Japanese firms need to change their strategy in emerging markets and know more about the consumers in those countries that serve as the new engines of global growth, scholars and business experts told a recent symposium in Tokyo.
Despite their continuing lead in technological innovations, Japanese companies are losing out to South Korean rivals in a growing number of sectors as they fail to grasp the diversifying consumer needs worldwide, they said.
The experts were speaking at the symposium organized April 12 by the Keizai Koho Center under the theme “Competitiveness of Asian Companies — Conditions for Being Successful in the Global Market.”
It has become clear that following the Lehman Brothers shock of 2008, emerging powers like China and India drive global demand while advanced economies are confined to sluggish growth even after they have pulled out of recession, said Toshihiko Kinoshita, a researcher at Waseda University’s Comprehensive Research Organization.
Japan in particular does not seem to see a clear way out of the current doldrums as many of its once powerful leading firms lose international competitiveness and the nation’s share of the world export market declines, said Kinoshita, a former professor at the university.
In the July-September period of 2009, combined operating profits of nine major Japanese electronics firms including Sony, Panasonic and Toshiba fell short of the profit gained by South Korea’s Samsung Electronics alone, he said, adding that such a trend may continue for some time.
Why are the Japanese firms losing global competitiveness? Kinoshita cited the radical changes in the worldwide business environment and the nation’s excess dependence on certain export industries and markets. Data shows that Japan’s auto, electronics and machinery exports to the United States and electronics and chemical exports to China were particularly hit by the global recession.
Even as many individual companies made efforts to keep up their competitiveness, the total factor productivity of Japan as a whole has changed little since the 1980s and the nation’s service sectors remain weak, he said. Japanese firms have continued to spend heavily in research and development even in tough times, but such efforts have not led to increased productivity, he added.
Kinoshita said that while low growth is forecast in many advanced economies in the coming years, there are limits for Japanese firms to explore domestic demand.
Instead, they need to rethink their strategy toward the “volume zone” consumers in the emerging markets and have a more accurate grasp of the consumer needs there, he said.
“Many Japanese companies, particularly people in their headquarters in Japan, seem to believe that their products have excessive quality and features for consumers in the emerging markets — and that they can sell well if only they lower the price of the products. But are they really offering what the consumers want?” Kinoshita said, noting that the firms’ R&D efforts to adapt their products to local markets have been insufficient.
A key problem with Japan’s manufacturing sector today is that the pursuit of technological innovations has not necessary led to competitive advantages for the companies, said Ryozo Yoshikawa, a special researcher of the University of Tokyo’s Manufacturing Management Research Center.
“That’s what impressed me most when I returned to Japan (in 2004) after spending 10 years with Samsung,” said Yoshikawa, who served as executive director of Samsung Electronics after working for Japanese electronics firms.
Japan spent ¥19 trillion in R&D, had 710,000 researchers in natural science, humanities and social science fields and newly registered 140,000 patents in 2007 — all ranking No. 2 in the world. Still, Japan fell from the world’s No. 3 in 2000 to 13th in 2007 in per capita gross domestic product, while slipping from the top position in the Swiss-based International Institute for Management Development’s competitiveness ranking in 1993 to 24th in 2007, he observed.
Meanwhile, the market value of Samsung Electronics alone rivals those of Japanese giants Sony, Panasonic and Toshiba combined, and South Korean makers today dominate electronics and electric equipment markets in emerging economies, Yoshikawa said.
Contrary to what the companies believe, Japanese manufacturers’ R&D investments have not resulted in higher profits, he said.
In a number of consumer electronics products, personal computers and semiconductors, South Korean firms have outperformed Japanese companies in their share of the global market, Yoshikawa quoted from industry data.
“Many business executives believe that the South Korean firms have caught up with the Japanese companies in terms of technology — even though it’s not true. They simply lose out in terms of sales and profits because they have not adapted to a business model with an eye on the global market,” he said.
Yoshikawa noted that many Japanese manufacturers have not been able to cope with the two major changes in their business environment — globalization of manufacturing and digitization of manufacturing.
Not only have markets become globalized but also the procurement of parts and components, R&D and competition in the manufacturing sector have as well, and companies need to change everything including their organizational structures, the manufacturing process and the use of information technology, he said.
Digitization of manufacturing, he noted, has had a huge impact because it made it easy for companies without the necessary technology to be able to build high-tech products thanks to the digitized product design information and product development process. Today, micro-controlled units can perform what used to be made possible only with the knowhow built through years of efforts by Japanese engineers, he pointed out.
