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Section 3 Challenges and strategies for Japanese corporate activities in the East Asian region
<Key Points>
1. Characteristics of Japanese corporate activities in the East Asian region and development of a
business environment
Looking at the comparative advantage structure between Japan and each region in East Asiain terms of trade, in relations with China, there is a downward tendency in sectors such asproducts and partially completed products, while comparative advantage is increasing in somematerials and parts. This is thought to be an indication of the deepening degree of internationalspecialization relationships between Japan and China, in a similar way to the NIEs and theASEAN 4, and looking at such relationships, it will be important as a strategy of companieslocated in Japan to maintain value-added key components and a supply strategy for East Asia. The following points will be discussed with regard to the overseas business activities ofJapanese companies: (1) Characteristics of motivation for entry into the East Asian region anddevelopment of business; (2) recouping of headquarters costs and collection of profits; (3)making the most of merits in business costs; (4) local management structure; (5) R&Dactivities; and (6) efforts by Japanese companies with the opening of the Chinese market. Withregard to (1) above, the difference in comparisons between Japanese companies and foreigncompanies is that Japanese companies emphasize balance in production functions betweenChina and ASEAN and foreign companies focus on the use of R&D functions. With regard to(2), there are some cases in which the recouping of headquarters costs and collection of profitsrelating to Japanese overseas business activities are not progressing smoothly and it isnecessary for the Japanese companies’ side to focus on means of appropriately recoupingheadquarters costs. In addition, it is necessary for the government side to formulate and clarifystandards relating to the operation of various systems. With regard to (3) to (5), it is necessary toachieve efficiency and optimization in local corporate management structures concerning localprocurement, local response and local R&D, while appropriately adjusting a variety of methodsto achieve efficiency depending on the business situation. With regard to (6), in response to theexpansion of business opportunities following the opening of China’s distribution market withits accession to the World Trade Organization (WTO), various efforts are being made bymanufacturing and distribution companies. With regard to manufacturing companies, mutuallybeneficial relations are being created with Chinese companies. In addition, with the intensifyingcompetition among distribution companies, some companies are expanding their businessesthrough unique business development, and in order to contribute to an enhanced presence in thefuture it will be necessary to pay careful attention to the implementation of pledges to abolishrestrictions in the Chinese distribution market. With the rapid changes enveloping the East Asian region, it will be necessary for Japanesecompanies to maximize the benefits of the merits of market growth in their local businessactivities, and construct an optimal management structure in response to business realities toensure that their own competitiveness is further enhanced through maximum use of the
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outstanding cost competitiveness of East Asia. In addition, in the East Asian region and aboveall in ASEAN, as a result of Japanese companies’ early advance into those countries theypossess some advantages over companies from other countries, and this fact is important fromthe perspective of avoiding excessive concentration in China. To this end, in addition toconstructing a management structure to realize an “ASEAN optimum” that takes ASEAN as awhole, it is necessary to create a business environment that will enable Japanese companies toconduct economic activities without obstruction, including the formulation of a swiftlyeffective ASEAN Free Trade Agreement (AFTA) and the promotion of economic partnership.
2. Strategic efforts by Japanese companies in the East Asian region Given the changes enveloping the East Asian region, there are a considerable number ofcompanies that are succeeding in gaining profits, through strategic efforts such as creating newdemand through differentiation and constructing an optimal production and specializationstructure with the greater East Asian region. What many of these companies share in commonin their efforts is a focus on the construction of a management structure that will actively makethe most of new demand and cost competitiveness as they grasp the business opportunitiesprovided by the expanding East Asian economy. With the growing East Asian economybecoming mainly a battlefield for competition among global corporations, it will be necessaryfor Japanese corporations to create an optimum management structure that will facilitate themaximum benefit being derived from the merits inherent in East Asia, including those from thestandpoint of the greater East Asian market, while diversifying their view to make the most ofthe East Asian region.
The previous section outlined the earnings performance of Japanese companies in the growing East
Asian market.
This section describes the challenges for Japanese corporate activities in the East Asian region and
strategic approaches that have proved successful for expanding business in this region, focusing on the
following points with regard to the approaches necessary to improve the earnings performance of
Japanese companies in the East Asian region in the future: from a macro-economic perspective on (i) the
comparative advantage structure between Japan and each region in East Asia in terms of trade; and from
a micro-economic perspective on (ii) the characteristics of motivation for entry into the East Asian
region and development of business, (iii) recouping of headquarters costs and collection of profits, (iv)
making the most of merits in business costs, (v) local management structure, (vi) local R&D activities,
and (vii) efforts by Japanese companies with the opening of the Chinese market.
1. Characteristics of Japanese corporate activities in the East Asian region and development of a
business environment
(1) Characteristics of the comparative advantage between Japan and each region in East Asia in
terms of trade
<Increase of comparative advantage in high value parts>
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Looking at the comparative advantage structure between Japan and each region in East Asia in terms
of trade from the viewpoint of trends in revealed comparative advantage (RCA)1 (Fig. 2.3.1), there is a
general downward tendency in relations with all regions in the sector of products and partially
completed products, such as television equipment, VTRs and other end products. In particular, a sharp
downward tendency for television equipment in relations with China is evident.
By region, the RCA over the NIEs (Fig. 2.3.1 (1)), has been falling in the sector of products and
partially completed products such as television equipment and VTR since the mid-1990s. On the other
hand, the RCA has remained strong in the sector of materials and parts such as non-ferrous metals and
electronic components (semiconductors, etc.) as well as and iron and steel.
A high RCA has been maintained over ASEAN 4 (Fig. 2.3.1 (2)) for products and partially completed
products such as metal processing equipment and engines, and for materials and parts such as electronic
components (semiconductors, etc.), iron and steel, non-ferrous metals and auto components.
Against China (Fig. 2.3.1 (3)), there is a downward tendency for most items in the sector of products
and partially completed products except for metal processing equipment and communications
equipment. In the sector of materials and parts, however, the RCA for electronic components
(semiconductors, etc.) and auto components is gradually increasing.
In other words, in the specialization structure with China—including Japanese affiliates located in
China—the comparative advantage of high value parts manufactured by companies located in Japan is
increasing. These trends seem to be an indication of the deepening of international specialization
relationships between Japan and China, demonstrated by the shift in the trade structure from
products/partially completed products to highly functional materials/parts. This shift, in turn, is in line
with the development of international specialization relations with China, which is changing its role
from export destination to a location for knockdown production and to full-fledged production in local
plants, in the same way as NIEs and ASEAN 4 countries. The competitive strategies of Chinese
companies and Japanese companies located in China also seem to be contributing to this relationship.
In other words, Chinese companies do not produce key components and depend on procurements from
foreign companies; their strength is mostly in the form of production specialized in processing and
assembly. Another reason for this trend is the fact that many Japanese companies located in China are
focused on processing and assembly in order to take advantage of the low labor costs, leading to the
structural dependence of China on imports from Japan for key components. To put it the other way
around, in order to maintain the comparative advantage and to uphold and improve the competitiveness
of business activities in Japan, it is increasingly more important for companies in Japan to provide key
components, which embody high technological skills, to local companies in China and elsewhere as
well as Japanese companies that are operating in East Asia. According to a questionnaire survey carried
out by JETRO of Japanese companies located in Asia, when asked what they intended to do as a
1 Revealed comparative advantage (RCA) is an index which identifies the ratio of exports of each Japaneseproduct to each region by comparing it with the average global exports ratio. When RCA is more than one,the product can be seen to have comparative advantage. RCA for trade in each region = (Amount of eachJapanese product exported to each region/Total amount of Japanese exports to each region) / (Amount of eachJapanese product exported globally/Total of Japanese global exports).
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Figure 2.3.1 Trends in revealed comparative advantage in trade
between Japan and each region of East Asia
response to the intensifying competition among Japanese companies in Asia, the majority or 51.9
percent of the companies point out “producing high value-added items” (Fig. 2.3.2). This seems to
indicate the ever-increasing importance of key components exported from Japan for Japanese
companies operating in East Asia as part of their strategies for competitiveness and is expected to result
in further increase in the exports of key components from Japan.
Products and partially completed products
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1995 1996 1997 1998 1999 2000 2001 2002(Year)
(RCA)
Television equipment
Metal processing equipment
communication equipment
engines
VTR
Auto
motorcycles
Materials and parts
0.0
0.5
1.0
1.5
2.0
2.5
1995 1996 1997 1998 1999 2000 2001 2002（Year）
(RCA)
Steel
Non-ferrous metals
Auto components
Electronic components (semi conductors, etc.)
Products and partially completed products
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1995 1996 1997 1998 1999 2000 2001 2002（Year)
(RCA)
Television equipment
Metal processingequipment
Communicationequipment
Engines
VTR
Auto
Motorcycles
Materials and parts
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1995 1996 1997 1998 1999 2000 2001 2002(Year)
(RCA)
Steel
Non-ferrous metals
Auto components
Electronic components (semiconductors, etc.)
Products and partially completed products
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1995 1996 1997 1998 1999 2000 2001 2002(Year)
(RCA)
Television equipment
Metal processing equipment
Communications equipment
Engines
VTR
Auto
Motorcycles
Materials and parts
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1995 1996 1997 1998 1999 2000 2001 2002(Year)
(RCA)
Steel
Non-ferrous metals
Auto components
Electronic components (semi conductors, etc.)
Recentincreasing trend
Note: RCA for trade in each region of East Asia is calculated thus:(Amount of each Japanese product exported to East Asia/Total amount of Japanese exports to each region of East Asia）
= (Amount of each Japanese product exported globally/Total of Japanese global exports）
Source: The Summary Report on Trade of Japan (Japan Tariff Association).
(1) To NIEs
(2) To ASEAN4
(3) To China
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(2) Characteristics of motivation for entry into the East Asian region and development ofbusiness of Japanese affiliates and foreign affiliates2
(a) Comparison of motivation for entry of foreign affiliates in China and ASEAN
Looking at the results of a questionnaire survey (See AN 2.3.1) carried out among major foreign
affiliates in East Asia for their motivation for entry into the region (into China and ASEAN in particular,
with emphasis on Thailand3) there is a significant difference in the perceived attraction among countries.
