kellogg, Whirlpool or Hush Puppies, to name a few). Beyond universities and brand names, however, the state of Michigan has a lot more to offer to Japanese business enterprises. Here are some basic facts and information about Michigan. Michigan Facts Nicknamed the Great Lakes State or the Wolverine State, Michigan is the 10th largest state of the United States, with 58,110 square miles of land, 38,575 square miles of Great Lakes water area and 3,288 miles of Great Lakes shoreline. It is located in the Midwest, just separated from the state of Illinois and the city of Chicago by Lake Michigan and a bridge away from Windsor, Canada. The seat of the state government is in Lansing, and its two largest cities and centers of business are Detroit and Grand Rapids. According to the 2000 Census, Michigan has a population of 9,938,444, which makes it the 8th most populous state in the U.S. Economic Indicators Michigan's Gross State Product (value added in production of goods and services by labor and property located in the state) for 2004, estimated at $372.8 billion, made Michigan among the nation's top 10 states in economic output. With 22 Fortune 500 companies headquartered in Michigan, the state ranks in the top 10 among 50 U.S. states with the most Fortune 500 companies. As of 2007, nearly 500 Japanese-owned businesses were operating in Michigan. These businesses employed nearly 37,000 Michiganders. Welcoming Climate for Japanese Business The number of international firms with operations in Michigan confirms the maturity and international strength of the state’s economy. There are 3,760 divisions, affiliates and subsidiaries in the state representing 40 countries and encompassing all industry and service sectors. In particular, immigrants from Japan enjoy a healthy community life in Michigan where Japan tradition and heritage is appreciated and preserved. Japanese associations are active participants in their respective communities. There are approximately 10,000 Japanese nationals residing in Michigan. Japanese companies have been leading foreign investors in Michigan. As of 2007, there were 472 Japanese-owned businesses operating in Michigan. These businesses employed approximately 37,000 local employees and nearly 2,400 Japanese expats. 17,314 of these jobs were in the manufacturing sector. 279 of the businesses were in the manufacturing sector, of which 64% were automotive-related. 179 of these businesses are engaged in the field of motor vehicle parts. 82% of the businesses are wholly Japanese-owned and 13% are joint ventures.

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Industries Michigan’s key industries include automotive, plastics, furniture, life sciences, agriculture, home defense and alternative energy. These industries would give Japanese companies ready access to industry players, an established supply chain and a labor force with industry-specific skills. Automotive. Michigan is the center of the North American automotive industry. It is home to the three American automakers (GM, Ford and Chrysler) and nearly two-thirds of the 150 top suppliers to North America (including Delphi, Lear, Visteon and BorgWarner). Each year, more than $10 billion is spent on automotive-related R&D in Michigan—more than 49 states, Canada and Mexico combined. As the country’s No. 1 state for auto-related research and development, Michigan is home to more than 330 autotech centers representing the world’s most innovative automakers. Recent expansions in Michigan include a new Tesla Motors technical center, a new Hyundai technical center and a Nissan design studio. Plastics. The plastics industry impacts our lives in many ways—from the automotive industry to large global companies such as Huhtamaki, one of the world’s largest packaging companies, located in central Michigan, where food containers are thermoformed. In the U.S., Michigan ranks 4th with respect to employment and 5th for plastics shipments, which amounted to $21.2 billion in 2005. Furniture. Grand Rapids has been traditionally known as the Furniture Capital of America. Through the years, the Metro Grand Rapids region has been considered the capital of office furniture manufacturing, with office furniture manufacturers Steelcase, Herman Miller and Haworth headquartered there. As of 2004, the “Big 3” of the office furniture industry had produced products worth approximately $9 billion annually. Life Sciences. Michigan leads the nation as one of the fastest growing life sciences states. Its growth has exceeded the U.S. average, rising 72% in employment, 32% in number of companies and 165% in sales. To date, Michigan is home to more than 500 life sciences companies that employ more than 31,000 people. Agriculture. In spite of urban expansion into farmlands, Michigan has maintained about 53,000 farms with approximately 10.1 million acres. To date, Michigan ranks first nationally in the production of dry black beans, blueberries, pickling cucumbers, flowering hanging baskets, impatiens and geraniums. In addition to beans and wheat, principal field crops are oats, hay, corn, rye, potatoes, soybeans and sugar beets. Alternative Energy. The state is leading the way in developing alternative fuel energy sources that will reduce dependence on foreign fuel, such as fuel cells, biofuels, advanced batteries, hybrid vehicles, photovoltaics and wind turbines. Michigan’s agricultural products, like the soybeans used to create biodiesel, are contributing greatly to a growth spurt in the alternative energy sector. Recently, 11 ethanol and biodiesel fuel manufacturing companies chose to locate in Michigan.