Japanese high-tech firms continue to put an emphasis on technological innovations in product development, but they could face shrinking profits if they become mired in price competition and may eventually be forced out of the market, Yoshikawa said.
South Korean firms including Samsung may trail others in innovations but develop their products flexibly to fit the needs of people in each market, he said. Globalization means diversification of consumer needs around the world and the competitiveness of a company would depend on whether its products would be selected by the diverse consumers, he added.
Today, the emerging markets in Asia alone have a combined population of about 3 billion and Samsung apparently targets people who lead an average daily life in these countries — who are estimated to account for roughly 30 percent of the total market, Yoshikawa noted.
Kinoshita of Waseda University noted that Japanese firms lag behind firms in South Korea, Singapore and India in tapping into human resources globally — even though they expanded into overseas markets decades earlier than many Asian rivals.
It is questionable whether Japan offers an environment where talented workers from outside the country can make a successful career here, said Venkataraman Sriram, senior vice president of Infosys Technologies Ltd., an Indian software development and IT consulting firm.
Software development cannot be automated and relies on human resources as the key to growth, said Sriram, who also heads the company’s Japan operations. The number of employees at Infosys has increased to nearly 110,000 as the Bangalore-based firm has expanded its business with the global market, he said.
Sriram emphasized that human resources will hold the key to competitiveness. Companies can no longer compete with a labor cost advantage as manufacturing shifts everywhere and capital can be raised anywhere thanks to the global money flow, he said.
As companies seek more skilled and talented human resources, they “go to where the talent is, and the talent will choose” which companies to join, he said. And unless companies have established the system to do so, they will be unable to secure talented workers globally, he added.
The emerging economies and their companies do face a host of challenges in the years to come, Kinoshita pointed out. Even as China has managed a V-shaped recovery after a sharp slowdown that followed the Lehman Brothers shock, the government admits to the weaknesses of its infrastructure, the shortage of resources and the growing ranks of the poor, he said.
A real estate bubble has expanded in some major cities and areas like Beijing, Xi’an and the island of Hainan; trade frictions with the U.S. and Europe have intensified as pressure mounts for the appreciation of the yuan; and worsening finances of local governments pose the rising risk of nonperforming debts, Kinoshita said.
Many large corporations are saddled with overcapacity while large numbers of small- and medium-size firms are collapsing, he said. Unemployment is rising among the highly educated population while the supply of cheap labor from rural farming regions becomes tighter and the Chinese economy is also beginning to feel the impact of the population aging, he added.
Kinoshita said that given the post-financial crisis global economic landscape, China’s export-driven economic growth pattern will need to be adjusted. Its current account surplus — which has stood in recent years at around 10 percent of its GDP — will need to shrink, he said.
Meanwhile, China’s consumer spending today accounts for around 35 percent of GDP — much lower than 55 percent to 70 percent among the industrialized economies and even below most other Asian economies, Kinoshita noted. For personal consumption to take off in China, structural reforms, like closing the income gap between the rich and the poor and expanded social security programs, are essential, he said.
The Chinese government recognizes the low productivity of its state-owned enterprises and has plans to streamline these into about 80 corporations, he noted. Some cash-rich corporations are also eager to buy efficient manufacturing operations of companies around the world and invest in world-famous brands, he added.
He Zhiyi, a professor of Beijing University and Shanghai Jiaotong University, observed that China’s rapid growth over the past 30 years has pushed some of its leading firms to the forefront of global competitiveness.
The number of Chinese firms among the Fortune 500 rankings has increased from a mere six in 1999 to 43 in 2008. Some Chinese firms have become so big as to rival the country’s provincial governments in size, he said, noting that petrochemical giant Sinopec now has an annual revenue that equals the GDP of Sichuan Province, the ninth-largest in the country.
Others have accumulated enough wealth to acquire overseas firms, including Lenovo’s 2004 acquisition of IBM’s personal computer division and the recent move by Geely Holding Group to acquire 100 percent of Swedish automaker Volvo, he noted.
But He also recognized that a whole range of social problems confronting China today — a result of the introduction of a market economy system — are all the more serious because China has gone through what most Western economies have experienced over the past one or two centuries in just 30 years.
He stressed that many of the problems emerging in China — widening rich-poor gap; increasing fraud and bribery; product safety and food scandals; environment destruction and energy waste; and labor-management disputes and mass protests — are not unique to China but something that most advanced economies have experienced in their own phase of economic development.
Still, the situation in China today is much more serious because the economic development is happening so quickly, he noted.