For both China and ASEAN, the “growth potential of the local market” is the most highly rated feature
at the initial period of the entry (5.0 for China and 4.1 for ASEAN). The absolute evaluation of each
feature shows that ASEAN falls behind China overall.
Next, in view of the change in the level of attractiveness from the initial period of entry to the present
day, for China, there is a significant increase in the level of attractiveness of such factors as “local
infrastructure (transport, communications, electricity, etc.)” (3.3 à 4.0), “excellent local human
resources (white collar)” (2.7 à 3.6), and “local technology and R&D” (2.1 à 2.9). Although the level
of attractiveness of those features has increased for ASEAN as well, ASEAN is falling behind China in
terms of rate of increase for each feature (Fig. 2.3.3).
As for the Japanese affiliates’ motivation for entry into China and ASEAN 4 (Fig. 2.3.4 (1)), the
majority of companies consider China more attractive than ASEAN 4. Most companies point out as a
reason they consider China more attractive than ASEAN 4 the “growth potential of the Chinese market”
(Fig. 2.3.4 (2)).
It can be concluded that Japanese affiliates and foreign affiliates alike prefer China over ASEAN as a
destination for market entry because of the attractiveness of the Chinese market growth potential.
2 In order to distinguish Japanese affiliates from foreign affiliates, the term “foreign affiliates” as used in thissection does not include Japanese affiliates.3 Since this survey was conducted among European and US foreign affiliates, the replies concern mainlyThailand, which is the major base for a wide-range entry of European and US companies in East Asia.
51.9
42.9
42.1
37.9
34.5
16.5
8.2
7.8
6.2
3.5
0.0 10.0 20.0 30.0 40.0 50.0 60.0(%)
Producing high value-added items
Increasing local procurement
Aggressive marketing
Streamlining operations
Recruiting and training personnel, hiring local staff
Improving efficiency of logistics system
Localization of management strategy and decision making
Outsourcing
Transferring production facilities to third country
IT investment
(Answers)
Figure 2.3.2 Responses to the intensifying competition in Asia
Note: Multiple answers. Valid answers from 1,901 companies.Source: JETRO (2002).
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(2) ASEAN
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0(Level of attractiveness
for the initial period)
Attractivenessincreased afterthe entry
Attractiveness decreasedafter the entry
(Level of attractivenessin present day)
Figure 2.3.3 Trends in motivations for entry of foreign affiliates in China and ASEAN
(1) China
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
(Level of attractivenessfor the initial period)
1. Growth potential of local market2. Low cost of local labor (blue collar)3. Excellent local human resources (white collar)4. Easy acquisition of local land5. Rich natural resource6. Local technology and R&D7. Foreign capital inducement policy by the local government8. Local infrastructure9. Request by major client
Attractivenessincreased afterthe entry
Attractiveness decreasedafter the entry
(Level of attractiveness inpresent day)
(1) Comparing the attractiveness of ASEAN and China as mid-term stronghold of production
China is moreattractive than
ASEAN 4
Cannot decide at themoment
ASEAN 4 is moreattractive than China
Note: Valid answers from 469 companies.Source: Japan Bank for International Cooperation (2002).
56.7%
10.2%
33.0%
(2)The reason for considering China and ASEAN4 as attractivestrongholds of production
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%(Answers)
(Ratio to the total number of answers)
Reasons for considering China to beattractive
Reasons for considering ASEAN 4 to beattractive
Note: Multiple answers. Valid answers from 266 companies in China and 48 companies in ASEAN 4.Source: Japan Bank for International Cooperation (2002).
Growth potential of themarket
Easy to secure low-cost labor
Easy to secure low-costmaterials
Easy to secure good workers
Easy to secure goodmanagers
Other reasons
Figure 2.3.4 Motivation for entry of Japanese affiliates into China and ASEAN
as mid- and long-term strongholds of production
Source: METI
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(b) Functions to be strengthened by foreign affiliates in China and ASEAN What kind of functions do foreign affiliates plan to strengthen in China and ASEAN in the future?
Looking at the functions foreign affiliates intend to strengthen, for China the highest rated function is
“R&D” (56.5 percent) followed by “sales to the local market” (52.2 percent), while the rating of
production-related functions, such as “component production” (17.4 percent) and “assembly of
completed components” (8.7 percent) is distinctively low. For ASEAN, on the other hand, the highest
rated function is “sale to the local market” (94.4 percent), followed by “component production” (77.8
percent). In other words, there seems to be a tendency for foreign affiliates to gradually strengthen their
sales to the local market in China and ASEAN, while placing emphasis on the R&D function (rather
than on the production function) and strengthening it, particularly in China (Fig.2.3.5).
Japanese affiliates, on the other hand, tend to rate highest the strengthening of the “production”
function, followed by the “sales” function. In other words—although the difference in the number of
samples and in the categories included in the survey make precise comparison difficult—a characteristic
that can be pointed out for Japanese affiliates is that they seem to place relatively low priority on the
strengthening of the R&D function when compared to the trend of foreign affiliates in China (Fig.
2.3.6).
Figure 2.3.5 Functions to be strengthened by foreign affiliates
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Component Production
Assembly of completed components
Sale to the local market
R&D
Distribution, logistics
Regional administrative functions
Local market research
Component procurement from local market
After service
(Function)
(Response rate)
ChinaASEAN
Note: Multiple response formatSource: METI search
Figure 2.3.6 Functions to be strengthened by Japanese companies
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Production
Sales
R&D
Regional administrativefunction
(Function)
(Response rate)
ChinaASEAN 4
Note: Multiple response format. Valid responses were received from 518 companiesoperating in China and 341 companies operating in ASEAN 4.Source: Japan Bank for International Cooperation (2003).
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(c) Trends related to the allocation of functions and the base strategy in the entire East Asian
region
What do these foreign affiliates plan to do with regard to allocation of functions and base strategies in
the East Asian region?
Looking at foreign affiliates’ plans for allocation of functions in the East Asian region among their
bases in China and ASEAN, companies that have entered into China show a stronger tendency toward
concentration of functions than companies that have entered ASEAN (an average of 54.5 percent for the
former against 16.7 percent for the latter). Looking at the companies that have entered into China by
type of industry, the tendency toward concentration of functions is stronger for electric and electronic
appliances, and for general and industrial machinery than for automobiles, with the distinctions among
industries quite clear (automobiles 40.0 percent, electric and electronic appliances 80.0 percent, general
and industrial machinery 100.0 percent). Presumably, this is because i) companies in the automobile
industry adopt different sales strategies according to the characteristics of consumers in each country
and region, and ii) concentration is easier for electric and electronic appliances, and general and
industrial machinery in terms of compatibility of parts and other architectural aspects in these industries.
Another point of note is that for the food-related industry, all companies are choosing to maintain the
status quo, presumably because of the need to adjust products to the characteristics of each market (Fig.
2.3.7).
As for the trends in function allocation and base strategies of Japanese affiliates, looking at their
approach for the business development activities in China and ASEAN 4 (Fig. 2.3.8), most companies in
all industries are taking the balanced approach in their base strategies4.
4 According to the Japan Bank for International Cooperation (2003), for both China and ASEAN, this“balance” may be taking two different values into account: the attractiveness as a market and the
Figure 2.3.7 Trends in allocation of functions of foreign affiliatesin East Asia
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Average fo
r China
Average f
or ASEAN
Automobiles (China)
Automobil
es (ASEAN)
Electrics a
nd electro
nics（China ）
Electrics a
nd electronics (
ASEAN)
General industria
l machinery (China)
General industria
l machinery (ASEAN)
Chemicals (China)
Chemicals
(ASEAN)
Food (China)
Food (ASEAN)
Distribution (China)
Distribution (ASEAN) (Types of
industry)
(Share of answers)
1. Decentralize functions within East Asia2. Maintain the status quo3. Concentrate functions in specific area within East Asia
Note: No companies operating in China answered that they would “decentralize the functions.”Source: METI.
Maintain thestatus quo
Decentralize
Concentrate
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Industry Emphasis on China Emphasis on ASEAN Balanced approachAll-industry average (461) 26.0% 5.6% 53.8%Chemicals (76) 25.0% 5.3% 53.9%General machinery (50) 28.0% 8.0% 50.0%Electrics and electronics (88) 30.7% 1.1% 58.0%Automobiles (77) 18.2% 5.2% 59.7%Precision machinery (22) 45.5% 0% 31.8%
These trends show that Japanese affiliates take into account the risks of extreme concentration of
functions in China alone and are reluctant to carry out a concentration for the entire East Asian region.
However, the tendency to emphasize the balance between China and ASEAN 4 is particularly strong for
industries such as the automobile industry, and the electric and electronic appliances industries, where
Japanese companies have a substantial buildup in ASEAN 4 due to direct investments and need to
respect the characteristics of the market (59.7 percent for the automobile industry, and 58.0 percent for
the electric and electronic appliances industry). Thus, it is obvious that regarding the concentration of
functions in the entire East Asian region, there are certain differences depending on the characteristics of
the type of industry, just like in the case of foreign affiliates.
(3) Characteristics of recouping of headquarter costs and collection of profits
As already mentioned, the presence of the East Asian region as a source of profit for Japanese
companies has been increasing in line with the accelerating pace of Japanese companies’ overseas
expansion. With this expansion of overseas business activities, recouping of R&D costs and collection
of profits overseas are becoming increasingly important. That is why this section outlines the status of
collection of licensing fee revenue and overseas profit of Japanese companies.
(a) Licensing fee in East Asia
Looking at the levels of running royalty5 rates of technology exports by companies located in Japan by
country/region, for running royalty rates less than 5 percent in total, China holds the largest portion or
69.7 percent (Fig. 2.3.9).
