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2018.10.15

Problems of Japanese Companies Failing to Achieve Results in Silicon Valley -Same Phenomena Seen in Chinese Markets; First Step in Overcoming Challenge Is Site Visits by Top Management-

An article published in April 19, 2018

  • Kiyoyuki SEGUCHI
  • Research Director
    Kiyoyuki SEGUCHI
  • [Expertise]
    Chinese Economy and Relations among Japan/China and the United States
Silicon Valley and Chinese markets, the focus of global companies' attention

Silicon Valley is at the center of the world's new business development. It is said that 60% of all investments in new business development by U.S. corporations are made in Silicon Valley, with smaller concentrations in New York (10%), Boston (10%) and other areas (20%).

It is difficult to understand the future direction of world business without visiting Silicon Valley.

Meanwhile, the Chinese economy has been the primary engine driving global economic growth since 2010. Chinese domestic markets have been growing much faster than other overseas markets.

In addition, in line with the rapid structural change of the Chinese economy, market needs are changing at a fast pace. Since situations also vary from one region to another, you cannot know as much about the market needs unless you visit major markets across the country and see them with your own eyes.

Silicon Valley and China are currently the most important hubs for companies playing in the international arena. At the same time, these are the very two areas which are changing most rapidly of all global markets. In both areas, Japanese companies are not quick in action.

I had thought until quite recently that as Silicon Valley and China were completely different markets, the reasons why Japanese companies were slow in action in these areas were also really different.

However, when I talked with experts and intellectuals well-versed in trends of Japanese companies operating in Silicon Valley, I realized that Japanese firms that were not performing well in the two areas faced surprisingly many common problems.



Major problems of Japanese companies failing to achieve results in Silicon Valley

When I made a business trip to San Francisco in March, I had an interview with a Japanese person working there with extensive knowledge about the circumstances of Japanese companies doing business in Silicon Valley. He said as follows:

With the importance of innovation having been pointed out very often in Japan over the past several years, a situation that can be called Open Innovation Boom has continued. Against this backdrop, a lot of Japanese companies have started to focus on Silicon Valley.

The number of Japanese business travelers to Silicon Valley or Japanese companies' offices located there increased five- to ten-fold over the past five years. As Japanese corporations send their employees to Silicon Valley with the purpose of collecting information, the employees sent there are generally those from the R&D or corporate planning department.

When we look at these changes, Japanese corporations appear to have been putting considerable effort into new business development. However, their effort has actually got almost nowhere.

Despite the fact that the number of Japanese companies which, focusing on Silicon Valley, continue to gather information there grow at such a fast pace, few of them have succeeded in new business development or boosted their earnings.

The following three problems are pointed out as the major reasons for that:

Firstly, the period of expatriate work assignment is short. Many Japanese companies dispatch head office staff to work in Silicon Valley for about three years. The same goes for executives stationed in New York and elsewhere.

Generally speaking, employees who are highly valued within a company are sent abroad only on a short-term basis, while working in the head office for a long period of time. This is often the case with Japanese firms.

It is extremely difficult for them in such a short expatriate work as the three-year expatriation period to build strong relationships with local business people and to achieve results from establishment of a new business. He/she acquires a certain amount of business knowledge, gathers information and makes friends in the three years, but returns to Japan after that and another employee sent abroad to take over his/her position starts again from scratch.

With this happening once every three years, it is very unlikely that new business development will deliver results. A person who has not settled into his/her local business community is generally unable to earn trust from local companies.

Therefore, although Japanese corporations appear to be keen on the surface about new business development by putting money and manpower into it on a continuous basis, the truth is that their efforts have borne little fruit.

The second problem is that Japanese companies' criteria for evaluating employee performance are unfit for new business development.

Companies which have accomplished outstanding results in Silicon Valley are characterized by the fact that they find a few successful cases out of a number of failures they have experienced and develop those few into a big business.

By contrast, most Japanese corporations do not take on risk-taking challenges.

Executive managers encourage their subordinates to challenge without any fear of failure. However, if an employee actually fails, he/she gets a negative performance evaluation; if he/she has repeated failures, it becomes impossible for him/her to overturn the negative evaluation he/she has got as a result of the previous failures, even if he/she succeeds in the long run.

Because employees understand quite well the real nature of the performance appraisal system, they do not dare to tackle risk-taking challenges unless they are exceptionally motivated and brave.

Furthermore, it is usually the case in Japan that such a pro-active attitude to deal with risk-taking challenges is given little recognition within a company.

Thirdly, there is a lack of collaboration between expatriates and relevant departments at the head office.

As is often the case with Japanese firms, the president decides to dispatch excellent human resources to Silicon Valley, feeling a sense of crisis about the company's growth and continuity over the long term and considering that he/she needs to do something in order to develop a new business.

The dispatched person manages to make contact with local human networks within the constraints of the short period of time and strives to link the networks to relevant departments at the head office to further strengthen the relationships.

Despite these steps he/she takes meeting the president's expectations, it often happens that the relevant key departments at the head office are slow to react.