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Homeland Security. Michigan is home to companies and organizations working to develop and refine technology and resources for protecting the homeland. For example, Emergent BioSolutions in Lansing is the maker of the only FDA-approved anthrax vaccine. One of the Army’s largest weapon systems R&D centers is located in Warren. Cost of Living and Doing Business Companies and residents find the cost of living and doing business to be very affordable. In 2007 Forbes magazine ranked Metro Detroit 3rd in terms of the nation’s most affordable housing market with a median home price of $154,000. Home prices, as reported by the Housing Index for 2006, compare favorably with high-tech and industrialized regions around the nation: Boston, $355,000; Washington, D.C., $420,000; San Jose, California, $655,000. The Consumer Price Index (a statistical estimate of the level of prices of goods and services) covering the Metro Detroit region and about 50% of the state’s population has historically been below the national average. Strategic Location and Logistics Michigan is strategically located in the central United States. Both Chicago, Illinois and Toronto, Canada are only a few hours by car from Detroit. Interstate Highway I-75 connects Michigan’s businesses to major industrial centers between Michigan and southern Florida (including manufacturing facilities of automotive OEMs such as Chrysler, Ford and GM, and the U.S. manufacturing facilities of many foreign OEMs operating in the U.S., including Toyota, Honda, Nissan and their suppliers). Interstate Highway I-94 starts at Detroit’s east border with Windsor, Canada, and runs all the way to the West Coast of the United States. Michigan’s highway system is connected to Canada by three vehicle bridges and one vehicle tunnel. The state has numerous efficient and convenient connections, with 19 airports, an extensive rail network and navigational connections to the Atlantic Ocean through the St. Lawrence Seaway. The recently expanded and modernized Detroit Metro Airport is the nation’s newest international terminal, offering daily nonstop flights to more than 130 destinations and 15 countries. Direct flights are available from Detroit to Nagoya, Osaka and twice daily to Tokyo. With the various networks of transportation channels, Michigan’s industries are served by state-of-the-art warehousing and logistics service providers. Strong Labor Force Michigan’s labor force now exceeds 5.4 million, more than the population of 31 other states. The state boasts an abundance of highly educated and experienced engineers due to a robust labor market driven by large-scale employers in the automotive and healthcare industries, and a constant supply of engineers and other skilled tradespersons. There are more than 65,000 automotive research and development professionals in Michigan, and the skilled, educated workforce ranks 4th nationally for high-tech employment.

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Higher Education Michigan has 15 public universities, 51 independent universities and colleges, and 29 community colleges that produce some of the most qualified graduates in the U.S. Michigan is 4th in the nation for the number of engineering graduates per year. Beyond offering top engineering programs, Michigan’s educational institutions, such as the University of Michigan and Michigan State University, are known worldwide for programs in law, business, agriculture, medicine and other sciences. Abundant Resources

Situated amid four of the largest lakes in the U.S. (also known as the Great Lakes), Michigan has more coastline than the entire East Coast of the United States and more public beaches than Hawaii. There is no location in Michigan that is more than 6 miles away from a body of water or more than 85 miles from a Great Lake. The Great Lakes comprise 90% and 20% of the U.S. and world’s fresh water resources, respectively. Lifestyle

For Japanese business executives whose responsibilities require an extended stay in the U.S., Michigan is unsurpassed as a place in which to live and raise a family. Michigan has affordable mid-sized cities that offer low housing costs, short work commutes and quality schools. Moreover, Michigan is recognized as the Midwest’s premier outdoor vacation destination with four recreational seasons, plenty of outdoor activities and 99 state parks. With Oakland County being the nation’s fourth wealthiest county, famous brand names, like Saks Fifth Avenue, Neiman Marcus, Tiffany, Gucci, Cartier, Crate and Barrel, Nordstrom and the Disney Store, are in Michigan.

Tourism

Throughout Michigan, museums showcase the history of the automotive industry and the country: the Gerald R. Ford Presidential Museum in Grand Rapids, Greenfield Village and the Henry Ford Museum in Dearborn, and the Walter P. Chrysler Museum in Auburn Hills are just a few examples. In Northern Michigan, the Mackinac Bridge (otherwise known as the Mighty Mac) is an engineering wonder, designed to withstand the strong winds of the Great Lakes. Mackinac Island, on the eastern end of the Straits of Mackinac, offers a glimpse of Midwestern lifestyle at the turn of the century; the entire island is listed as a national historic landmark and is well known for its ban on automobiles on the island. Michigan is also a great place to enjoy outdoor activities such as golfing, professional sports entertainment, hiking and water sports. As in any country in the world, location can determine your success. Please consider Michigan. It has a lot to offer.

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II. Doing Business in the U.S. In exploring the U.S. market, Japanese business enterprises will face legal and business issues and considerations that are specific to this market. Below is a brief discussion of some of the factors that a Japanese company should consider when entering this market. Minimal Regulation of Foreign Investment With few exceptions, foreign investment and strategic alliances between U.S. and companies from other countries, such as Japan, are subject to limited regulation by federal, state and local governments. This can be contrasted with the situation in other countries where administrative guidance is customary and government agencies approve, consult or review details in advance of permitting foreign direct investment. Although there are a few regulations, voluntary compliance with the rule of law is emphasized and penalties for noncompliance can be severe. Accordingly, Japanese companies investing in the U.S. should become generally acquainted with applicable laws and regulations of the federal, state and municipal governments, as well as the basic administration of government in the locale in which they will operate. The U.S. government and the state of Michigan each have three branches: executive, legislative and judicial. Generally speaking, the U.S. government is concerned with matters of interstate and foreign commerce, while the state of Michigan is more concerned with matters immediately affecting the state itself and the private contractual and property rights of its citizens. The U.S. Constitution leaves a great deal of authority to the 50 individual states. Japanese companies investing in the U.S. will find that their interactions with the federal government on a day-to-day basis will generally consist of matters such as the payment of federal income taxes, business immigration, import/export control matters and required foreign investor reporting to the Bureau of Economic Analysis. In Michigan, Japanese companies will deal with the state government on matters such as incorporation, discussions of investment incentives, and payment of state income and property taxes, as well as day-to-day operational issues such as human resources-related matters and environmental compliance. In addition, local matters such as zoning requirements and certain business licenses must be addressed with the county and other municipal governments. Many of the permits and licenses required for the operation of a business in Michigan are discussed on publicly operated Web sites, such as Michigan’s official economic development Web site (www.michigan.org). Private consultants such as certified public accountants, law firms, human resources professionals and various business consultants are usually retained by foreign investors to assist with compliance. Regulation of Foreign Investment The Foreign Investment and National Security Act of 2007 (FINSA) which will become effective on Oct. 24, 2007, and the 1988 Exon-Florio Act may apply to foreign investments. These two laws may require national security review for proposed investments or acquisitions by