This apparently indicates a trend among companies located in Japan to be unable to secure sufficient
amount of royalties from China for the technology and know-how they have provided6. However, as the
attractiveness as a production base. For some companies the “balanced approach” may mean placingemphasis on ASEAN 4 as a market (“developing in ASEAN a system suited to local demands, takingadvantage of advanced technology”) and on China as a production base (“for export to Japan, low-endprocesses to be carried out in China”) (a company in the electric/electronics industry); for others, it may mean“production specialization structure” (“carrying out high-precision limited production of diversified productsin ASEAN and making products suitable for mass production in China”) (a company in theelectric/electronics industry). However, the Japan Bank for International Cooperation suggests that in mostcases the balance probably means looking to enter the Chinese market (avoiding risks) while maintaining thebuildup in ASEAN countries.5 Running royalty is royalty paid on output of contracted products or for the period of contract.6 It has been pointed out that administrative guidance regarding the level of running royalty rates still exists inChina (Suzuki, 2002).
Figure 2.3.8 Business development activities of Japanese companies in China and ASEAN 4
Note: Excluding "comparison impossible" and "other."Source: Japan Bank for International Cooperation (2003).
(Unit: %)
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number of companies surveyed was small and the level of technologies covered by the contracts is
unclear, it is difficult to determine whether the reason for this trend lies in underestimation of the value
of technology/know-how of the licensee country. Still, it has been pointed out that problems stemming
from underestimation of technology/know-how have occurred in China7. In order to solve such
problems and facilitate technology import, it is necessary to put forth efforts for improving the
recognition and appreciation of the licensee country for technologies and know-how.
Also, in cases where production is carried out in the form of joint venture, the appropriate recouping of
costs is possible only when the expenses incurred by the headquarters of a Japanese corporation, such as
R&D costs, are correctly reflected in the cost calculation for local production when formulating local
production plans; otherwise these expenses will have to be covered solely by the headquarters of the
Japanese corporation. Therefore, it is very important for Japanese companies to clearly set out in their
operation strategies the viewpoint of appropriately recouping costs incurred by the company as a whole
for creation of high value-added intangible assets, such as intellectual property, know-how, and brand.
Less than2%
2-5% Less than5% intotal
5-8% More than8%
Unit costcontract
Periodcontract
No response Total
No. % No. % % No. % No. % No. % No. % No. % No. %All regions 23 10.2% 82 36.4% 46.7% 19 8.4% 13 5.8% 27 12.0% 8 3.6% 53 23.6% 225 100.0%NorthAmerica
4 9.3% 8 18.6% 27.9% 7 16.3% 5 11.6% 4 9.3% 0 0.0% 15 34.9% 43 100.0%
Europe 5 15.2% 6 18.2% 33.3% 1 3.0% 2 6.1% 3 9.1% 2 6.1% 14 42.4% 33 100.0%Asia 12 10.1% 65 54.6% 64.7% 9 7.6% 1 0.8% 18 15.1% 6 5.0% 8 6.7% 119 100.0% China 2 6.1% 21 63.6% 69.7% 4 12.1% 0 0.0% 5 15.2% 0 0.0% 1 3.0% 33 100.0% NIEs 7 20.0% 14 40.0% 60.0% 3 8.6% 1 2.9% 6 17.1% 1 2.9% 3 8.6% 35 100.0% ASEAN 4 1 3.2% 17 54.8% 58.1% 1 3.2% 0 0.0% 6 19.4% 4 12.9% 2 6.5% 31 100.0%
(b) Collection of profits of Japanese companies in East Asia
Appropriate collection of overseas profits is necessary in order to truly put the fruits of the Japanese
companies’ overseas expansion to use for the revitalization of companies located in Japan. Comparing
the collection of profits of Japanese companies in Asia in recent years with that in North America and
Europe, it is apparent that, for the Asian region as whole, the collection has been achieved on the same
scale as in North America. (The average share of collected profits over a period of five years is around
40 percent in both North America and Asia (Fig. 2.3.10).)
Next, looking at the share of disbursements for investors in the after-tax profits of each region in East
Asia, ASEAN 4 tops other regions with 95.0 percent (Fig. 2.3.11).
7 It has been pointed out that there are many problematic cases, where technology guidance is conducted untilthe technology can actually be put to use, and licensing fees are charged according to previous agreement, atwhich point the licensee refuses payment on the grounds that “this technology is widely available and doesnot constitute expertise” (Kita (2002)). Also, patent rights are often not established for a technology/know-how due to delayed patent examinations; as a result, Japanese companies incur substantial damages due toproducts infringing potential intellectual property rights, such as counterfeited products which are not underlicense contracts.
Figure 2.3.9 Running royalty rates of technology exports by Japanese companies(by country/region: FY2000)
Source: National Institute of Science and Technology Policy of the Ministry of Education, Culture, Sports, Science and Technology (2003).
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1996 1997 1998 1999 2000 5-year average ShareNorth America 147,776 247,721 352,193 361,000 395,517 300,841 42.7%Asia 193,404 226,656 337,499 340,475 351,771 289,961 41.1%China 15,010 40,110 51,166 39,058 55,271 40,123 5.7%ASEAN 4 95,921 99,101 146,945 195,567 146,886 136,884 19.4%NIEs 78,701 79,622 131,567 97,351 138,401 105,128 14.9%Europe 47,206 64,591 97,204 103,609 123,926 87,307 12.4%All regions 409,709 571,633 815,081 824,017 905,339 705,156 100.0%
Disbursements for investors (A) After-tax profits (B) (A)/(B)Asia 351,771 605,641 58.1% China 55,271 146,921 37.6% ASEAN 4 146,886 154,644 95.0% NIEs 138,401 303,368 45.6%All regions 905,339 1,074,340 84.3%
It is difficult to estimate the situation on the basis of this data alone, but it does seem to indicate that the
collection of profits from after-tax profits has proceeded much more smoothly in ASEAN 4 than
elsewhere in East Asian regions. In China, by contrast, the collection of profits in the form of remittance
of dividends does not seem very compared with ASEAN 4. This trend can be explained with the fact that
it is relatively difficult to remit dividends in China due to the Chinese policy of foreign currency control.
However, the retained earnings ratio of Japanese affiliates is lower in China than in any other major
region (Fig. 2.3.12).
FY2000North America 89.4%Asia 79.1%China (includes Hong Kong) 74.4%Hong Kong 87.0%ASEAN 4 86.3%NIEs 3 74.6%Europe 103.1%All regions 84.4%
Figure 2.3.10 Trends in the disbursement for Japanese investors
Note: 1.“Disbursement for Japanese investors” is the sum of dividend, interest on debt, royalty and fee for technical guidance paid each year. 2. Data of manufacturing industry.Source: Survey of Overseas Business Activities (METI).
(Unit: Million yen)
Figure 2.3.11 Ratio of disbursements for investors to after-tax profits of East Asian regions(Manufacturing industry: FY2000) (Unit: Million yen)
Source: Survey of Overseas Business Activities (METI).
Figure 2.3.12 Retained earnings ratio of East Asian regions
(Manufacturing industry: FY2000)
Note: 1. Due to data restriction, the value of "China" includes that of Hong Kong. 2.NIEs 3 refers to ROK, Taiwan and Singapore.Source: Survey of Overseas Business Activities (METI).
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This is probably due to Japanese companies’ tendency to carry out transfer of profits8 taking advantage
of transfer pricing in an attempt to avoid various risks inherent in the Chinese economy, such as changes
in the business system, for example. Under normal circumstances, collection of profits by headquarters
of Japanese corporations should be conducted not through price adjustments in merchandise trade that
utilize transfer pricing, but through non-merchandise trade such as remittance of dividends which reflect
the actual state of business. Therefore, deregulation related to remittances in non-merchandise trade, and
formulation and clarification of standards pertinent to authorization of transfer pricing in trade of
intellectual property, brands and other intangible assets are necessary from the viewpoint of facilitating
the recouping of costs and collection of profits of Japanese companies.
(4) Characteristics of making the most of merits in business costs
(a) The perspective of expanding local procurement
For all Japanese companies, export-oriented and local sales-oriented alike, that operate in the East
Asian region amidst the severe competition with European, US and local companies, reduction of
business costs is an extremely important task. According to a questionnaire survey implemented by
JETRO among Japanese companies located in Asia, the majority or 76.0 percent of the companies point
out “selling price” as the most strongly felt indicator of the intensifying competition in the Asian region
(Fig. 2.3.13). In other words, companies are in a situation where they must further cut down business
costs in order to reduce selling price.
However, further reduction of human resources has become insignificant as Japanese companies are
already located in countries where such costs are low. The proportion of human resource costs to total
business costs is 4.0 percent in the Asian region (3.5 percent in China) while it is as high as 14.4 percent
in Japan (Fig. 2.3.14).
8 As the enforcement of the transfer pricing taxation system in China was strengthened in 1998 and becauseof the lack of experience of the Chinese enforcement authorities in the field of transfer pricing, the collectionof profits by headquarters of Japanese companies through transfer pricing involves greater risks.
76.0
46.6
19.3
13.3
10.6
5.1
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 (%)
Local selling price
Export price
Quality, functions
Delivery time
Differentiation of products
Service
(Indicators)
Figure 2.3.13 Most strongly felt indicators of the intensifyingcompetition in the Asian region
Note: Multiple answers. Valid answers from 1,900 companies.Source: JETRO (2002).
- 159 -
In other words, for Japanese companies that are already located in East Asia, the most important
strategy in order to cut down business costs is to reduce material and component costs. Toward that end,
companies must strive for cutting business costs through expansion of local procurement. According to
the questionnaire survey carried out by JETRO, as much as 42.9 percent of the companies included in
the survey point out “increasing local procurement” as a measure to respond to the intensifying
competition (Fig. 2.3.2), which indicates a widespread awareness of this issue. Yet, this does not mean
that expansion of local procurements is an effective measure in all cases. Objective calculation of costs
in regard to components with scale merit produced in Japan and ASEAN countries shows that it is often
more reasonable to import components from already established production bases than to procure them
locally. In the automobile industry, for example, the growth of the Chinese market is indeed remarkable,
but companies, taking into consideration the risks of the Chinese market, should explore the possibilities
for efficient utilization of the established ASEAN production bases where investments have been made
for many years now.