For instance, although an expatriate employee introduces an opportunity for technical cooperation, counterparts working at the head office in Japan make no attempt to initiate contact themselves, saying, "Such an opportunity exists in Japan as well". If contact is initiated at all, it takes as long as half a year for the head office to examine a cooperation method and other related matters.

Consequently, they fail to start a new business, as the partner candidate the expatriate has found with much effort walks away or determines to go into partnership with another company.

These are the circumstances that a lot of Japanese corporations having made inroads into Silicon Valley are currently faced with. I have heard that topnotch companies in Silicon Valley understand these problems of Japanese firms and that, regarding information exchanges with Japanese companies as a waste of time, some of them refuse to deal with them.

However, there are some exceptions. One milestone a company needs to reach before building up a certain presence in Silicon Valley is the total investment it has made in Silicon Valley amounting to 100 billion yen or more.

Three Japanese companies, namely Toyota Motor, SoftBank and Rakuten, meet this criterion. SoftBank has a particularly strong presence.



What Japanese companies that are slow in action in Silicon Valley and Chinese markets have in common

The problems of Japanese firms we have seen above are also common to a number of Japanese companies doing business in China.

At the root of these problems lies an underlying problem common among most Japanese firms, a belief that a product will sell well, as long as it is good.

This belief stems from a big misunderstanding that experiences they have gained from doing business in Japan are useful and directly applicable to international business and thus there is no need for them to see the needs of the global market with their own eyes.

Market needs vary considerably from one country to another. In China, they do so significantly across regions as well. Moreover, they are changing at a pace that is far faster than in Japan.

Japanese companies will be unable to beat the competition that exists in Chinese domestic markets, unless they understand such a wide variety of market needs in a timely manner and adapt performance, services, prices, designs, etc. exactly to them.

In Japan, Japanese firms' competitors are Japanese firms in many cases, whereas in China, the competitors are leading global companies expanding into China from all over the world with the aim of finding new market opportunities.

There is no chance for Japanese corporations to beat the competition, if they solely continue doing business based on the experiences gained in Japan, while their powerful competitors are making desperate efforts to satisfy the market needs. The same goes for Japanese firms having failed to achieve results in Silicon Valley.

In a nutshell, the essential problem of Japanese companies is their self-righteous attitude, or a lack of humility, in dealing with the global market.



What is the solution for the essential problem of Japanese companies?

So how can Japanese companies with humility understand a wide range of needs of the global market in a timely manner and provide products and services meeting these needs in an appropriate manner?

There is no easy way for them to solve the essential problem, because they are required to reform their corporate management systems to accommodate the diversification of market needs resulting from economic globalization.

It is the president who must lead the reform. In addition, it is the R&D department that has produced the essential problem.

It is necessary for the president to take the initiative in making a radical change to the self-righteous attitude the R&D department has traditionally adopted so that it will flexibly and expeditiously develop products and services in response to diversified and rapidly changing market needs in an appropriate manner.

To this end, it is important for the president to demonstrate a clear intention to set great store by market needs in the first place.

That is to say, the first step in the drastic reform is for the president to visit Silicon Valley and Chinese markets where global corporations engage in fierce competition several times a year to see the frontline of the markets for him/herself and gain firsthand knowledge of their needs.

On top of that, he/she should determine from a long-term perspective the type of business the company should start and the area of Chinese markets it should advance into, and in order to achieve these goals, secure a mechanism, human resources, technologies, funds, etc. necessary to get a grasp of market needs.

Management organization needs to be reformed so that these elements will act in response to changing market needs, while departments in charge of R&D, production control including cost reduction and quality control, and development of sales networks will organically collaborate with one another.

It is only the president who can forge ahead with this shakeup. As the overriding goal of vice presidents and other executive officers in lower positions is to become a president or be promoted to higher positions, very few of them think about what the company ought to be from a long-term and fundamental point of view and endeavor to put the thought into action.

Even for a president who is responsible for doing so, it takes a great deal of resolution to take on the challenge for such a drastic reform as mentioned above.

Only a president who thinks seriously about what the company should be over the long term and who has the courage to devote every effort to achieving the target can run the risk of taking up the challenge.

A president who leaves office in a few years does not have enough time to think about that. It is tough to serve as president. It takes three to four years to really catch on.

If a president leaves office in five to six years, he/she must start looking for his/her successor and thinking about an incoming management system around the time management gets on the right track. He/she has no time to contemplate from a long-term standpoint what the company needs to be, or to show initiative and take action toward realizing it.

Taking this into consideration, I believe it is necessary for him/her to sit in presidency for around ten years.

However, a person with qualifications necessary to become president is not always chosen as president. If a person who has assumed the presidency is found to be unqualified for the position, it is crucial to encourage him/her to pass the mantle of the presidency to another person as soon as possible.

A common challenge for many Japanese firms is, through a sweeping management reform led by a risk-taking president, to take a humble approach to the global market and establish a management organization that will accommodate the diversification and rapid changes of the market.

I hope that many Japanese firms will overcome the difficulties and take on the challenges of doing business in Silicon Valley and China with no fear of failure.


(This article was translated from the Japanese transcript of Mr. Seguchi's column published by JBpress on April 19, 2018.)

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