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Japan’s strategic location in the Asia-Pacific region, combined with its advanced technology infrastructure, has positioned it as an attractive destination for data centre investments.
Tokyo and Osaka are the current hotspots of Japan’s data centre ecosystem, collectively housing over 75% of the country’s existing data centre capacity. However, the investment landscape is evolving, with both domestic and international players increasingly exploring opportunities beyond these traditional markets.
This expansion is driven by the rising demand for data processing and storage capabilities, government initiatives to decentralise digital infrastructure, and the growing need for resilient, geographically distributed data centre networks that can support emerging technologies like artificial intelligence, cloud computing, and edge computing.
To be successful in this rapidly growing market, investors need to remember that in Japan, forming strong partnerships with local contractors is not just a strategy for market entry; it is an essential part of doing business. Japan’s general contractor culture prioritises trust, long-term relationships, and collaborative approaches that go far beyond traditional contractual arrangements.
With over 20 years of experience working with global data centre providers, TBH is uniquely positioned to advise foreign investors aiming to establish or expand their presence in Japan, leveraging extensive experience and deep understanding of both local business culture and technical complexities.
In this article, Director Meiske Sompie discusses the nuances of the Japanese construction industry, the country’s distinctive contractor culture, and the realities of building and operating in this dynamic market.
Japan’s Unique Construction Hierarchy
The Japanese construction market is one of the largest in the world, distinguished globally by rigorous standards and stringent building codes; the sector has been specifically tailored to withstand the country’s frequent seismic activities.
This focus on earthquake resistance has resulted in Japan’s building sector becoming known as one of the most technologically advanced, safest, and resilient in the world.
The Japanese licensing system is divided into two main types: Ordinary Construction Business Licences and Special Construction Business Licences.
The latter is the system reserved for prime contractors handling projects above certain monetary thresholds, typically USD 280,000 for most categories and USD 420,000 for general categories.
The largest General Contractors (GCs) are referred to locally as Zenecon (a phonetic abbreviation of the English pronunciation). These large GCs are part of what is known in Japan as keiretsus – business group networks that have long-standing relationships with subcontractors, suppliers, and even financial institutions, allowing them to manage complex projects.
By teaming up with smaller players, the Zenecon share their vast resources and expertise, empowering them to get involved in large-scale projects. It’s a winning formula that lets everyone get in on the action.
Five of the largest GCs are known as the “Super Zenecon.” This group, which sounds like a team of superheroes, instead forms the core of Japan’s construction sector. The Super Zenecon have combined annual sales of more than JPY 1 trillion and operate in various industries outside of construction, including architectural design, and Research & Development (R&D).
These heavyweights are followed by numerous mid-sized and smaller contractors organised in a hierarchical pyramid structure, with the largest GCs at the top, subcontractors in the middle, and professional trade contractors at the base. This system has been part of the Japanese construction industry for decades and differs from anything outside of Japan.
Tier One Versus Tier Two General Contractors
Tier One GCs in Japan are large, well-established business groupings with extensive experience in data centre construction. Their size and power reflect the enormous and varied infrastructure needs of a country that is both densely populated and prone to natural disasters. They approach project management with a deeply rooted Japanese mindset that values collaboration and precision. Tier One GCs are well versed in delivering high-quality, high-reliability data centres. Their expertise in seismic design, energy efficiency, and advanced cooling systems usually makes them the go-to partners for both international and domestic hyperscalers and colocation providers.
Japan’s Tier Two general contractors do not have the same scale as their Tier One counterparts (although they are still larger than most Australian Tier One GCs). However, they do offer a different kind of advantage. Their smaller size allows for a more agile and personalised approach, making them an attractive partner for international data centre clients who value flexibility, adaptability, and more standardised international project management practices. This can be a major draw for project owners looking for a contractor that is willing to align with the conditions or requirements of their international investors.
Cultural Differences
Unlike the often-transactional nature of Western contracting practices, Japanese GCs prioritise building enduring, long-term partnerships.
One key aspect of these relationships is the concept of “nemawashi,” or consensus-building. Decisions in Japan are rarely made unilaterally; instead, they involve a careful process of consultation and agreement among various stakeholders. This can lead to slower outcome processes, but it does ensure that once a decision is reached, it has broad support and is more likely to be implemented effectively.
The hierarchical structure of the Japanese contractor environment also plays a strong role in general business interactions, and understanding and respecting these hierarchies is crucial for foreigners’ keen to enter the market successfully.
Project Management Differences
Unlike Western contractors who typically rely on detailed schedules and formal project management tools, Japanese GCs tend to use a more siloed and detailed Quality Controls approach. This approach is characterised by:
Implicit Understanding
There is often a “trust us” attitude in Japan, based on the contractor’s extensive experience. Contractors may not provide explicit milestones or detailed risk allocation plans, encouraging clients instead to trust their track record of successful project delivery.