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foreign persons in the U.S. and in limited cases the President may be enabled to block or unwind certain investments or acquisitions of U.S. companies or assets. The U.S. Department of Commerce’s Bureau of Economic Analysis requires certain foreign investors to complete and file initial investment survey forms within a short period after completing an initial investment in or establishing a new entity in the U.S. Subsequent filings of annual surveys also are required of certain foreign investors. The survey forms are very simple to complete and are kept confidential. Site Selection and Incentives In the United States, businesses decide where to locate their operations based on a combination of factors, such as: cost of doing business; availability of human resources; access to a supply chain; proximity to important business relationships; quality of life; and incentives provided by the state. In most cases, the final choice is driven by a variety of multiple, context-specific circumstances, such as industry and market needs. For decisions based on specific requirements, state and local governments may provide relevant information and guidance. Michigan offers a wide range of incentives for businesses choosing to relocate here, including special funding for specific industries and projects, tax credits and incentives. For information on incentive packages, contact the Michigan Economic Development Corp. Facilities/Real Estate Business enterprises, including foreign-owned businesses, can acquire the right to use real estate via the acquisition or lease of property. Foreign business enterprises may acquire real property either directly or through U.S. subsidiaries or affiliates. When a company acquires property, the contract for the purchase of land must be in writing. Ownership is transferred by delivery of a written deed, which is perfected by recordation in the county land records. Acquisitions are typically covered by title insurance, which protects against defects in the transfer of ownership and certain undisclosed limitations on use and third-party claims. If the purchase of real estate is financed, the lender will typically record a mortgage in the land records. Brokers, title insurers and lawyers are often engaged to facilitate transactions. Ownership of real estate by foreign companies investing in the U.S. is generally not specially regulated. However, foreign investors may be subject to certain reporting requirements. Furthermore, the transfer or disposition of proceeds arising from transactions by foreign companies and certain affiliates may be subject to special withholding requirements under the Foreign Investment in Real Property Tax Act of 1980. As to the use of property, use restrictions should be confirmed prior to the purchase or lease of real estate. The state facilitates the process of choosing an office location through the Michigan Office of Site Development Services. Notably, incentives such as credits or tax incentives may be available for investors to set up business operations in special locations. For example, Michigan offers a variety of incentives

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in locations such as Renaissance Zones, HUB-Zones, and brownfield sites. Brownfield sites include locations for which environmental cleanup, redevelopment or other special measures may be necessary for use, expansion of use or redevelopment. Immigration All Japanese nationals coming to the U.S. to work and live must have a visa. The U.S. issues various types of visas to Japanese nationals. The application process and requirements vary depending on the purpose of the visit to the U.S. While in the U.S., Japanese nationals may engage only in the activities for which the visa was issued, as described in the visa application. Visas for Tourism or Business Meetings. Visitors, who are coming to the U.S. solely as tourists, or to attend business meetings, may generally enter the U.S. for up to 90 days without a visa as long as they have a valid Japanese passport. Eligible Japanese Citizens may travel to the United States for Business or pleasure without a visa under the visa waiver program, provided they have a valid passport, a return or onward ticket, and will stay for no more than 90 days. Tourists and business people who take advantage of this program may not extend their stay in the United States beyond 90 days and may not change their visa status. Visa waiver program travelers must have a valid machine-readable passport (two lines of coding below the photo on the bio page). In addition, persons with passports issued on or after October 26, 2005 must have a digital photo encoded in the passport. Travellers may also use the waiver to make their initial entry into the United States from Canada or Mexico by land. In such cases, upon entering at a land border port of entry you may be required to present proof of financial solvency and a residence abroad to which you intend to return. There is no list of specific documents which must be presented. Employment Visas. Japanese nationals who wish to engage in any type of employment, even for a very short time, must first file a petition with the U.S. Department of Homeland Security and obtain a document called an “approval notice.” Before entering the U.S., the applicant must submit this approval notice to the appropriate U.S. consulate in Japan, along with the other visa application papers, and obtain a visa which authorizes employment. L Visas. If the Japanese national will be providing any type of services to a subsidiary established in the U.S., an L visa should be obtained. The L-1A visa requires that the Japanese national has been employed by the Japanese parent company, as an executive or senior manager, for at least one year, and be coming to the U.S. to act in a similar capacity. The L-1B visa similarly requires employment for at least one year with the Japanese affiliate, and also requires that the applicant have highly specialized knowledge or expertise concerning the company’s products which is not available in the U.S. H Visas. A small number of H-1B visas are available each year for foreign nationals with a bachelor’s degree in a specialized area of expertise who will be employed in that area. Application for H visas may be accepted only during a short time period each year, which in some years may be no more than a few days long.