(b) Strategies for expansion of local procurement
In order to expand local procurement of components, it is often important to design and develop
products keeping in mind the possibilities to take advantage of low-cost general purpose components
that are already available in the markets in the East Asian region, as in the case of the electric and
electronic appliances industry, for example. But even in such cases, the cost of components and
materials is not composed solely of the cost of components and materials that are available on the
market and therefore, in expanding local procurement of components, it is necessary to explore
opportunities for cost reduction with consideration of components specific for certain products whose
local market procurement is difficult because of quality and/or other requirements. For that reason,
companies need to improve the efficiency and the technical level of all their local supply chains through
measures such as careful selection of appropriate suppliers and technical guidance toward quality
improvement, while paying sufficient attention to the protection of intellectual property rights in order
to prevent outflow of technologies.
Figure 2.3.14 Proportion of human resource costs tototal businesscosts in manufacturing in Japan and overseas
14.4%
5.7%
6.8%
3.5%
4.2%
4.2%
4.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
Domestic companies
Foreign companies (whole region)
North America
Asia
China
ASEAN4
NIEs
(Country/Region)
(%)Note: 1.Calculated by: total salaries/sales cost + distribution costs and general management costs. 2. Data is for FY2000.Source: Survey of Overseas Business Activities (METI), Financial Statements Statistics of Corporations byIndustry (Ministry of Finance).
- 160 -
(5) Characteristics of management structure of Japanese companies, and European and US
companies
(a) Strengthening local response of Japanese companies lagging behind
In their overseas business activities, Japanese companies have not much advanced the strengthening of
local response, which includes appointment of local staff to high managerial positions and transfer of
decision-making authority to local affiliates.
Specifically, in overseas affiliates of Japanese companies (in the manufacturing industry), the share of
locally hired top executives is 27.9 percent for Asia as a whole and 28.6 percent for China. These
numbers indicate that the appointment of local staff to high managerial positions is not yet advanced
(Fig. 2.3.15).
Top executive Deputyexecutive
Personnel,labor
management
Accounting Sales Purchasing R&D Planning,research
All regions 28.9 38.9 69.9 60.9 53.1 63.0 31.2 34.8Asia 27.9 36.9 68.9 60.1 49.4 59.2 27.5 31.4
NIEs 34.7 38.7 67.8 67.5 57.7 64.8 34.4 38.5 ASEAN 4 21.6 27.1 68.3 53.9 38.9 52.2 20.1 24.7 China 28.6 46.6 70.8 60.6 54.5 63.1 28.9 31.2
North America 28.8 43.3 71.6 60.3 60.1 71.6 40.1 41.5Europe 31.3 43.8 73.1 67.1 59.7 68.2 38.9 40.1
In contrast, the majority of the top executive officers in European and US companies that have entered
the Chinese market are said to be of Chinese descent or distinguished local managers9, evidence that the
appointment of local staff to high managerial positions is common. In fact, looking at the nationality of
company presidents of major US and European companies, the share of presidents dispatched from the
home country is only 23.1 percent, while the presidents of approximately 80 percent of the companies
are either local people or people of Chinese descent (including Taiwanese nationals) (Fig. 2.3.16).
Total Local Third country Home country (Chinese)
Home country
Number 13 6 3 1 3% 100.0% 46.2% 23.1% 7.7% 23.1%
9 Japan Center for Economic Research (2002) p. 122.
Figure 2.3.15 Share of local employees in the management staff of offshore local affiliates ofJapanese companies (manufacturing)
(Unit: %)
Note: Data are as of FY1998. Local employees, Japanese staff, and N/A (position does not exist) should sum up to 100%.Source: Survey of Overseas Business Activities (METI).
Figure 2.3.16 Nationality of company presidents of US and European companies
Note: "Third country" persons are all of Taiwan or Chinese descent.Source: METI research.
- 161 -
With Japanese companies, the process of transferring decision-making authority to local affiliates has
not made much progress either. Regarding marketing, for example, final authority often lies not with
local affiliates but with international marketing divisions of companies’ headquarters. It has been
pointed out that this results in a tendency for marketing, which should be implemented on a consumer-
oriented basis, to not be properly reflected in the business development of local affiliates, and, as a
consequence, market strategies of local affiliates tend to focus solely on price competition, which is a
strong point of Chinese companies10.
On the other hand, observing the management structure of local affiliates of European and US
companies in China in detail, the decision-making authority pertinent to local marketing-related
functions, such as “business and customer development” and “product planning” has been largely
transferred to local affiliates (Fig. 2.3.17). In other words, the management structure of local affiliates of
European and US companies in China is established as a production and sales system independent from
the headquarters, and compared with local affiliates of Japanese companies, local affiliates of European
and US companies apparently possess greater decision-making authority.
(b) Impact of the delayed strengthening of local response
This delayed strengthening of local response on the part of Japanese companies is expected to produce
various adverse effects, such as i) obstructing the securing of good human resources and damaging the
motivation of employees, ii) slowing down the decision-making process in local affiliates, and iii)
obstructing the smooth creation of sales and procurement networks.
With regard to i), the current personnel system in Chinese companies is based on the Western-style
principles of merit and ability, where opportunities for career advancement rather than company scale
and salary are criteria in the choice of workplace for excellent human resources. Therefore, such human
resources tend to refrain from seeking employment in Japanese companies’ local affiliates where high
10 Sha (2001).
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Business and customer development
Product planning
Merchant/supplier
Personnel affairs
Research and development
(Section)
(Share of answers)
Source: METI.
Figure 2.3.17 Status of transferring decision-making authority to the local affiliates:
US and European companies operating in China
- 162 -
managerial positions are filled by people dispatched from Japan. Also, it is thought that slow promotion
may be a factor that damages the motivation of local employees.
With regard to ii), it has been noted that the slow decision-making process in Japanese companies
hampers the development and introduction of products that match the market needs and the creation of
an efficient local production and procurement structure, which seems to be leading to a tendency for
Chinese companies, the market and consumers to gradually distance themselves from such affiliates11.
With regard to iii), the effects of i) and ii) may result in a situation where a marketing and component
procurement network based on local business practice cannot be utilized efficiently.
(c) The necessity to strengthen local response
Needless to say, the strengthening of local response will not immediately produce direct effects such
as reduction of costs and improvement of earnings performance.
However, considering the response to the fast economic changes in East Asia and the influence on the
motivation of employees, efforts to strengthen local response are likely to produce some indirect effects
toward smoother and more efficient management of local affiliates. Furthermore, amidst the expanding
introduction of high value-added products into the East Asian markets and the ever stronger tendency
toward shortening of the product cycle on those markets, Japanese companies are required to speed up
and maximize the collection of profits through acquiring of even more responsive product development
power and fast advancement of distribution of the developed products on a global level.
Against this backdrop, in order to further improve their earnings performance through efficient
business operation in the East Asian markets, Japanese companies must strive to keep abreast with the
markets by accelerating the speed of the decision-making process related to management and production,
developing products and services that swiftly grasp the market needs and creating local distribution and
supply systems that can forestall competitors. To achieve all this, Japanese companies must advance
efforts for strengthening of local response. However, companies should keep in mind that in the event of
a merger with a local company when the non-local party brings in know-how pertinent to operation and
technology, it is often important that the Japanese affiliate take charge of management, as in the case of
the automobile industry, for example.
<Characteristics of management structure of Chinese companies that have been achieving growth
in recent years>
How does the management structure of Chinese companies, which are achieving growth in recent
years, compare with the local management structure of Japanese companies?
The echelon of management executives of Chinese companies, which have been attracting much
attention in recent years, is dominated by relatively young people in their late 30s up to early 50s (Fig.
2.3.18). Also, many major Chinese companies adopt a remuneration system which emphasizes
providing incentives according to employees’ abilities and achievements (Fig. 2.3.19).
11 Sha (2001).
- 163 -
Company Position Name AgeBaoshan Iron and Steel President Ai Baojun 41China First Automobile President Zhu Yanfeng 40Shanghai Automotive President Zhao Fenggao 51
Haier CEO Zhang Ruimin 52Konka President Chen Weirong 41TCL Chairman/President Li Dongsheng 44
Legend President Yang Yuanqing 37Stone Chairman Duan Yongqi 54
Tsingtao Brewery President Peng Zuoyi 51Petro China President Ma Fucai 53
Company Rewarding system Outline Applied sectionTCL Pseudo stock option Allocate 40% of the stocks of its subsidiaries to the
managers.Managerial section
Huawei Pseudo-stock option After a year of employment, employees become entitled tobuy stocks of the company.
Whole company
Haier Open-bid system Researchers make open proposal for product developmentprojects to ask for necessary funds. Remuneration dependson the degree of success of individual projects.
R&D section
Midea Target responsibility structure Managers (division heads or higher position) set numericaltargets for the next three years for sales, profits, etc. fortheir own sections. Their salary and bonus will depend onthe level of achievement of this target.
Managers (divisionheads or higher)
From this perspective, the production and supply of low-priced products taking advantage of low-cost
labor is not the only factor that underpins the drastic growth of Chinese companies; the creation of a
management structure based on merit and ability, in which relatively young managers exercise swift
leadership and which emphasizes speed and incentives also seems to be an important factor. This type of
management structure of Chinese companies, in combination with the processing and assembly-oriented
production system typical for the Chinese industry, seems to be working to their advantage.
In other words, under this swift management structure, Chinese companies seem to have succeeded in
rapidly increasing their share through measures such as i) fast development and launch at low cost of
products tailored to the market needs through the utilization of key components available on the existing
market, and ii) taking advantage of the company sales and distribution system and providing high-level
after-sales service for consumers.
(6) Characteristics of R&D activities of Japanese companies, and European and US companies
(a) Weak local R&D activities of Japanese companies in the Asian region
For Japanese companies whose business is local sales-oriented, local R&D activities are sometimes an
important element that contributes to the improvement of sales and earnings performance on the local
market. This happens, for example, when products designed and developed by the headquarters in Japan
do not match the needs or the preferences of the local market and need to be modified to meet the local
Figure 2.3.18 Young Chinese top executives in the spotlight
Note: Age is as of 2001.
Source: Inoue (2002) p.223.
Figure 2.3.19 Rewarding systems of managerial sections that arecharacteristic of Chinese corporations
Source: Nikkei Business (2002).
