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2015.03.06

Necessary Conditions for Japanese Companies to Survive in the Chinese Market

IIST e-Magazine on February 27, 2015("Reading the Changing Chinese Market" Final Part)

  • Kiyoyuki SEGUCHI
  • Research Director
    Kiyoyuki SEGUCHI
  • [Expertise]
    Chinese Economy and Relations among Japan/China and the United States

 Last time we looked at why Japanese companies and other parties believe pessimistic views of the Chinese economy based on misconceptions, as well as the opportunities presented to these firms by a rate of expansion in the Chinese market that has been unimaginably rapid by developed country standards.

 In the final article in this three-part series, we turn to the reasons why many Japanese companies have not yet been able to seize these opportunities presented by the swiftly growing Chinese market.

 The first reason is that because many company leaders have a pessimistic bias toward the Chinese economy grounded in misapprehension, they are slow to make investment decisions, with other companies taking chances out from under their feet in the meantime. This includes excessive concern over investment scale not only for new orders but even existing business, so that they fail to roll out new stores or invest in boosting production capacity at sufficient scale or speed to develop the necessary product and service volume to keep up with demand. As a result, market share which should they should have been able to seize is instead going to rival firms.

 In many cases, those company leaders with this problem don't understand the real reason that their company's performance is not improving. The real reason is that they take too long to make their investment decisions, and then they invest too little but still they labor under the illusion that the problem is flat demand in the Chinese market. As a result, even with a poor business performance staring them in the face, they don't seek to take appropriate countermeasures.

 There are of course some local managers who realize this. However, if they inform top management back home of the real problem, they run the risk of appearing to be criticizing the management decisions of the parent company, which could impact negatively on their own subsequent personnel evaluation. In many cases, then, they keep quiet about the real reason, making little effort to refute pessimistic assessments of the Chinese economy put forward by senior executives at the parent company based on misconceptions, and easily meeting their given business targets while waiting to be called back to Japan for their next posting.

 Such local management passivity arises from painful experience, whereby because senior executives at home believe the general tone in Japan, which is dominated by pessimism over the Chinese economy, they ignore information passed on from their local subsidiaries, making it extremely difficult for local managers to persuade them otherwise.

 The only way to overcome this problem is for the company president to go to China five or six times a year to observe the actual state of the Chinese market with their own eyes and gain a proper understanding, and then ensure that they make final investment decisions themselves. Everything about the Chinese market, from the massive market scale to the rapidity of change and the diversity of market needs, exceeds what Japanese companies have experienced in any other market which they've entered. As a result, there is often little utility in the judgment of talented executives in areas such as management planning, personnel, financial affairs and legal affairs who have no China experience. If the company president does not personally make judgments and decisions, senior executives will lean toward conservatism and make the kind of mistaken investment decisions described above.

 Top Japanese performers in China business in areas such as trading, finance, air conditioners, automobiles, construction machinery, elevators, miscellaneous goods and clothing have opened the way for improving their business performance as a result of judgment calls and decisions made by the company president at critical investment decision moments.

 The second reason is insufficient understanding of market needs-in other words, insufficient marketing power. Many Western companies make top-down decisions on their sales strategies, so the judgment of the marketing division planning those strategies carries a lot of weight.

 Marketing and its Japanese-style counterpart-eigyo(sales)-are very different things. Marketing entails analyzing overall market trends from various perspectives, accurately interpreting market needs, and developing product development strategies and sales strategies geared to these. To use a military metaphor, it is strategic planning by joint chiefs of staff with the power to orchestrate the strategies of the various different divisions. Eigyo, by contrast, is more like hand to hand combat by foot soldiers, with sales staff channeling their energies into building and expanding sales networks and setting appropriate prices, for example, through individual negotiations with customers and dealers. No matter how strong the foot soldiers, if they're pursuing the wrong strategy, the likelihood of victory is limited.

 Many Japanese companies don't make much of marketing and simply apply the Japanese-style eigyo approach to their China business. As a result, they have been unable to supply products and services accurately tailored to the needs of the Chinese market, which sits outside the scope of conventional developed-world thinking in all its parameters. At home, personnel in eigyo divisions and the product development divisions responsible for manufacturing can often work out market needs by themselves to some extent, but that doesn't work with the Chinese market. And because they haven't even recognized the fact that they don't have an accurate picture of Chinese market needs, they believe that the reason product and service sales are failing to grow is flat demand in the Chinese market, not because of problems in their own product development and sales strategies.

 Considering the case of foreign companies entering the Japanese market exposes the challenges. For food products, companies must know what flavors and serving sizes Japanese consumers like; in the case of cars, the functions, appearance and interiors that Japanese consumers prefer; for apparel, the design and quality that have appeal here. Virtually no foreign companies depend on foreigners for this knowledge. This simple fact makes very clear the type of management which Japanese companies need to pursue in the Chinese market.

 In short, marketing needs to be placed in the hands of talented Chinese with a good grasp of the Chinese market, based on which local top management need to build a comprehensive management strategy. Their judgment should be respected by management back home, with product development strategies, sales strategies, PR and advertising strategies and personnel deployment carefully tailored accordingly.

 In order to leave key management decisions to local management, parent companies need to place local management in the hands of talented Chinese leaders along with talented Japanese leaders trusted by the company president. For the Japanese leader, providing appropriate support for the management strategies spearheaded by the Chinese leader while ensuring close partnership between the local operation and the parent company will be critical responsibilities.

 The third reason is that Japanese companies do not transfer enough power to their local subsidiaries. This is due to a number of factors: a lack of talented Chinese leaders to whom power can be transferred; management's lack of understanding of the importance of transferring power; resistance from the various divisions responsible for making a profit out of the company's China business; and resistance from internal administrative divisions to any rapid organizational change. Because these issues also impact heavily on the distribution of power among the relevant company executives, dialogue amongst executives will fail to produce a conclusion. The company president must make the decision that power will be transferred to the local subsidiary and act resolutely on that decision.

 The transfer of powers to local subsidiaries-in other words, localization-is the root of management globalization. The personnel best equipped for accurately reading Chinese market needs are Chinese. The personnel best equipped for making decisions on product development, sales strategies, advertising and personnel deployment geared to those needs are Chinese. Companies can get away to some extent with instead using personnel from Taiwan or Hong Kong with a good understanding of China, but Japanese natives are almost out of the question.

 Building the necessary company structure to pursue management globalization requires a major transformation in management structure. Many Japanese companies believe that they have already successfully risen to the challenge of globalization, but the true globalization of management requires localization-in other words, transferring power to local subsidiaries-an achievement that remains beyond most Japanese companies.

 This is apparent when we look at who is in charge of making profit from China business. In many companies, business divisions under the charge of an executive from the parent company have that profit responsibility; few companies leave it to a Chinese Chief Representative who orchestrates the whole range of the company's operations in China. Because power is not granted to positions without profit responsibility, little progress is made toward localization.

 Japanese companies aiming to expand their sales channels in the Chinese market will need to pursue localization as the flipside of globalization of the parent company's management structure. To meet the challenge of China's transforming market, Japanese companies will need to transform themselves into global companies.

 Companies that seize this opportunity to push boldly ahead with localization and achieve success in the Chinese market are also highly likely to realize globalization in markets other than China and boost their competitiveness as well.

 Many Japanese companies boast world-leading technological development capacity and production management ability. However, many lag behind their Western counterparts when it comes to marketing ability and management localization. Taking on the challenge of the Chinese market is a great opportunity for Japanese firms to enhance the international competitiveness of their management and boost their presence in global markets.


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