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Japanese companies who anticipate sending employees from Japan to the U.S. under the L visa program should consider consulting with an attorney at least six months in advance regarding timing, requirements, and the appropriateness of the particular employee as an applicant. The lead time for an H or L visa, depending on individual circumstances, is 3 to 12 months from the date of application for the approval notice. E Visas. Pursuant to a treaty between the U.S. and Japan, Japanese citizens who establish a business in the U.S. may apply for an E visa, if they will be directing the business operations of the U.S. company, or if they will provide other important skills to operate the U.S. business. The E visa also requires either a substantial Japanese investment in the U.S. company or substantial trade between the U.S. and Japanese companies. Legal Assistance for Visa Applicants. Although it is not required that visa applications be submitted by lawyers, business and corporate visa applications are typically prepared and submitted by law firms due to the complexity of the application process and the experience that immigration specialists have in working with the relevant governmental authorities. Mistakes in the filing process may significantly delay an approval or even result in the rejection of applications. Labor and Employment The initial recruitment of local employees is among the first challenges a Japanese investor faces. Unless there are existing relationships with local prospective employees, investors will commonly consult with recruiting agencies, which typically charge a fee for screening, arranging interviews and negotiating the placement of prospective employees. For certain positions, companies may use outsourced employees or staffing services for temporary assignments. Temporary staffing is available for start-up companies that have uncertain human resources needs, but after a certain period of time the staffing company may permit the company to hire the temporary employees permanently and directly for a fee. From a legal perspective, the U.S. labor market differs in several important ways from other markets. First, employment is generally “at will,” which means that either the employer or employee may terminate the work arrangement with or without cause and with or without notice. Exceptions to this general rule include: contractual stipulations which may provide for termination grounds; and anti-discriminatory laws which regulate pre-employment activities and prohibit termination based on race, national origin, sex, maternal status and the like. Second, most U.S. employees rely to a much greater extent than their overseas counterparts on income from employment and work-linked benefits in areas like healthcare and supplementary pension savings. Government agencies provide income and health benefits only to those who are outside of the labor force, such as the unemployed. However, employee benefits and working conditions are subject to regulations. While wages are often dictated by market forces, there is a federal minimum wage and a higher minimum wage may be required in some states and cities. Labor laws, such as the Fair Labor Standards Act, also regulate overtime pay, prohibit child labor and require equal pay for equal

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work regardless of gender. There are also mandatory benefits such as Social Security and Medicare. Certain employers provide fringe benefits to employees. Fringe benefits can include hospital and medical insurance, life insurance, disability insurance, paid leave and pension plans. Executives often participate in profit sharing and share option plans, which must comply with applicable laws if made available to employees. As to labor-management relations, the National Labor Relations Act guarantees the right to form unions and prohibits employers from dominating unions. If the majority of workers approve, the union is certified and becomes the official representative of employees for purposes of negotiating terms and conditions of employment. Union membership in the U.S. has been declining for years, both as a percentage of the work force and in absolute numbers. In Michigan, despite the reputation of unions in certain industries, only 10% of non-government employees are unionized. Financing Operations in Michigan It is typical for new businesses to be funded initially by capital investments, including cash infusions or contributions of equipment, machinery and technology to the business. In the case of foreign investment, the Japanese parent company may contribute capital, and it may also loan operating funds to the U.S. subsidiary via an inter-company loan under which the U.S. subsidiary will make payments of capital and interest to the Japanese parent. For companies seeking debt financing, there are a number of state, regional and national banks and leasing companies operating in Michigan. Many of them have Japanese-speaking managerial employees who can explain available financing and terms to Japanese clients. Banks in the U.S. might require that Japanese parent companies guarantee bank loans to their newly-created U.S. subsidiaries. Because many banks operating in Michigan have liaison relationships with Japanese banks, a Japanese company seeking debt funding should consult with its main Japanese bank services provider regarding relationships it might have with banks in Michigan. An introduction from a reputable Japanese bank can be an efficient way to begin a new relationship with a bank in Michigan. In addition to self-funding of capital and bank loans, Japanese companies may consider funding initial U.S. operations in the U.S. partially with local investor capital. For example, some companies will establish a joint venture with a Michigan company that will agree to share the burden of initial capitalization or help in securing bank financing. Venture capitalists also might offer funding in the form of equity in exchange for ownership shares. While joint venture partners and venture capitalists are sometimes silent investors, more often they will require informational rights, and some degree of control. Accordingly, before considering third party equity financing, Japanese companies must strongly consider the potential loss of control to such third party investors, and determine whether the loss of control is outweighed by any benefits that an investor may bring to the company. The Michigan Economic Development Corp. can provide further details regarding public funding that may be available to Japanese companies establishing operations in Michigan.

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Buying and Selling Products/Services The terms of buyer and seller transactions are generally determined by private negotiations and agreements between private parties. With the exception of sales of certain materials and goods and the provision of certain professional services, businesses in the U.S. are generally subject to few special regulations. The Michigan version of the Uniform Commercial Code applies to the sale of goods in Michigan. The United Nations Convention on Contracts for the International Sale of Goods may apply to certain sales of goods internationally, depending on what the parties stipulate in their agreements. Service contracts are generally governed by Michigan common law, which is the law established by judicial decisions. U.S. contracts may vary from the contract that Japanese companies may be used to in their own country and tend to be much more detailed. For example, in addition to specifying business terms, U.S. contracts tend to address other matters such as termination rights, remedies for failure to perform, limitations on the amount and types of damages payable, specification of the forum for dispute resolution (such as by court or by arbitration) and the governing law of the contract. Accordingly, it is advisable that a Japanese company not only review contracts in detail, but also develop a relationship with a legal counsel. A Japanese company should consult with its legal counsel before entering contracts, particularly contracts such as those that determine the following: long-term supply or purchase obligations; exclusivity for sales and distribution territories; obligations to pay commissions or royalties; licenses of intellectual property or know-how; purchases and sales or leases of real estate; non-compete provisions; and confidentiality agreements or non-disclosure and non-use agreements. Taxation Under the income tax treaty between Japan and the United States, income attributable to a Michigan subsidiary will be subject to U.S. federal income tax. The treaty also provides that taxation of dividends, interest and royalties paid by a wholly-owned U.S. corporation to its Japanese parent is eliminated with few exceptions. Otherwise, the Japanese parent of a subsidiary will not be subject to tax in the U.S. unless the Japanese parent conducts business in the U.S. through a permanent establishment. Typical transfer pricing restrictions will apply to transactions between a wholly-owned subsidiary and its Japanese affiliates. In the U.S., tax jurisdiction is divided among the federal government, the 50 states and the District of Columbia, and local counties and municipalities that have varying degrees of tax authority. A company’s tax burden depends on the jurisdiction in which it operates and earns taxable income. Michigan corporations and other business entities are subject to the Michigan Business Tax (“MBT”), which replaced the Michigan Single Business Tax. Taxpayers other than insurance companies and financial institutions are generally subject to a two part tax under the MBT- a .8% “modified gross receipts tax” and a 4.95% “business income tax”, plus a 21.99% surcharge. A company’s MBT can be significantly reduced by brownfield development credits, designated Renaissance Zones credits and other incentives.