- 164 -
market needs. Also, local R&D activities can be an important element not only from the perspective of
improving sales and earnings performance, but also from the perspective of improving cost
competitiveness. In other words, in local production sometimes companies cannot procure the same
materials and parts as the ones envisioned in the design of their headquarters and therefore, in order to
realize low-cost local production, they must consider what kind of materials and parts are available
locally at the initial stage of designing and developing products for the local markets. In that sense, local
R&D activities perform an important supporting role for the local production systems. However, in the
overseas operation of Japanese companies, R&D activities in the Asian region are very weak compared
to R&D activities in North America or in Europe (Fig. 2.3.20). This is probably due to the fact that
Japanese companies’ entry into the Asian region has traditionally been focused on the region’s role as an
export base rather than on the sales in the local markets, and therefore the companies did not implement
proactive R&D activities pertinent to design and development of products that match the local needs.
(b) Active local R&D activities carried out by European and US companies in China
In recent years, European and US companies have been stepping up their R&D activities in China.
The ratio of cost for R&D to sales of offshore local affiliates of US companies, for example, has been
rising sharply, from 0.36 percent in 1998 to 1.57 percent in 1999 and 1.95 percent in 2000 (Fig. 2.3.21).
Also, a comparison between the R&D activities that US and Japanese companies carried out in China
and ASEAN 4 on the basis of the growth in total R&D costs in the manufacturing industry (Fig. 2.3.22)
indicates that US companies, though expanding their R&D activities in the entire East Asian region,
have concentrated their efforts on China, while Japanese companies have focused the development of
R&D activities in ASEAN 4, and R&D activities in China have remained sluggish.
0
50,000
100,000
150,000
200,000
250,000
300,000
1995 1996 1997 1998 1999 2000 1995 1996 1997 1998 1999 2000 1995 1996 1997 1998 1999 2000(FY)
(million yen)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0（％）
North AmericaEUAsia
Source: Survey of Oversesas Business Activities (METI).
Ratio of ordinary profit to sales(Manufacturing: right axis)
Total R&D costs
Asian region is seeing a poor trend in R&Dactivities
- 165 -
What is the current status of such R&D activities’ expansion in China?
The results of a questionnaire survey carried out among major foreign affiliates operating in the East
Asian market (See AN 2.3.1) indicate that all companies except for Japanese affiliates have transferred
to China mainly R&D functions pertinent to applied research with the objective of localization, and to
product design and development for the local markets (Fig. 2.3.23). Only one company, an electronics-
related manufacturer, replied that they were “carrying out (or planning to carry out) basic research,”
which, in this case, constitutes R&D focused on issues pertinent to the Chinese language in terms of
software development. In other words, the results of this questionnaire survey indicate that the share of
basic research in local R&D activities is very small and most R&D activities can be classified as applied
research.
Figure 2.3.21 Ratio of cost for R&D to sales ofUS offshore local affiliates
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
1994 1995 1996 1997 1998 1999 2000 (Year)
All regionsEuropeAsia-PacificChinaNIEsASEAN 4Japan
Note: Refer to Figure 2.2.12 for the definition of US offshore local affiliates.Source: USDIA (US Department of Commerce).
China
Japan
0
50
100
150
200
250
300
350
1995 1996 1997 1998 1999 2000
Source: Survey of Overseas Business Activities (METI).
China
ASEAN 4
(Base year 1995=100)
(FY)
US
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1995 1996 1997 1998 1999 2000 (Year)
Source: USDIA (US Department of Commerce).
China
ASEAN 4
(Base year 1995=100)
Figure 2.3.22 Trends in total R&D costs of Japanese and US offshore affiliatesin China and ASEAN 4
- 166 -
(c) Merits of local R&D activities implemented by European and US companies in China
This expansion of R&D activities in China seems to be stemming from the consistent strategy for the
Chinese market that European and US companies began at an early stage. In other words, major
European and US corporations see the potential of the Chinese market as a great business opportunity
and have proactively entered into the Chinese market from that perspective. The objective of their entry
has always been to take advantage of domestic demand, and companies have developed the R&D sector
as a strategic support of local business activities from the perspective of achieving the highest possible
profits.
In contrast to Japanese companies, which have fallen behind in the local R&D activities, European
and US companies are enjoying various benefits from their strategies for expansion of local R&D, such
as i) cost reduction through switching to local procurement of components, ii) response to the changing
local consumption structure (shortening of the technology and product cycle, and diversification of
demand and preferences), and iii) utilization of the local research infrastructure including local
engineers, universities and other research institutes. If Japanese companies wish to enjoy such benefits,
they must strive for greater efficiency of their local sales-oriented business activities through
implementation of local R&D activities.
However, the types of local R&D activities implemented by Japanese companies depend largely on
the strategy of each company. The Chinese economy is growing steadily, but it also has various factors
that constrain corporate activities. Against this backdrop, as well as with consideration to the market
characteristics of each type industry, the approach toward implementation of local R&D activities
differs depending on whether the company intends to build its earnings structure from a long-term
perspective, or prefers to raise profit from a short-term perspective. Each company should choose an
approach that matches its corporate strategy.
(d) Outlook on the future development of local R&D activities by Japanese companies in the
Asian region
Figure 2.3.23 Types of R&D activities foreign affiliates arecarrying out in China
0
10
20
30
40
50
60
70
80
90
100
All foreign companiesin China
Automobiles Electrics andElectronics
General industrialmachinery
Chemicals Food(Types of industry)
No R&D functions
Applied research only
Carrying out(or planning tocarry out) basicresearch as well
Source: METI.
(%)
- 167 -
Despite the abovementioned trends, in recent years Japanese companies too are showing signs of
gradual advancement in the development of R&D bases in China with a view to the potential of the
Chinese market. Looking at this advancement in detail, in most cases its objective is to provide swift
response to the needs of the local market (Fig. 2.3.24).
From the viewpoint of the importance of such response to market needs as a means to increase profits
in the Chinese market, the tendency for Japanese companies to expand their R&D activities in China are
likely to continue in the foreseeable future. Nevertheless, from the perspective of balanced creation of
bases in the entire East Asian region, it is important that Japanese companies implement in a well-
balanced manner R&D activities in ASEAN, China and other countries.
<State of Chinese Electronics Firms’ R&D Activity>
Overall, current R&D activity by Chinese electronics firms is lacking in vigor. However, some
companies are investing aggressively in research and development. Looking at the sales to R&D ratio of
the top 100 Chinese electronics, electric and IT companies, just 20 exceeded the R&D-sales ratio of
Japanese electrical device/equipment manufacturers (4.0 percent in FY2002), and 28 exceeded the ratio
of Japanese precision device/instrument manufacturers (5.0 percent), a paltry figure (Fig. 2.3.25).
This situation probably arises from the aforementioned fact that the strength of Chinese firms lies
mostly in processing and assembly-type production. It has been pointed out that companies in the home
appliances industry in particular, which represents the firms with the highest sales in China, do not
develop their own innovative core technology. Rather, they rely on externally procured key parts
developed in advanced countries (as imports or from foreign firms in China) directing their efforts to
acquiring and absorbing the technique to combine these parts into coherent products and putting this
technique to practice12.
12 Kita (2002), p. 30.
0 10 20 30 40 50 60 70 80 90
Swift response to the localmarket needs
Cost reduction
Local human resourcedevelopment
Shorter cycle of productdevelopment
Other
(Answers)
Note: Multiple answers. 218 valid answers.Source: JETRO (2002).
(%)
Figure 2.3.24 Reasons of Japanese manufacturing companies for setting up
Design/R&D section in China
- 168 -
Nevertheless, there are a few firms, mainly in the IT industry, which are aggressively investing in
R&D. The firm with the top market share in digital switchers, Huawei, is an R&D-based private
company which has established research centers in Silicon Valley and around the world, and is engaged
in technology partnerships with United States IT firms such as Lucent, Intel, Motorola, IBM, and Sun13.
Huawei boasted an R&D-sales ratio of 13.6 percent and a profit margin14 of 19.1 percent in 2000, both
remarkably healthy figures. At a time when Chinese companies in general are not making much money,
other PC and software development companies in China such as Legend (3.0 percent and 3.6 percent),
Founder (4.5 percent, 4.0 percent) and Tsinghua Tongfang (5.5 percent, 9.7 percent) are also realizing
high profitability, based on their strong investment in R&D.
(7) Response to the expansion of business opportunities following the opening of China’s market
Following its accession to the World Trade Organization (WTO), China has pledged to implement
progressive elimination15 of various restrictions in the distribution and other sectors. This is expected to
expand the business opportunities for Japanese companies as well. This section outlines the response of
various companies in the manufacturing industry and the distribution industry to the expansion of
business opportunities following the opening of the Chinese market.
13 Kuroda (2001), p. 59.14 Calculated by dividing total profit by sales.15 China pledged progressive elimination of restrictions in the distribution sector pertinent to sales andafter-sales service as well as retail trade of products manufactured in China (Office for Trade Policy Review,METI (2001) “Schedule of concessions and commitments on goods and schedule of specific commitmentson services pertinent to Protocols of accession for China”(http://www.meti.go.jp/policy/trade_policy/wto/accession/data/pro_tariff.pdf))
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
0 10 20 30 40 50 60 70 80 90 100(Ranking in volume of sales)
Ratio of cost for R&D tosales for Japan’s precisiondevice/instrumentcompanies: 5.01%(FY2000)
Ratio of cost for R&D tosales of Japan’s electricaldevice/equipment: 4.04%(FY2000）
Besides the companies mentioned above, there are also Yangtze Optical Fibre and Cable Company (51st, 57.15%) and Shougang NECElectronics (78th, 37.13%).Financial Statements Statistics of Corporation by Industry (Ministry of Finance), Science and Technology Research Survey Report (Ministryof Public Management, Home Affairs, Posts and Telecommunications), Japan Machinery Center for Trade and Investment (2001). (Originalsource: Almanac of Chinese Electric Industry).
