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Recently there’s been some chatter online about the status of Fender Japan. There were many great guitars coming out of Fender Japan – indeed you may remember this post from 2012 in which I had a look at some particularly beautiful Fender Japan instruments. There’s currently a discussion over at TalkBass.com about Fender Japan. It started with forum member GazzBass, who said “I guy in my local music store in Osaka told me there will be no more stocks of Fender Japan guitars and once they are gone that will be it. I also heard they were closing the factories. That’s all the info I could get from him. Anyone else heard about this?”

Several other members go on to say they’ve spoken to folks working in Japanese music stores who have confirmed that the distribution agreement has ended and that Fender Musical Instrument Corp is taking over. This would certainly explain why the Japanese website for Fender now looks very much like the FMIC site instead of its own unique design like it was up to quite recently.

Once upon a time I was a finance journalist, so I dug into Fender’s prospectus from their abandoned IPO a few years ago (filed on March 8, 2012) and found the stuff that sheds some light on exactly who Fender Japan is/was, for those who are unfamiliar.

Fender Japan used to be a joint venture between FMIC and two Japanese shareholders, Kanda Shokai Co., Ltd. and Yamano Music Co., Ltd but this JV was terminated and the two Japanese companies then became Fender’s Japanese distributors, each handling different sections of the product range.

“Following the termination of a joint venture in Japan with two of our greater than 5% stockholders and their affiliates, Kanda Shokai Co., Ltd. and Yamano Music Co., Ltd., we entered into distribution agreements with each of these entities.”

The prospectus notes;

“Pursuant to a distribution agreement most recently amended in April 2010, we granted Kanda Shokai the exclusive right to distribute certain of our products, including Japanese-manufactured Fender products and Gretsch products, within the country of Japan. Under the distribution agreement, we received $10.5 million, $15.2 million and $16.9 million from Kanda Shokai for each of fiscal 2009, 2010 and 2011, respectively. For fiscal 2012, the annual minimum purchase amount under the agreement is $15.0 million and as of January 29, 2012, we have received $1.6 million from Kanda Shokai in fiscal 2012. The agreement terminates on December 31, 2012. However, we are obligated to renew the agreement for successive one-year terms if Kanda Shokai meets certain minimum purchase thresholds and otherwise complies with the terms of the agreement.”

So Kanda Shokai were handling the Japanese-made Fender products and Gretsch products. There’s a very similar paragraph right under that one about certain Fender, Jackson, Charvel and Guild products which were being distributed by Yamano;

“Pursuant to a distribution agreement most recently amended in March 2005, we granted Yamano the exclusive right to distribute certain of our products, including certain Fender, Jackson, Charvel and Guild products, in Japan. Under the distribution agreement, we received $12.8 million, $14.6 million and $19.7 million from Yamano for each of fiscal 2009, 2010 and 2011, respectively. For fiscal 2012, the annual minimum purchase amount under the agreement is $17.5 million and as of January 29, 2012, we have received $1.7 million from Yamano in fiscal 2012.”

(I wouldn’t read anything into the $1.6 million and $1.7 million amounts in Fiscal 2012, since at that point the fiscal year was still quite young.)

Then importantly;

“The agreement terminates on December 31, 2012, but will be renewed automatically for successive three-year terms unless either we or Yamano fails to comply with certain specified conditions.”

That’s especially important because a little earlier;

“…we are party to two exclusive distribution agreements for the Japanese market with two of our significant stockholders that contain restrictions limiting our ability to terminate the agreements. Should we desire to replace these distributors with our own sales force, as we have done in Europe, or if we were to seek to retain a new distributor for the Japanese market, these agreements may prevent us from doing so.”

Another thing to note;

“Our largest markets that are covered by third party distributors are Japan, Australia and Italy. Our strategy in entering new international markets is to identify and partner with local distributors who understand the market and consumers. We continually monitor the markets in which we operate, and, when we believe a market opportunity to be of appropriate size, we evaluate whether to establish our own direct sales operations within that market.”

If the agreement terminated on December 31 and was being renewed automatically for three-year terms, that would leave almost a year still to run on the current agreement as of right now, so I wonder if certain conditions weren’t met. Most likely this would be keeping on top of payment schedules or fulfilling minimum order requirements, but that’s just a guess. Or maybe FMIC bought out the remainder of the contract. So it seems that if Fender Japan is no more, then Fender decided to handle its own Japanese sales rather than working with a distributor model. There’s no indication of whether this was the plan all along from when the joint venture was dissolved, or if it was a decision made recently after five years of working under a distributor model instead of a joint venture model.

Personally I really hope some of those great Fender Japan guitars are shifted over to USA or Mexico production. The Richie Kotzen Telecaster was originally a Japan-only model, only recently making it to worldwide release. I imagine production of that one would be moved to Corona or Mexico. Similarly, the Aerodyne series were amazing instruments, especially the basses, so I hope the Aerodyne series can continue. And I’d sure love to see a USA-made Paisley Telecaster. Fender is making really exceptional instruments right now in Corona and in Mexico, and my brother recently bought a Chinese-made Modern Player Series Telecaster just like this which is a really great sounding and playing guitar.

By the way, this is not related to Fender Japan but there was something in the prospectus that I found kind of surprising, in the section where companies are required to state any factors that could conceivably impact output and earnings. One such event happened to Fender in 2010, when their paint supplier went under;

Similarly, in the past, we relied on a single supplier of paint for the guitars manufactured at our Corona, California manufacturing facility. That supplier discontinued business in fiscal 2010. For a variety of reasons, including the specialized nature of the paint we require, replacing that supplier was costly and time consuming. As a result, we were unable to produce guitars at our Corona facility for a period of approximately four months in fiscal 2010, and full production did not resume for a further three months. This disruption significantly reduced our net sales and income from operations in fiscal 2010, and the associated delays created a backlog of orders. The disruption also led to increases in scrap and rework rates and costs associated with testing new paints and training personnel to use new paints during this period. Although we have since developed secondary sources for our primary paint coatings, the unavailability of paints or other key raw materials could adversely affect our business in the future. 

No guitars from Corona at all for four months, and reduced output for another three after that? That must have been stressful for everyone involved and I’m glad to see Fender has developed secondary sources for their paint supply since then. In fact, some of us are such hardcore collectors that there are players out there who would actively seek out a variation like this, should the issue ever arise again.