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Michigan also imposes real and personal property taxes and sales taxes. Under recent tax reform manufacturers can claim a refundable credit equal to 35% of the personal property taxes levied on industrial personal property. Generally, manufacturers are exempt from sales tax for purchases of raw materials and equipment used in manufacturing. Import/Export Regulations Since the terrorist attacks of Sept. 11, 2001, the federal government has instituted changes to import and export regulations. Increased surveillance and enforcement by federal agencies designed to protect trade routes with important trading partners such as Japan do require companies to take special care to learn and adhere to U.S. import and export regulations. A number of Japanese companies invest in Michigan to promote the import of Japanese-made products. They are either selling finished products or jointly producing products with Michigan companies for sale in the U.S. or for re-exportation. Establishing sales, assembly, warehousing or R&D facilities in Michigan can help promote a Japanese company’s imports into the U.S. Imports must be properly declared to the U.S. Customs and Border Protection (CBP). CBP officers may detain and examine imports to ensure compliance with laws and regulations. When a formal “entry of merchandise” occurs, the “importer of record” must file or electronically transmit all required documentation. The importer of record must use reasonable care to enter, classify, and value the goods to enable CBP to assess duties, collect accurate statistics, and determine whether all applicable legal requirements are met. Because the rules are complex and the penalties for noncompliance severe, importers commonly seek advice or services from outside experts such as customs brokers, attorneys or other consultants prior to importing products.

Michigan specifically established foreign or free trade zones (FTZ) to encourage and promote international trade-related activities with countries such as Japan. FTZ procedures are designed to reduce tariff barriers on domestic manufacture which incorporates foreign-sourced parts. The FTZ can reduce, delay, or altogether eliminate U.S. customs duty on foreign goods to be stored, distributed, combined with other foreign or domestic products, or used in manufacturing operations while in the zone. No customs duty or excise tax is paid on goods in an FTZ until they are transferred into U.S. commerce. Michigan has six major FTZ areas: Detroit, Battle Creek, Sault Ste. Marie, Kent-Ottawa-Muskegon counties, St. Clair County and Flint. Combined, Michigan FTZ are among the leaders the United States for annual volume ($6.04 billion in 2005), and in the number of firms using FTZ services (51 companies in 2005).

The major U.S. Export Control Laws are the International Traffic in Arms Regulations, the Foreign Assets Control Regulations and the Export Administration Regulations. The U.S. State Department’s Directorate of Defense Trade Controls administers ITAR and generally regulates the export of defense articles and services. The U.S. Department of Treasury’s Office of Foreign Assets Control administers FACR and regulates generally all U.S.-origin goods and services, regardless of strategic or military non-importance. U.S. Treasury also administers a list of major sanctioned countries and other areas subject to special controls. The U.S. Department of Commerce’s Bureau of Industry and Security administers the export regulations. Generally speaking, the bureau is concerned with the regulation of “dual use” goods and technologies that

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have both civilian and military applications. Japanese companies intending to export high technology items from the U.S. (including chemicals, micro-organisms, toxins, high tech software and computer technologies, telecommunications and navigation and avionics equipment), should be familiar with the export regulations. Lack of knowledge is not a defense and there are many pitfalls for the unwary exporter. Because noncompliance can lead to serious penalties (including the prohibition of export activities), it is common for exporters to consult with licensed customs brokers and/or law firms with respect to the export of particular items and the establishment of compliance procedures within the company. Risk Management Japanese companies need to plan to protect their property and operations, and to protect against lawsuits from third parties. In addition to establishing proper corporate governance and internal procedures, insurance products protecting against many such liabilities may be available. Generally speaking, Japanese companies should consider the following with respect to risk management:

o Obtaining property loss and damage insurance to insure facilities, equipment and inventory against destruction and theft.

o Liability insurance to insure against liabilities to third parties (for example,

employee lawsuits, product liability claims, etc.). o Establishing proper internal procedures and responsibility for matters relating to

the storage, use and disposition of hazardous and controlled materials; managing human resources; and ensuring proper documentation, filing and maintenance of business records.

o Confirming that products and services meet industry requirements relating to

product labeling, safety and other standards. o Planning for currency rate fluctuations that might affect the business. o Carefully reviewing the company’s obligations under contracts and consulting

with legal advisors with respect to important contracts. There is a growing number of Japanese-speaking professionals in Michigan who can assist investors with risk assessment and compliance matters.

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III. Entry to North American and Global Markets (via Michigan) Japanese business enterprises seeking to enter the U.S. market have several options for establishing their U.S. presence:

o Appointing a U.S. company as a sales representative or distributor to market, sell and distribute Japanese-made products for the North American market, or as a licensed manufacturer in North America.

o Establishing a wholly-owned subsidiary corporation in the U.S. o Jointly establishing a U.S. company with a business partner to operate as a joint

venture. o Contractually entering into a strategic alliance with a U.S. company. o Investing in an existing U.S. company as a silent or active investor. o Acquiring an existing U.S. company.

The route by which an investor chooses to invest is commonly driven by factors such as the investor’s available capital, its existing know-how with respect to operating in the U.S., strategic business goals and the availability of opportunities. Sales Representatives, Distributors and Licensed Manufacturers Specific market and other business strategies for Japanese companies include the following: Sales Representatives and Distributors. Japanese and other foreign manufacturers commonly appoint U.S. distributors or sales representatives in the U.S. to launch the marketing, sale and distribution of their products. The sales representative or distributor should be a local organization with ties to the industry. Michigan law is flexible in regard to contracting sales representatives and distributors. Appointments may be exclusive or non-exclusive, and the term length, commission rates and other terms may be freely negotiated by the parties. Japanese companies also may consider establishing a subsidiary company in Michigan to support U.S. sales representative and distributors. A local subsidiary of the Japanese company can participate in marketing activities, as well as directly support sales, maintenance and repair services with local engineering and technological support. Licensed Manufacturing or Assembly. With respect to certain products destined for the North American and global market, Michigan can be the optimal location from which Japanese companies can produce, manufacture or assemble their products to meet local requirements. In addition to its highly-skilled and globally recognized manufacturing and engineering work force, factors such as Michigan’s proximity to North American customers (including major Asian and EU companies doing business in Michigan), its global distribution routes and reputation for state-of-the-art logistics, warehousing, robotics, automation and other manufacturing and

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production technologies can also be strategic advantages for global or emerging Japanese companies. A Japanese company may take advantage of Michigan’s value-added production capacity by licensing a Michigan-based manufacturer to produce the Japanese company’s products in exchange for royalties paid to the Japanese company, by outsourcing production in Michigan, or by establishing and licensing a wholly-owned subsidiary or joint venture company in Michigan to manufacture products. Some Japanese companies may begin with assembly in Michigan and expand local operations to partial production or full production over time. Management of U.S. and Canadian Sales (From Michigan Location). Canada is Michigan’s largest trading partner. Michigan’s geographic location and industrial ties to other U.S. states and Canada make it the logical choice for centralized North American operations. Establishing a Wholly-Owned Subsidiary Unless business operations in the U.S. will be owned by a Japanese company’s subsidiary or other affiliate in the U.S., Japanese companies normally establish operations in the U.S. in the form of a business corporation. In order to form a corporation, articles of incorporation must be prepared and filed with the appropriate state agency; in Michigan, it is the Bureau of Commercial Services. Under Michigan law, the articles of incorporation must include:

o Name of corporation. o Name of the resident agent and registered office in Michigan upon whom legal

service of process may be served. o Description of the general nature of the corporation's business. o The term of the corporation. o The number and class of shares to be issued. o The name and business or residence address of the incorporators. o Any agreements between incorporators regarding terminations, distributions of

assets, dissolution and any other matters that the incorporators may decide to include.

Incorporation is simple and relatively inexpensive. A basic Michigan corporation can be established in a few days and for as little as a few thousand dollars with the help of a law firm in Michigan. Japanese investors should confer with lawyers, tax and financial advisors, as well as banks in Michigan with respect to issues such as the following:

o Tax planning.

o Immigration procedures for Japanese nationals to work in the U.S.

o Labor and employment practices and laws for local hires.

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o Sitting issues for office or other operating space.

o Local business licensing requirements.

o Trademark protection and registration of fictitious names.

o Available incentives for foreign investors.

o Banking requirements and available services. Investing in and Joint Ventures with existing Businesses A Japanese company might choose to invest in or acquire an existing U.S. company or establish a joint venture with a U.S. company not only to reduce the required time and capital otherwise needed to enter the U.S. market, but also to acquire existing know-how, human resources, equipment and other strategic value. A joint venture may also reduce costs and otherwise expedite market entry or product development. Joint Ventures / Strategic Alliances Generally speaking, a joint venture is a joint business arrangement between two or more parties to accomplish a business goal. Contractual arrangements such as strategic alliances, joint research and development projects may also be considered joint ventures. Japanese companies may find a joint venture to be an expedient means to gain access to capital, technology, equipment, human resources, sales and distribution networks. Joint ventures can provide companies from Japan and the U.S. with mutual benefits derived from the sharing of strategic strengths. A joint venture with a Michigan corporation can simplify the process of Japanese entry into global markets. For example, with new Japanese automobile technology and Michigan’s automotive background, joint ventures between Japanese and Michigan’s companies would be mutually beneficial. Investing in a U.S. Company U.S. companies may seek investment by a Japanese company for both strategic and for financial reasons. For example, Michigan companies in markets undergoing restructuring may need additional funds in order to reduce existing debt, finance facility upgrades, or fund business operations and product development. For some Michigan companies, equity investors may be a more economical source of funding companies than debt financing. In some circumstances, Japanese companies may be preferred equity investors because of the strategic value that the investor may bring to the business in terms of know-how or new business relationships. For Japanese companies, equity investments in Michigan companies can provide not only an opportunity for capital gains, but also a doorway to begin relationships with potential strategic partners and acquisition targets. Michigan laws, for example, permit a number of very creative legal tools for strategic investors engaging in private equity transactions whether under the scenario of a venture capital investment, financial support of a financially distressed company or otherwise. Many Michigan companies are listed on public markets. Because the U.S. and

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Japanese equity markets can be very different, it is advisable that Japanese investors consult with financial advisors, tax consultants and attorneys at the early stages of exploring potential investments. Acquiring a U.S. Company A Japanese company may acquire U.S. companies via capital markets in a public takeover or as the result of a privately negotiated transaction between the acquirer and the owners of the target. Acquisitions of public and private U.S. companies, including by foreign investors, are common. The process for acquiring a company usually begins with retention of a financial advisor such as an investment bank, or the financial advisory services of a consulting firm. When choosing an advisor, Japanese companies should strongly consider the familiarity the advisor has with not only the target U.S. market, but also the Japanese company’s existing market, as well as its managerial and business culture. The advisor will often guide the investor through the various stages of an acquisition. U.S. companies may seek out acquisition by Japanese companies under a number of circumstances:

o Owners or management of family-owned or other closely-held companies are retiring and there are no heirs or other appropriate persons to carry on the business.

o Economic restructuring has placed the company in a difficult financial position. o Management seeks new or additional ownership to provide capital infusions

necessary for further research and development, expansion of facilities, overseas expansion, acquisitions of additional assets, or for other strategic advantages.