20 Companies
28 Companies
Huawei Technologies （8th, 13.62%)
Zhongxing Telecom Equipment (22nd, 11.96%)
Datang Telecom Technology and Industry(36th, 11.79%)
Tsinghua Tongfang （28th, 5.46%）
Shanghai Hua Hong (Group)（34th, 6.55%)
Beijing Peking UniversityFounder Group （13th, 4.51%）
Note:
Source:
Figure 2.3.25 Comparison of the ratio of R&D to sales: Top 100 Chinese
companies related to electrics, electronics and information (2000)
- 169 -
(a) Expansion of complementary and cooperative relations in the field of marketing between
Japanese manufacturing companies and Chinese companies
As a result of the opening of China’s distribution market following the country’s accession to the
WTO in December 2001, foreign manufacturing companies have been allowed to create independent
sales and after-sales service networks, and Japanese manufacturing companies were given a full-fledged
access to China’s consumer market. Against this backdrop, Japanese manufacturing companies are
required to operate in a more efficient and market-oriented manner.
For Japanese manufacturers of household electric appliances in particular, the strict restrictions that
existed in China’s distribution market hampered the provision of sufficient after-sales service to the
Chinese consumers, which contributed to the drop in their market share. Their Chinese counterparts, on
the other hand, succeeded in creating sales and after-sales service networks covering all of China and
thus increasing customers’ satisfaction in their products. This has been pointed out as one of the factors
underpinning the drastic expansion of their market share16.
However, the Chinese consumer market with its rural areas is enormous and the creation of sales and
after-sales service networks covering all of China involves substantial burden in terms of funds. For that
reason, a trend toward establishment of business alliances has been expanding in recent years, where
Japanese manufacturing companies provide technical cooperation and key components to Chinese
companies in exchange for the use of their sales and after-sales service networks.
For instance, a Japanese motorcycle manufacturer has established a joint venture with a Chinese
motorcycle manufacturer with the objective of integrating the engine manufacturing technology owned
by the Japanese party with the marketing and procurement network of the Chinese. Another example is
the comprehensive business alliance between a Japanese and a Chinese maker of electric appliances.
The Japanese company’s objective is to implement technical cooperation in key components, such as
batteries, liquid crystals and motors, and expand the provision of key components, while distributing
their products via the wide-ranging and diverse distribution network of the Chinese maker as well as
introducing the Chinese maker’s brand products into the Japanese market. A third example is the
agreement between two makers of household electric appliances to consider a possible alliance that will
utilize the strengths of both companies in the form of expanding the provision of key components such
as cathode ray tubes (CRT), plasma display panels and compressors, cooperation in the field of DVD
technologies and distribution of the Japanese maker’s brand products via the distribution network of the
Chinese counterpart.
These trends indicate a continuing expansion of complementary and cooperative relations that utilize
the strengths of Japanese manufacturing companies and Chinese companies, such as the technology and
high value-added components of Japanese companies, and the sales and after-sales service networks of
their Chinese counterparts17. The efficient utilization of the superior marketing and distribution system
16 Oohara (2000) pp. 6-16.17 It has been pointed out, that in the case of the motorcycle manufacturers, the total distribution network willinclude 750 stores affiliated with the Japanese party and 3,500 stores affiliated with the Chinese counterpart;in the case of electric appliances makers, the distribution network of the Chinese party will include 411 directsales companies, 9,000 dealers and 11,900 service bases; and in the case of the household electric appliances
- 170 -
of Chinese companies and the creation of mutually beneficial relations is perhaps one of the effective
policies that Japanese manufacturing companies can implement in order to develop their business in a
more efficient and market-oriented manner in China’s consumer market.
(b) Development of business activities by Japanese distribution companies in the Chinese market
• Domestic changes in the distribution industry in China in line with the expansion of China’s
consumer market
<Status of China’s consumer market and distribution industry>
China’s consumer market is expanding year by year in line with the rise in the income level.
Particularly outstanding is the increase of consumption expenditure in urban areas (4.2 times from 1990
to 2001). Nevertheless, it should be noted that in 2002 the income disparity between urban and rural
areas was 3.1 times, and that there is a slowdown in the rise of consumption and income in rural areas
and the perspectives for a medium-term expansion of consumption are rather uncertain (See Figs. 1.2.16
and 1.2.17 in the previous chapter). Yet, in addition to the expansion of consumption expenditure mainly
in urban areas, the support by Chinese government authority for the distribution industry as a policy for
creation of employment opportunities in line with the changes in the industrial structure is also
contributing to the vivacity of the wholesale and retail industry of the recent years. For example, the
commercial sales value in the domestic wholesale and retail industry in China has increased 30.3 percent
from 1998 to 2001. Also, looking at the figures for Chinese and foreign companies separately,
particularly outstanding is the increase for foreign affiliates (241.6 percent from 1998 to 2001 (Fig.
2.3.26)).
1998 2001 Share (1998) Share (2001) Growth rateTotal commercial sales value 232,608,168 303,027,309 100.0% 100.0% 30.3%Domestic companies 228,942,369 290,504,464 98.4% 95.9% 26.9%Foreign affiliates 3,665,799 12,522,846 1.6% 4.1% 241.6%
Looking at a more detailed picture of the wholesale and retail industry in 2001 by type of capital
(domestic or foreign), domestic Chinese companies feature lower volume of sales per company and per
capita than foreign affiliates (the gap is 2.3 times per company and 3.0 times per capita in the wholesale
industry, and 5.2 times per company and 2.1 times per capita in the retail industry). In other words, the
activities of domestic companies in China’s wholesale and retail industry tend to be of a smaller scale
and their labor productivity tends to be lower than those of foreign affiliates that have been operating in
the Chinese market. This tendency is particularly notable when a comparison is made between state-
owned retailers and foreign retailers (the gap is 7.1 times per company and 2.8 times per capita (Fig.
2.3.27)).
makers, the distribution network of the Chinese company alone will include 33 direct sales companies and177 business bases (Tsugami (2003) p. 187).
Figure 2.3.26 Growth rate of commercial sales value in the domestic wholesaleand retail industry in China (comparison between 1998 and 2001)
(Unit: ten thousand yuan)
Note: Values are for both wholesale and retail industries.Source: China Statistical Yearbook (National Bureau of Statistics of China).
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Number ofcompanies
Number ofemployees
Volume of sales(Unit: ten
thousand yuan)
Ratio to thewholesale and
retail industry asa whole
(Unit: %)
Volume of salesper company
(Unit: tenthousand yuanper company)
Volume of salesper capita(Unit: ten
thousand yuanper capita)
Wholesale and retail industry in total 25,543 4,045,757 303,027,309 100.0% 11,863 74.9Total 15,258 1,982,927 251,330,345 82.9% 16,472 126.7Domestic companies 15,058 1,963,164 243,876,342 80.5% 16,196 124.2State-owned enterprise 7,736 1,124,343 135,090,971 44.6% 17,463 120.2Share-holding enterprises 949 197,366 35,053,610 11.6% 36,937 177.6Private sector enterprise 1,262 47,116 9,990,400 3.3% 7,916 212.0Foreign affiliates 200 19,763 7,454,003 2.5% 37,270 377.2Hong Kong, Macao, Taiwan 84 7,212 1,223,603 0.4% 14,567 169.7
Wholesaleindustry
Other countries 116 12,551 6,230,400 2.1% 53,710 496.4Total 10,285 2,063,028 51,696,964 17.1% 5,026 25.1Domestic companies 10,075 1,963,366 46,628,122 15.4% 4,628 23.7State-owned enterprise 3,839 707,606 13,066,683 4.3% 3,404 18.5Share-holding enterprises 742 427,033 12,077,130 4.0% 16,276 28.3Private sector enterprise 1,161 149,972 4,745,144 1.6% 4,087 31.6Foreign affiliates 210 99,662 5,068,843 1.7% 24,137 50.9Hong Kong, Macao, Taiwan 100 44,054 1,700,334 0.6% 17,003 38.6
Retailindustry
Other companies 110 55,608 3,368,509 1.1% 30,623 60.6
<Foreign retailers with new types of business operations and intensifying competition>
With support from the Chinese government, which strives for modernization of the distribution
industry, these foreign retailers have expanded their activities in China, mainly through new types of
business operations that had not existed in China before. Specifically, European and US distribution
companies have come into the market through warehouse type of operations and Japanese distribution
companies through department store, chain store and convenience store-type of operations. However,
from 1998 onward, retail prices maintained a downward trend for four consecutive years (Fig. 2.3.28)
and an excessive number of chain stores have opened in big cities such as Shanghai and Beijing. Against
this backdrop, sales competition has intensified further resulting in the suppressed earnings performance
of distribution companies as a whole and the emergence of clear winners and losers among retailers.
Under these circumstances, not only Chinese retailers, but also some foreign retailers are withdrawing
from the market as well.
Figure 2.3.27 Operation of wholesale and retail companies in China,classified by different capital structure (2001)
Source: China Statistical Yearbook (National Bureau of Statistics of China).
Figure 2.3.28 Trends in growth rate of retail price index
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001(Year)
(Y-to-Y/Unit: %)
Growth rate of retail price index
Source: Foreign Economic Data (Cabinet Office).
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• Development of business activities by foreign distribution companies in China
<Development of business activities by foreign distribution companies in the retail sales sector>
Amid such bleak conditions, foreign retailers are developing various rather unique business activities
in order to secure a share and profits in the increasingly-fierce Chinese retail market. For instance, a
European retail company has entered the Chinese market with large warehouse-type outlets selling
lifestyle-related commodities at low prices and is expanding its operations mainly in Beijing and
Shanghai. Unlike its operations for entry in other foreign markets, the company chose not to install
information processing facilities such as bar-code scanners or point-of-sale (POS) systems in outlets in
China in order to reduce initial investment, thus managing to achieve substantial cost reductions in this
unique way.
As for Japanese retailers, while some companies are withdrawing from China, there are also those that
are expanding their business through unique business activities in the field of upscale department stores
and convenience stores. For example, a department store operator which specializes in women’s
garments entered the Chinese market in 1993 with a rich assortment of high-fashion products and outlets
to match them, and introduced customer service and sales practices18 that had no precedent in state-
owned Chinese department store companies. Through such characteristic business activities, this
company has gained the support of the wealthy in Shanghai and other Chinese cities, and is relatively
steadily expanding its operations. In another example, a convenience store operator launched in
Shanghai in 1996 what amounted to the first convenience store chain-type of operation in China, which
was a new form of distribution business in the country. Nowadays, the company has expanded the chain
to approximately 100 stores mainly in Shanghai.