Network Reliance
Japanese GCs maintain close partnerships with subcontractors and suppliers, allowing them to work within networks that can be difficult to understand to outsiders. This interconnected system enables smooth project execution but can be challenging for foreign investors to comprehend fully or to permeate from the outside. This approach may restrict owners’ access to more competitive pricing options by concentrating decision-making within a few large players.
Risk Management
The size and financial capacity of big GCs allow them to carry a significant portion of project risk more effectively than smaller contractors in other countries. Contingency is usually baked into their pricing structure, rather than being explicitly outlined in project documentation. Japanese GCs often use a more integrated planning framework compared to Western contractors, which means they can reduce some risks through flexibility but introduce others due to less explicit documentation and timelines.
Zenecon Model
Most large Japanese contractors operate on orders as main contractors rather than subcontractors. This system allows them to:
- Manage all aspects of a project, including design, construction, and even research and development phases
- Maintain tight control over quality, schedules, and costs
- Have significant influence on both design and construction culture in Japan due to their size and capabilities
Japanese Contractors: Renowned Quality and Efficiency
Japanese contractors are renowned for their exceptional attention to detail and unyielding commitment to quality, making them an attractive partner for foreign investors. They are amongst the largest and most experienced construction companies globally, with a wealth of experience tackling technically challenging projects both in Japan and across Asia. This expertise allows them to navigate the complexities of international construction and complex engineering with ease, adapting to international practices or tools when required.
Their systematic approach to project execution has earned them a reputation for attention to detail, technological proficiency, and a commitment to delivering high-quality end products. Japanese contractors aim for “zero defects,” focusing on extensive quality checks and potential reworks, ensuring facilities are built to the highest standards with minimal downtime and maximum efficiency. This dedication to quality is reflected in their approach to project management, where they prioritize delivering high-end projects successfully within agreed terms, avoiding claims or disputes and focusing on effective and efficient project completion.
While upfront construction costs may be higher, Japanese General Contractors (GCs) often include efficiency guarantees and comprehensive responsibility. If issues arise, Japanese GCs are expected to handle them without additional charges, reducing disputes and losses through swift and fair management of changes and unforeseen circumstances. This flexibility during construction corresponds to fewer disputes and losses afterwards, as changes and unforeseen circumstances are typically managed quickly and fairly within the agreed price.
When problems do arise in Japan, they are typically resolved discreetly in private meetings, rather than through confrontational negotiations. This means that if additional funds are needed for a project, the contractor might find another way to compensate for the current shortfall, rather than directly asking for more money. This approach, emphasising quality, efficiency, and trust-based relationships, ensures that Japanese contractors remain a preferred choice for international data centre investors seeking reliable, high-quality outcomes.
Challenges Working in Japan
Japanese business culture highly values indirect communication and trust. This cultural norm can lead to misunderstandings and miscommunications, especially when there’s a lack of trust in the contractor’s ability to deliver.
One of the most significant challenges for outsiders working in Japan is what they perceive as a lack of transparency in project documentation and scheduling. For professionals accustomed to detailed schedules and risk allocation plans, the absence of these tools when working with Japanese General Contractors (GCs) can be disorienting.
Project teams often struggle to effectively track progress and identify potential risks without these familiar tools. This difference in approach can create a sense of uncertainty and unease for those used to more explicit project management methods.The cultural preference for harmony in Japan also influences how problems are addressed during a project. Issues may not be clearly disclosed immediately when they arise. Instead, negotiations over changes to project plans can feel opaque and confusing to outsiders.
This indirect approach can be particularly frustrating for investors accustomed to more direct and transparent communication styles. Another area where cultural differences become apparent is in the concept of cost contingency. In Japan, the approach differs significantly from international practices.
While projects outside Japan typically set aside explicit contingency funds for known and unknown risks, Japanese GCs tend to build contingencies and escalations implicitly into their pricing. This contrasts sharply with the international practice of explicitly setting aside separate contingency funds using probabilistic methods and including them as distinct line items in cost estimates and budgets.
This difference in handling cost contingencies can lead to significant misunderstandings, especially for project financiers. They often find it challenging to assess the level of risk accounted for in the project budget. As a result, managing cost overruns and adapting to changes in project scope becomes more complex and potentially contentious. Understanding and navigating these cultural nuances is crucial for successful project management and collaboration with Japanese contractors.
While the indirect approach may seem less transparent to outsiders, it’s deeply ingrained in Japanese business culture and requires adaptation and patience from international partners.
Tips for Successful Business Relationships in Japan
Japan’s unique data centre market presents a unique set of challenges and opportunities.