In an acquisition transaction, legal counsel should be consulted early in the process and prior to commencing formal negotiations. Financial advisors will usually work as a team with legal counsel, tax advisors, and other advisors and consultants to manage the various legal, financial and operational aspects of a transaction and to provide services such as the due diligence investigation of the target company, its assets, liabilities, ownership, management and other aspects of its business. The transaction costs for an acquisition can be significant, but an acquisition can also be the fastest and most efficient entryway for some Japanese companies into the U.S. market.

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IV. Business and Cultural Environment

Culture permeates business practices whether in Japan or the U.S. If not addressed appropriately, cultural differences can prove a difficult obstacle to overcome. Thus, for Japanese enterprises, it makes sense to devote time and attention toward understanding the similarities and differences between the business cultures of the U.S. and Japan. Below is a discussion of the similarities and differences.

o Different approaches in business dealings. Whereas Japanese businesspeople tend to place emphasis on process and look at the “big picture,” their American counterparts will typically be very strategic, focused on details and outcome-oriented.

o Heavy reliance on professional services. Given the relative complexity of doing

business in the U.S., business enterprises rely heavily on professionals, such brokers, consultants, advisors, and lawyers, in conducting their businesses. The benefits of using professional services often outweigh the costs. Because of serious monetary and operational consequences of lack of research and preparation and non-compliance with regulations, U.S.-based enterprises treat the fees of professional service providers as a necessary part of the cost of doing business.

o Reliance on Law. Americans look to the law for predictability and risk-

management and as a standard process. Japanese businesspeople and companies should expect their American counterparts to adhere to laws and legal procedures when transacting business agreements.

o Importance of reputation. Like in Japan, U.S. business enterprises value their

reputation in the business community. Thus, in having a fresh start in this market, it is important for a foreign company to consider the effects of its actions on its long term reputation. In the U.S., a good reputation results from sound management practices, transparency, predictability and fair dealings.

o Business and cultural norms are industry and region specific. In conducting

business, a Japanese business enterprise should be sensitive to industry and region-specific norms. “The United States is a melting pot of different peoples” is a popular description of the cultural diversity in the U.S. A keen understanding of cultural and business norms will positively impact a Japanese company’s business dealings. A good reputation often comes from the good experience of other entities in dealing with a business enterprise, and a large part of a good experience stems from the observance of norms and sensitivity to cultural differences.

o Less emphasis on relationships. In Japan, business flows from relationships; in the

U.S., relationships flows from business. Just like in Japan, good relationships with customers, business associates and employees are essential to a company’s success in the U.S.; however, relationships will not necessarily keep parties from demanding what they are entitled to based on market and legal considerations. Thus, foreign enterprises must adapt to the culture of relying on contracts in addition to developing relationships.

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Japan-related Associations in Michigan

Japan Business Society of Detroit: A Driving Force

Started in 1973 as the Japan Society of Detroit, with its increasing needs of expanding their activity beyond education and community issues, the Japan Business Society of Detroit (“JBSD”) was established in 1993. The JBSD consists of 5 sections, Business, Publication, Culture, Sports and Education. With 1,520 members (232 member companies and 40 individual members), it plays a prominent role in business and social activities within Michigan’s Japanese community. The JBSD hosts cultural and sports events as well as public seminars on various topics throughout the year.

Japan-America Society of Greater Detroit and Windsor

Established in 1989, the Japan American Society of Greater Detroit & Windsor has played a vital role in the local community, bringing together Japanese, American and Canadian business people, for over 17 years. The members represent local American, Japanese and Canadian manufacturers, R&D operations, trading companies, transportation companies, major banks, utilities, accounting and law firms. They are dedicated to strengthening friendly relations among Americans, Canadians and Japanese nationals doing business in the area. They are part of the National Association of Japan-America societies network.

Japan America Society of Western Michigan

Established in 1999, the JASWM is dedicated to promoting cultural, business, educational and social exchanges for the development of both Japanese and American communities in West Michigan. They work with Japanese companies in the area and their U.S. suppliers, costumers and service organizations to extend Michigan hospitality to those who are assigned to Michigan from Japan. Cooperating with West Michigan’s colleges and universities, valuable sources of information, teaching and research on Japan, they host activities including speaker programs, exhibitions, informational materials, publications, cultural and social events to build greater mutual understanding among Japanese and Americans living in West Michigan. They are part of the National Association of Japan-America societies network.

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V. Getting Started / Available Resources As Japanese business enterprises explore the U.S. market, they will find various government agencies, non-governmental organizations and private companies that are willing and eager to work with them. In this mature market, there is a wide range of specialized professional services that will contribute significantly to the success of a business enterprise. While top professionals may charge premium rates, their services are often indispensable and part of the cost of doing business here. Occasionally, some business enterprises opt to do things on their own and are able to get by; but the risks are substantial. Professional services, such as business advisory and management consulting, can positively impact a company’s success; while non-compliance with accounting, tax and legal requirements can result in hefty fines, penalties and monetary liabilities. Below is a description of services offered to Japanese companies. Economic Development Organizations Japanese companies interested in investment, incentive and market entry assistance should contact and work with economic development agencies early in the process of exploring the U.S. market. Economic developers maintain offices and personnel dedicated to work in confidence to address the needs of foreign investors, and provide objective information about the market including specific local incentive programs and other investment support. These organizations also provide introduction to potential partner firms. Economic development agencies can be governmental or non-governmental. In Michigan, the state agency dedicated to economic development is the Michigan Economic Development Corporation. In addition, there are region, county and city based economic development agencies and organizations. U.S. Commercial Service The U.S. Commercial Service is the trade promotion arm of the U.S. Department of Commerce's International Trade Administration. One of its primary missions is to assist U.S. companies in exporting products into foreign markets, such as Japan. Pursuant to the U.S. Department of Commerce's "Invest in America" initiative, the U.S. Commercial Service promotes and facilitates foreign direct investment into the U.S. and reaches out to foreign governments and potential investors. U.S. Commercial Service trade specialists are in 107 U.S. cities and more than 80 countries, including Japan, and are ready to provide relevant information and assist Japanese companies in exploring business and investment opportunities in the U.S. Financial Institutions The U.S. financial system includes a variety of institutions (e.g., credit unions, savings and loan associations). However, commercial banks are the most utilized by companies operating in the U.S.Most large banks provide a variety of services to assist foreign businesses in establishing operations in North America, including checking accounts to receive and send money, foreign exchange services, import/export loan assistance, and lending money for business expansion or day-to-day operations. Banks also assist with insurance, investments, and other related business products. Banks may also serve as consultants when setting-up subsidiaries of foreign companies and make introductions to other service providers and potential customers. In addition to business banking, banks provide personal financial services to the

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corporate client’s employees, including credit cards, checking accounts, and financing to facilitate purchasing a home. When establishing a new client relationship, the banker would want to learn about the company’s business and its plans. The new client should be prepared to share basic information about the company, its financial statements and business plan. Working with the region’s diverse economy allows Michigan banks to combine their understanding of their customers and clients with their history of working with Michigan’s global companies to provide a solution unique to needs of the business and its personnel. Some Michigan banks maintain a staff of specialists dedicated to serving Japanese business enterprises. Business Advisors, Consultants and Brokers Business advisors and consultants include accounting firms, management consulting, investment banks, law firms, brokers and other service providers.

o Accounting firms performing auditing, tax and consulting services for business entities. Accounting firms vary in terms of size and expertise. Japanese firms should go to the firm that they are most comfortable with; however, it is necessary that Japanese companies be served by firms with expertise in international accounting and taxation.

o Management consulting firms help companies to improve performance through

analysis of existing business problems and development of future plans. Management consulting may involve the identification and cross-fertilization of best practices, analytical techniques, strategy development, operational improvement, skills coaching or technology implementation.

o Investment banks help companies and governments and their agencies to raise

money by issuing and selling securities in the primary market. They assist public and private corporations in raising funds in the capital markets (both equity and debt), as well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions.

o Law firms advise business enterprises of how laws apply to their business and

operations. In the U.S., business enterprises do not go to law firms just when they have a court case. Legal services cover the entire life cycle of a business enterprise, from incorporating a business entity, tax planning, negotiating contracts, compliance with legal requirements, to labor and employment and intellectual property protection. Like accounting firms, law firms come in different sizes and Japanese companies are best represented by firms with an understanding of the business culture and needs of Japanese enterprises.

o Brokers assist in various business transactions because of the relative complexity of

the industry practices. Examples of brokers are real estate, insurance and stock brokers.

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o Japanese business enterprises operating in the U.S. will encounter a need for other services, such as payroll services, recruiting and human resources, maintenance services, etc. Because of the relative complexity of business processes and procedures, small and medium sized companies do not always have the in-house capability to handle these processes. Thus, there is a market for such service providers who are able to perform certain tasks more cost-effectively.

Engaging these professional services companies requires careful research. It is important that a Japanese enterprise engage the services of the company with the appropriate expertise, the right price range and the understanding of specific cultural and business needs of Japanese enterprises. Trade Associations To get involved and establish networks and relationships within the industry, Japanese companies may join trade associations and participate in their various activities. For example, in Michigan, there are regional trade associations (e.g., Detroit Regional Economic Partnership and chambers of commerce across the State), community-based business associations (e.g., Japan Business Society of Detroit), industry associations (e.g., Michigan Automotive Industry Association or the Grand Rapids Area Furniture Manufacturers Association) and associations dedicated to segments of particular industries (e.g., Original Equipment Suppliers Association and the Society of Automotive Engineers). These associations welcome the participation and membership of Japanese enterprises. About Warner Norcross We are dedicated to knowing your business and providing client-tailored, cost-effective and practical legal solutions to your business team to resolve complex legal challenges. Our bilingual and bicultural team provides Japanese and U.S. clients which bridges to cross the cultural and legal challenges of the global market, and the legal keys to open doors to business successes. Warner Norcross was founded in Michigan in 1931. Today, more than 200 Warner Norcross attorneys service more than 5,500 clients in Michigan and throughout the world. We are members of TerraLex®, an affiliation of leading independent law firms in nearly 100 countries including Japan, China, Korea, India, Mexico, Brazil and EU member nations. TerraLex offices are located in both Tokyo and Osaka, Japan. We are proud of our traditional Michigan roots, and also of our reputation of being among the most “tech-savvy” law firms in the United States. As a major law firm we face the same competitive global market forces as our clients and are dedicated to constantly implementing new ideas to improve our competitive edge and the quality of our services.

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