<Expansion of the presence of Japanese distribution companies>
Traditionally, under China’s planned economy, distribution was generally regarded as merely
transporting manufactured products, with little awareness of the provision of efficient distribution
services. Today, however, both the upstream and the downstream of the commercial distribution are
becoming very active. In the upstream, or the manufacturing industry, numerous foreign manufacturing
companies are in operation, and the downstream, or the retail industry, is witnessing an expansion of the
consumer market. Against this backdrop, the demand for efficient distribution services in the
intermediary stage of the commercial distribution process is increasing. The Chinese government too is
working to develop distribution infrastructure with the understanding that improvement of the business
environment is necessary in order to attract direct investment from foreign companies, which are one of
the driving forces behind China’s economic growth. (The total infrastructure investment in the
transportation and shipping industry, and in the post and telecommunications industry has increased by
122.9 percent from 1996, with road-related investment in particular increasing 191.2 percent (Fig.
2.3.29)).
18 In order to achieve such a level of customer service and sale practices, the company implements 150training sessions for salespersons annually, including the salespersons of its partners (Interviewed by JETROHong Kong).
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Against this backdrop, Japanese companies are intensifying their activities in the field of wholesales
and distribution, and the relative presence of Japanese companies is increasing. For example, a Japanese
wholesale and distribution company dealing with lifestyle-related products such as toiletry goods, has
added to its wholesale activities what may called credit function in the transactions between lifestyle-
related commodities manufacturers and local small and medium outlets. Taking full advantage of its
abundant fund, the Japanese company makes the payment to the manufacturers in place of the outlets,
thus reducing payment collection risks for the manufacturers and gaining superiority over local
wholesale companies. Furthermore, through the provision of such a service, the Japanese company is
involved in most transactions between manufacturers, and small and medium outlets, and thus has
succeeded in seizing substantial market control. This, in turn, has enabled the Japanese company to deal
with local small and medium outlets from an advantageous position in term of transactions and
collection of receivables, and to collect debts from local companies, which is often difficult, with
relative ease.
Currently, wholesale activities like the abovementioned one, are approved by the Chinese government
on an experimental basis and in big cities only. However, a progressive elimination of geographical and
investment restrictions is expected to take place by December 2004.
In the service sector, the expansion of overseas business activities in the distribution sector does not
directly lead to the industrial hollowing-out. Therefore, particular attention should continue to be paid to
the strict fulfillment of China’s commitment for elimination of restrictions in the distribution sector
following its accession to the WTO, as this elimination will greatly contribute to the further expansion of
the presence of Japanese distribution companies in China.
(8) Direction of the business strategies of Japanese companies and development of business
environment in the East Asian region
Figure 2.3.29 Trends in the ratio of road-related investment to thetotal infrastructure investment in the transportation and shipping
industry, and the post and telecommunications industry
1,128.4499.1 668.2 1,317.6 1,453.11,061.20
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1996 1997 1998 1999 2000 2001(Year)
(00s million yuan)
Others AviationTransportation and shippingRailroadsPost and telecommunicationsRoad-related
Source: China Statistical Yearbook (Bureau of Statistics of China).
(1,847.1)(2,197.5)
(3,252.2)
(3,641.9)
(4,116.4）
(3,429.3)
Road-related investment
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(a) The necessity of creating an optimal management structure in the East Asian region
Currently, the East Asian region is undergoing great changes.
These include i) the potential for market growth and expansion of East Asia as a whole and especially
of China with its 1.3 billion population, and ii) the possibilities for expansion of industrial
agglomerations of outstanding cost competitiveness against the backdrop of the development of
agglomerations of local industries in China and the full-fledged implementation of the ASEAN Free
Trade Agreement (AFTA) (reduction of intra-regional tariffs).
With these changes in the East Asian region, it is necessary for Japanese companies not only to enjoy
the maximum benefits of the merits of market growth of the East Asian markets that are expected to
grow, but to construct an optimal management structure in response to business realities to ensure that
their own competitiveness is further enhanced through maximum use of the outstanding cost
competitiveness of East Asia.
To achieve this, Japanese companies must maintain and improve their domestic capacities for
development of core technologies that will become the foundation of competitiveness, including
capacities for development of key components, which embody high technological skills of comparative
advantage. Also, with the globalization of corporate activities, the strengthening of headquarters’ costs
recouping and profit collection from offshore activities with consideration to the overall corporate
structure is also an important perspective. Furthermore, in terms of local business activities, it will be
necessary for companies to selectively advance various measures, such as expansion of local
procurement, strengthening of local response and promotion of local R&D activities that match the
market needs, while striving for streamlining and optimization of the management.
(b) The importance of development of business environment in the East Asian region
As a result of their earlier advance in ASEAN, Japanese companies traditionally possess some
advantages over European and American companies in the creation of supporting industries, such as the
automobile industry and the electronic components industry. In view of this situation, it is necessary to
clarify the role of ASEAN in exploring possible strategies for Japanese companies in East Asia.
Looking at the balance of direct investment of Japan in 1996 and 2000, the share of ASEAN 4 has
decreased to approximately one-third (Figs. 2.3.30, 2.3.31). Yet, from the perspective of avoiding
excessive concentration in China, ASEAN should maintain its role as an important export base. It is,
therefore, important to improve and restructure the existing inefficient management resources by, for
example, concentrating the production of the same sort of products and components in a given ASEAN
country, and improve the productivity of ASEAN through creation of a management strategy that takes
ASEAN as a whole (from “optimum by countries” to “ASEAN optimum”).
Integration and consolidation of ASEAN is essential in order to realize this “ASEAN optimum” that
will enable the construction of an efficient supply chain (procurement–production–distribution–sale) for
the region as a whole. The low rate of intra-regional transactions despite the implementation of AFTA is
thought to be a result of various cross-border transactions which prevent AFTA from taking its intended
effect. Therefore, it is important not simply to abolish intra-regional tariffs, but to clarify the problems
pertinent to the intra-regional transactions and strive for a solution to them.
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Japan US(Unit: 00s million yen) (Unit: million US$)
1996 2001 1996 2001All regions 265,259 329,230 All regions 795,195 1,381,674North America 95,016 164,108 North America 34,578 64,103EU 42,163 60,512 EU 389,378 725,793East Asia 89,757 63,072 East Asia 66,661 111,628 China 9,390 13,109 China 3,848 10,526 NIEs 32,169 26,856 NIEs 40,287 75,362 ASEAN 4 48,198 23,107 ASEAN 4 22,526 25,740Others 38,323 41,538 Others 304,578 480,150
Toward that end, Japan needs to deal with AFTA-related issues such as the delay in the schedule for
tariff abolition, as well as with the problems posed by the lack of an intellectual property rights system
and the insufficient infrastructure. Also, from the perspective of enabling Japanese companies to
US (2001)
Other34.8%
Europe52.5%
ASEAN41.9%
Japan4.6%
NIEs5.5%
China0.8%
Whole of East Asia(Excluding Japan)
8.1%
US (1996)
Other38.3%
Japan4.3%
ASEAN42.8%
Europe49.0%
China0.5%NIEs
5.1%
Whole of Asia(Excluding Japan)
8.4%
Figure 2.3.30 Trends in comparisons by region of balance of direct investment position
by Japan and the US (1996, 2001)
Note: Share ｂｙ region=Balance of direct investment position in each region/Balance of direct investment position worldwide × 100
Japan (2001)
NIEs8.2%
China4.0%
EU18.4%
North America49.8%
ASEAN47.0%
Other12.6%
Whole of East Asia(Excluding Japan)
19.2%
Approximate one-thirdreduction in ASEAN share
Japan (1996)
ASEAN418.2%
EU15.9%
China3.5%
NIEs12.1%
Other14.4%
North America35.8%
Whole of East Asia(Excluding Japan)
33.8%
Figure 2.3.31 Balance of direct investment of Japan and US by regions (1996 and 2000)
Source: USDIA (US Department of Commerce), Regional Balance of Payments (Bank of Japan).
Source: USDIA (US Department of Commerce), Regional Balance of Payments (Bank of Japan).
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conduct economic activities without obstruction, amidst the ever increasing closeness between the East
Asian economies and the Japanese economy, it is desirable to promote economic cooperation that will
eliminate obstructions such as the high tariffs on transactions with countries outside the ASEAN region.
2. Strategic efforts by Japanese companies in the East Asian region
In recent years, with the rapid growth of China’s economy, the attractiveness of the Chinese market
has been increasing in the East Asian region. The economic situation enveloping China is undergoing
some changes, such as the increasing attractiveness of China as a production base following the
development of the domestic supporting industries.
ASEAN as well is in a situation where its attractiveness as a market is expected to grow against the
backdrop of the advancing liberalization of trade and investment in the region. Also, if AFTA takes on
real effect following its implementation, Japanese companies are expected to be able to take greater
advantage of the merits of the production base optimization in the ASEAN region.
Given the significant changes in the situation in East Asia enveloping the activities of Japanese
companies, the perspective of at which point and how profits can be made along the overall value chain
of corporate activities will become even more important for Japanese companies when creating
corporate strategies for East Asia19.
Presently, bi-directional efforts for gaining of profits are observed in East Asia: i) efforts for gaining
profits through exploitation of the stratified new demand that is expanding mainly in China; and ii)
efforts for gaining profits through exploitation of the even greater scale merits and low cost merits
achieved through optimization of the production and specialization structure, which makes the most of
the developed supporting industries and the low-cost labor in East Asia. There are also cases, where
results have been achieved through cultivation of local partners, etc.
This section outlines strategic efforts on a micro-economic level for gaining profits by various
companies operating in East Asia with the scope of providing some clue for future corporate strategies
of Japanese companies in the region.