For a successful business relationship in Japan, consider these tips:
Adapt to Local Practices
Respecting Japanese business norms and communication styles is crucial for building successful relationships. Japanese contractors often prioritise their long-term business relationships over short-term gains. It’s important to familiarise yourself with “nemawashi,” the consensus-building process integral to decision-making.
Expect longer decision-making timelines and potentially higher upfront costs. The decision-making process in Japan can be slow and hierarchical, with multiple levels of management approval often required, which can significantly impact project timelines. This procedural approach is deeply ingrained in Japanese business culture, and it can be challenging for those accustomed to faster, more direct decision-making processes.
Japan’s level of precision and attention to detail can also extend project timelines but typically the advantages from such thorough workmanship are superior quality outcomes as a result.
While Japan’s regulatory system can seem like a bureaucratic maze for outsiders, failing to navigate these complexities, such as strict building codes regarding earthquake resilience and energy efficiency requirements, can lead to costly delays down the line – and even the complete derailment of a market entry strategy.
For example, Japan’s high seismic activity necessitates advanced earthquake-resistant data centre design with base isolation systems and seismic dampers to ensure operational continuity during earthquakes. These investments in resilience and quality may increase initial costs by 15-20% but will also significantly reduce downtime risks in seismic events and translate to enhanced long-term reliability and operational efficiency.
Contracts Should be Seen as Just a Formality
In Japan, business relationships are built on a foundation of trust. This doesn’t mean contracts are irrelevant; instead, they should be viewed as complementary to the underlying trust between contracting parties.
Japan’s history significantly influenced this trust-based system. During the Meiji Restoration (1868-1912), the country transitioned from a feudal, agrarian society to a modern nation-state, where personal connections and loyalty were valued over strict contractual agreements. The establishment of zaibatsu (corporate conglomerates) further reinforced the importance of trust, ‘saving face’, and long-term relationships in business.
Today, the Japanese business model sees contracts as documents that outline a shared understanding and commitment between parties, but trust functions as the primary mechanism for successful project coordination.
Misinterpreting cultural cues can, therefore, unintentionally have implications for communication and project management. For example, Japanese contractors may view a foreign partner’s insistence on enforcing their own international construction contracts or practices as a sign of distrust or lack of faith, potentially damaging the foundation of their business relationship.
By investing in relationship-building, demonstrating long-term commitment, and showing respect for Japanese business customs, foreign companies can create a strong foundation of trust that will serve them well in their Japanese business endeavours. The benefits of a trust-based system include greater flexibility and adaptability than rigid contractual frameworks provide, especially when dealing with unforeseen challenges and rapid technological changes.
Prepare for Different Approaches
When working with contractors in Japan, foreigners should be aware that contracts often rely on lump sum agreements, with documentation that leaves the scope of work and contingency allocated ambiguous. This may lead to misunderstandings.
Be sure to also prepare for different approaches to scheduling, progress milestones, contingency, and risk management – noting that contracts often do not incorporate provisions for re-measurement, progress payments, and value engineering, which are common practices in international construction projects.
4. Work with Locals, Not Against Them
While planning and scheduling are important to foreign investors to ensure that projects follow the anticipated timeline and costs are within budget, many Japanese contractors (that have not been exposed to international practices) may not be accustomed to working with these tools, nor keen to incorporate them.
Consider, therefore, developing relationships with GCs that might be more open to using these practices if they are important to the project owner or investors. Smaller contractors, for example, might be more receptive to utilising different methodologies and business models if they understand the reasoning behind them and see the future value of learning how to integrate them into current practices.
Note also that Japanese contractors often follow each other into new markets or regions, so identifying contractors already working with international developers can be advantageous.
Focus on Relationship Building
Understanding a partner’s cultural background goes a long way in reducing difficulties and entering into successful business agreements.
To develop trust with Japanese partners, always use appropriate honorific titles and formal language in business communications and avoid confrontational negotiation tactics, which can be counterproductive. Such tactics will more often lead to polite silence and withdrawal rather than engagement. By engaging in social activities and informal meetings, it is possible to organically strengthen business (and social) relationships. If in doubt, hire local representatives to help with interpreting language, non-verbal cues, and context in communications.
Lastly, when in Japan, ensure to always play the long game and practice patience, since multiple long meetings and social activities often precede important decisions.
Getting the Most out of Japan’s Data Center Market
With a proven track record across Japan and the APAC region, our experts bring decades of experience in global ICT and Data Centre projects and an established presence in the Asian market, to provide comprehensive guidance on critical aspects such as:
- Understanding and adapting to Japanese business norms and communication styles
- Working around the complex regulatory environment and strict building codes
- Managing local contractor relationships and project delivery methods
- Addressing unique challenges in scheduling, contingency planning, and risk management
- Optimising project costs while maintaining the high-quality standards expected in Japan
Find out more about Meiske Sompie or TBH Specialist Services by using the form below: