Asia is the new engine of global growth, but Japanese companies’ past success models of doing business in the region may turn out to be a liability under the changing competitive environment, experts said at a recent symposium in Tokyo.
Japanese companies need to combine their traditional strength with the new ideas of more diverse human resources from Asia and deeper knowledge of the local markets, the experts said.
Scholars from Japan and several other Asian countries were discussing the changing business environment in Asia and looking for clues for Japan’s engagement with the fast-growing region during the symposium organized Dec. 3 by the Keizai Koho Center. Yasuhiko Ota, a senior writer from the Nikkei business daily, served as moderator of the discussion.
In contrast to the widespread pessimism about weak political leadership and lack of direction in government policies in Japan, there is a significant degree of optimism about the future of Japanese corporations, said Neo Boon Siong, a visiting professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore.
“The Japanese economy continues to suffer from low growth. But Japanese companies’ profits have shown a V-shaped recovery after the ‘Lehman Shock’ of 2008,” said Ryuji Yasuda, a professor at the Hitotsubashi University Graduate School of International Corporate Strategy.
The main reason for the improved earnings, Yasuda said, is the expanded profits in their Asian operations: “Today, Asia contributes the most to the profits of Japanese firms. Their investments in and trade with Asia rose sharply over the past decade. Companies that have aggressively expanded in Asia and are seizing the growing market opportunities there are strong now.”
However, that will not mean that the experience and knowhow accumulated by the Japanese firms, many of which have done business in the region for 40 to 50 years, will guarantee them continued success in the rapidly changing Asian markets, he warned.
Japanese firms’ response to globalization so far has been defined by their Japanese headquarters’ view of the world — either in the export of products from Japan or local production for overseas markets, he said.
In today’s latest wave of globalization, the world’s economies are increasingly linked by a global network and, in particular in Asia, trade and investment have expanded within the regional network, Yasuda said. “No business models will be complete within Japan alone, and will only be complete inside the global or Asian network,” and Japan is lagging behind other economies, such as South Korea, in building such networks, he said.
Japanese firms have so far kept much of their headquarters’ functions in Japan, but some major firms are already starting to move part of these functions to other parts of Asia, Yasuda said. “The point is, you have to look at your operation in the whole Asian context, rather than looking at the world from Japanese perspectives,” he said.
The “flying geese” model of economic development in Asia — where Japan was ahead by several years of such economies as South Korea, Taiwan and Singapore, which in turn led Southeast Asian economies by several years — is no longer valid, Yasuda said.
No such time gap exists due to technology transfers, and consumers in many Asian economies are growing richer and shopping at global chain stores, he said. Japanese firms will lose out in the competition unless they address the domestic and Asian markets concurrently, he added.
Yasuda said that there will be no future for Japanese firms that expand their Asian operations merely in pursuit of lower costs as in the past. “Japanese firms facing tough competition have moved operations to Asia to cut costs and have outsourced to a growing number of local manufacturers,” and some of these local firms have now grown much bigger in size than the Japanese firms, he said.
Another trap into which Japan could fall, Yasuda said, is its traditional strength in manufacturing. Many Japanese firms have strong technology and production processes, but that’s where the profit margin is becoming slimmer than in raw materials and high value-added components, or in retail and service operations, he said.
For example, the market for infrastructure development such as electricity, road and water in Asia is estimated to reach $8 trillion in the coming decade. Japanese firms may be competitive in technologies and plant construction, but lag behind such countries as France, Germany and Singapore in the maintenance and operation services, where the profit margins are the highest, Yasuda said.
One big question, Yasuda said, is how many top Japanese corporate executives have a personal network in Asia when there are still uncertainties in the region’s future.
‘ ‘Asia is certain to grow, but it may not be a straight trend of growth because the prospect of the global economy remains murky,” he said.
“What is important is how many Japanese understand Asia. Very few top executives of Japanese firms have a personal network and knowledge in Asia. Today, many of the top officials of those firms are former heads of their U.S. operations, and few ex-chiefs of Asian subsidiaries climb to the top,” Yasuda said.
Neo, the National University of Singapore professor, stressed that Japanese firms need to diversify their human resources as they try to adapt to the new environment in Asia.
When high-quality products and process innovation commanded an unrivaled competitive edge, Japanese companies did not need to worry so much about human resources in their local operations in Asia, Neo said. “You hire them, but all you want them to do is to follow what you have already developed so well in Japan,” he said.
“Although that has served you well, you now face much stronger global competition,” particularly from South Korea and China, Neo said.
The challenge for Japanese companies, Neo said, is how to develop the capacity to adapt to the more competitive environment and continue to be innovative and successful. For that, Japanese firms need to “develop and engage people and talent outside Japan in locations wherever you operate,” he said.
“Innovation, I believe, comes from Japanese companies combining your traditional strength — product development and manufacturing excellence — with the talent, ideas, energy, knowledge and skills of the people in your production centers and markets wherever you operate,” Neo said. People in overseas subsidiaries “bring with them deeper understanding of their own local markets, consumers, culture and heritage.”
Japanese firms can start this in their overseas subsidiaries, but “ultimately the new perspectives, insights and the diversity have to be brought inside your corporate culture and leadership” in Japan, Neo said. In doing so, Japan’s “closely knit, homogeneous corporate culture can become a liability . . . because it makes new ideas much more difficult for you to accept and makes different values and diverse perspectives more threatening to you,” he added.
It is about expanding the firms’ management bandwidth, Neo said. What is at issue is “your management capacity to appreciate and be open to other ways of thinking and doing business . . . beyond what you have traditionally been good at,” and it means the companies “need to embrace a lot more diversity in your management, your boardroom and in your leadership,” he said.
Some Japanese firms are starting to use English as the official language of in-house communication to cope with their increasingly globalized operations, but South Korean companies such as Samsung are well ahead, Hitotsubashi University’s Yasuda said.
“People at Samsung say that by the time English-speaking employees of Japanese firms are dispatched to Indonesia, Malaysia and Thailand 10 years later, Samsung will have built up human resources who are fluent in the local languages of each of these countries and have become well-versed in local affairs,” Yasuda said. “The challenge for Japanese firms from now will be how many human resources they can develop who have both global and Asian viewpoints — and to have people who have become ‘localized’ in each of the Asian markets.”
Jung Sung Chun, head of the Japan study team at the Korea Institute for International Economic Policy, said Korean firms like Samsung aggressively hire global talent. “Samsung’s Japan unit recruits, for example, Japanese studying at South Korean universities who are well-versed in both English and Korean, and assign them to its operation in Tokyo,” he said.
What supports the South Korean firms’ active recruitment of foreign workers, Jung said, is a strong incentive mechanism that rewards and promotes workers based not on seniority but on performance.
In a typical Japanese work environment, your pay will not change no matter what you do, said Jung, who has previously taught at a Japanese institution.
“Many South Korean companies try to give strong motivations for their employees to explore work on their own, rather than being ordered to do a job,” he said. This is a major change in corporate policy that became widespread after South Korea was hit hard by the 1997 Asian crisis and helps attract talented people to many Korean firms, he added.
To attract global talent to their workforce, corporate management needs to understand what these people are looking for, Neo said.
Many of the global talent “are not just looking for a job” but are “looking for an organization where they can learn and grow, where they can help the operation but also achieve something” for themselves, and to do that “they join an organization that allows them to have some autonomy, some voice, the ability to create and gain different experience,” he said.
Such people will look for a work environment that is non-hierarchical, where they would not be bound by rank, seniority or position, but would be treated on the basis of their knowledge, ideas and ambitions, he said.
The global talent will not be content spending the first five years doing what they’re told “but want to be able to learn, contribute and have your say on Day One,” Neo said. That means their performance “must be recognized much earlier because they are not going to stay with you for the rest of their lives.”
And many of the global talent know the challenges facing the Japanese corporate culture and Japanese firms are “not among the most preferred employers of the best people — even in Asia,” Neo said.
Veena Loh Geok Mooi, a senior fellow of the Institute of Strategic and International Studies Malaysia, urged Japanese companies to use their technological strength and large corporate savings for more cooperation with Asia. “Japan should develop Asian technology by collaborating with foreign partners, especially in nations with surplus scientific and engineering workforce, and shift some research and development to countries where there are surplus young engineers,” she said.
To develop a pool of skilled labor for the future, Japan is also urged to “collaborate to build education centers in Asia or liberalize Japanese universities” to increase the intake of foreign students, she added.
Japan should also take advantage of its demographic changes “to develop innovation in new areas of growth in services that cater to the aging population’s demand,” she said. Japan has a high proportion of elderly people “to test-bed new innovations in health, financial, insurance products and other services,” and build a model that can later be exported worldwide, she noted.
Somprawin Manpraseat, an economics professor at Chulalongkorn University in Thailand, urged Japan to recognize the changing business environment and new opportunities in Southeast Asia as the region looks to create a single market by 2015.
What is also rapidly changing among members of the Association of Southeast Asian Nations, he said, is the greater connectivity through widening regional networks of highways, railways, power grids and gas pipelines.
Such closer regional integration, he said, also means that Japanese firms, through their production networks in Asia, can take advantage of ASEAN’s free trade agreements with other countries and regions “without Japan concluding FTAs on its own.”