(1) Strategies to cultivate new demand
In order to exploit new demand in East Asia, Japanese companies need to formulate business strategies
different from their strategies for Japan that match the characteristics of each market in East Asia. In
China’s consumer market, for example, the great disparity between people in the higher income brackets
and people in the lower income brackets results in a wide-ranging demand that cannot be calculated on
19 Amidst the progress of the “smile-curve” phenomenon in the manufacturing industry (“White Paper onInternational Trade 2002” METI (2002) p. 38), many companies secure their profits by outsourcing theprocessing and assembly processes overseas, and concentrate resources in more profitable sectors, such asR&D, sales and after-sales services in Japan. On the other hand, according to Kimura (2003), themanufacturing industry can be classified into the following three categories: industrial sectors where the“smile-curve” phenomenon is observed, such as computers and peripheral manufacturing; those where the“smile-curve” is not observed, such as passenger vehicles; and those where the “smile-curve” is observed butnot fundamental, such as consumer electronics. He points out that for the third category, reduction ofdomestic labor share, rather than allocation of resources to both ends of the “smile-curve,” is an importantmeasure for improvement of profitability.
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the basis of the per capita gross domestic product. Also, it is a market of severe competition with high
frequency of new entries by local companies, as well as a growing market of grand scale, and therefore,
once they accurately pick up on the demand, companies stand a very good chance of gaining enormous
merits. That is why it is necessary to clarify product strategies and narrow down targets (Fig. 2.3.32).
There are some companies that have succeeded in achieving unique market positions through
implementation of brand strategies and differentiation strategies aimed at creating a positive image of
their products among the customers. Furthermore, there are also cases where companies have succeeded
in securing competitive advantage and gaining profits through development of activities that utilize the
strengths of their management resources (core technologies, financial power, product competitiveness,
etc.).
% Population Companies
High income 10% 40 million Foreign affiliates and some local companies
Mid-income 40% 160 million Local companies and some foreign affiliates
Low income 50% 200 million Local companies
(1) Narrowing the target market
<Case 1: Homing in on the target customers>
The company opened its first outlet in Shanghai in 1993 in response to the city’s foreign retail firms
introduction policy.
The target customer group was the top 5 percent of Shanghai income earners, the 800,000 people
who earn in excess of 2,000 yuan per month (over 25,000 yuan annually). The typical customer would
be a female office clerk (aged 25-30) working in a foreign company. Ninety percent of the customers
would be Chinese. The company built a 300-space parking lot to cater to customers from the suburbs.
The store’s interior was made very luxurious to match envisioned customers’ expectations.
<Case 2: Effective use of company brand and product strategy differentiating between
customers>
The company uses its brands established in Japan for exports to China as a deluxe brand aimed at a
small number of high income earners. At the same time, it sells Chinese-made products under an
independent local brand (while incorporating the company logo to reassure consumers) to a more
general market (at less than half the retail price of the deluxe brand).
<Case 3: Strategy targeting customers that care strongly about quality and health>
The company has set a GDP of US$1,000 per capita as the minimum level for starting sales in a
country and carries out a feasibility study when the GDP exceeds this level. In Southeast Asia, cities are
about three times wealthier than rural areas. Where per capita GDP in urban areas exceeds US$3,000,
Figure 2.3.32 Targeting strata of foreign affiliates and local companies (urban areas)
Source: Ke Long (2003) p.19.
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people tend to start caring strongly about quality and health, and the company starts selling health drinks
to the relevant target customers.
(2) Building and differentiating a brand
<Case 4: Cutting ingredient costs while maintaining an upscale product image brings higher
margins>
The company swiftly launched in the Shanghai market a product that had been successful in Japan as
a luxury item. While maintaining the upscale packaging of a highly fashionable beverage, it cut
ingredient costs as much as possible by procuring locally, reaping high profit margins. The company
researched local taste preferences through marketing before deciding on flavors for the drink.
<Case 5: Product strategy that seeks differentiation vis-à-vis other companies>
Having learned from early failures, the company modified its product strategy and distribution
scheme. In a conscious effort to differentiate its product from other companies’ and based on market
research, the company developed unique-tasting products (light beer). As this became a hot-seller, the
company enhanced its relationship with retailers, reinforcing the sales of its other products.
<Case 6: Seizing an opportunity to invest capital and establish a brand>
Following a methodical survey of the market, the company captured the demand for luxury goods
from hotels catering for foreigners and improved its status in the 1980s. Seeing the developing reform
and liberalization policy as an opportunity, it expanded the business through intensive investment and, at
the same time, spent on advertising largely in the Shanghai area to establish its brand in China.
(3) Utilizing strong business assets to secure competitive advantage
<Case 7: Securing competitive advantage in core technologies through continuous technological
development>
In regard to the new demand for the “single-use drip-feed system”, the company sought to reduce the
cost of fluid containers, the key technology. This was achieved by arranging local production to reduce
distribution costs combined with continuous development of new manufacturing methods and raw
materials, enabling the company to secure its competitive advantage over other companies. (Core
technology is container manufacturing technology.)
<Case 8: Taking advantage of company strengths to achieve a strong position as wholesaler>
Utilizing its abundant capital, the wholesale company provided guarantees for manufacturing
companies against the risks involved with collecting payments from retailers (a major problem in
Chinese business). For retailers, the wholesaler ensured the supply of market-dominating products from
manufacturers, thus ensuring a strong trading position.
Thus, by skillfully grasping the characteristics of each market in East Asia, companies can expect to
greatly increase sales even of products whose sales are difficult to increase substantially on the mature
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Japanese market.
(2) Cost reduction through construction of an optimal production and specialization structure
Another important means for gaining profits is cost reduction efforts along the entire supply chain
through construction of an optimal production and specialization structure from the perspective of East
Asia including Japan, ASEAN and China as a single business region. Japanese companies, in particular,
have made significant investments in the ASEAN region so far and therefore have considerable capital
accumulations in that region (1.8 times more than foreign direct investments into China in 2001on a
stock base (Fig. 2.3.31)).
There are companies in the ASEAN region that are carrying out concentration of bases with a view to
utilization of the ASEAN Industrial Cooperation (AICO) scheme and full-fledged implementation of
AFTA. Still, because in the past, capital accumulations of Japanese companies were segmented into
each country, some companies seem hindered by this segmentation and their productivity remains low.
In order to overcome this inefficiency problem, ASEAN must improve the appeal of the region as a
production base where construction of efficient intra-regional supply chains can be realized. There are
also companies that establish new bases in ASEAN from the viewpoint of avoiding extreme
concentration of bases in China and securing balance among bases.
<Case 1: Solving of segmentation by regions>
A company is trying to overcome the segmentation problem in the following manner: Decentralize the
production of white goods and other utilitarian products for daily use, whose specifications vary from
market to market; evaluate the profitability and other factors of each product on each market, and
withdraw from its production as appropriate; and establish a core basis for each region in Asia and
concentrate plants there, so each of these bases can thrive.
<Case 2: Construction of local procurement systems for the entire ASEAN region>
With “production in areas where there is demand” as a general principle, this company is striving to
construct a local procurement structure for the entire ASEAN region by fostering local industries in the
ASEAN regions (engines in Indonesia, mission devices in the Philippines, chassis frames in Thailand,
plastic components in Malaysia), except for functional components which are intensively developed and
produced in Japan. The operations in China and ASEAN are made mutually independent in order to
diversify risks.
<Case 3: End processes carried out locally with a view of provision of services to set makers>
This company carries out concentrated production of technology-intensive electronic components in
Japan (exploring the merits of concentration). However, from the viewpoint of swiftly responding to the
procurement demands of its clients—European and US set makers—the final process of packaging is
carried out locally.
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<Case 4: Establishment of plants in ASEAN from the viewpoint of avoiding the risks of extreme
concentration in China>
This company established a plant for production of laser beam printers in China and balanced it with
the establishment of a plant for bubble-jet printers in Vietnam (Hanoi).
Thus, Japanese companies are working toward optimization of supply chains through construction of
optimal construction and specialization structures in the East Asian region in line with product
characteristics that will allow the companies to take full advantage of past capital accumulation and the
merits of concentration.
(3) Introduction of efficient management methods
There are also some cases in which companies have introduced efficient management methods in
order to make maximum use of the merits of operation in the entire East Asian region.
<Case 1: Expansion of local procurement through joint development with a local company>
As a result of a joint development of materials with a local company over a period of several years, the
company has succeeded in developing materials of the required quality. Thus it became possible to
procure materials at a low cost from the local company.
<Case 2: Realization of cost reduction by proposing standardized products to the client>
This company entered overseas markets ahead of its rivals. As a condition for price reductions, it
proposed standardized products manufactured on a large scale to its clients, for whom the company had
been making tailor-made products. Thus, the company increased sales of standard products up to 70
percent of total sales and achieved reduction of prime costs. Also, it implemented cost reduction through
utilization of components and materials made in China.
Amidst the changes enveloping the East Asian region, Japanese companies are advancing micro-
economic level efforts toward gaining profits in East Asia. What many of these companies have in
common in their strategic efforts is a focus on the construction of a management structure that will
actively make the most of new demand and cost competitiveness as they grasp the business
opportunities provided by the expanding East Asian economy. So far, Japanese companies have focused
on the construction of a management structure for utilization of low cost labor. However, with the
growing East Asian economy becoming the main battlefield for competition among global corporations,
it is necessary for Japanese companies to create an optimum management structure that will facilitate the
maximum benefit being derived from the merits inherent in East Asia, including those from the
standpoint of looking at the East Asian market as a whole, while diversifying their view to make the
most of the East Asian region.
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(4) Necessity of structural reform of the Japanese economy corresponding to the expansion of
Japanese companies’ overseas business activities
Parallel to the expansion of overseas business activities of Japanese companies outlined in this chapter,
changes are expected to occur in the employment structure and the industrial structure as a result of the
Japanese companies’ efforts to create new added value in processes other than assembly of products in
Japan.
Toward that end, it will be necessary, first, to develop a business environment conducive to the
strengthening of industrial technologies that are the source of innovation and to the creation, protection
and exploitation of intellectual property, from the perspective of creation of high added value in the
Japanese industry; and second, to expand activities in the service sector through promotion of business
creation in the Japanese service industry, from the perspective of the changing employment structure
and the industrial structure of Japan20.
20 For details refer to Sections 3 and 4 of Chapter III.
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