Monday, August 9, 2010
The new frontier for corporate Japan
Japanese firms push into emerging markets
Japan once prospered by exporting to rich countries. Now the action is elsewhere
IT IS the “new frontier”, says Japan’s trade ministry. Japanese firms have at last noticed that emerging markets are growing much faster than rich ones. And though they were late to the dance, they have brought some nifty moves.
Profits at Japan’s 559 major listed companies surged by 46% in the most recent quarter, to ¥3.8 trillion ($44 billion), according to Nikkei, a financial-information provider. That is a fourfold increase from a year ago, and largely due to soaring sales in emerging markets.
Many Japanese firms that lost money in 2009 have revived their fortunes by selling to the new global middle class. On August 4th Toyota, a carmaker, reported a quarterly operating profit of ¥212 billion, having lost ¥195 billion a year ago. Strong demand in Asia helped. Sony, an electronics firm, posted a healthy ¥79 billion profit in the most recent quarter, reversing a pretax loss of ¥33 billion a year ago. Its revenue from emerging markets grew by about 40%; sales in Brazil nearly doubled.
Countries outside North America and Europe will account for 80% of global growth between 2000 and 2050, by one estimate. Western consumers have become more frugal. Japan has been stagnant for two decades and its population is shrinking. Small wonder corporate Japan is looking elsewhere.
Its traditional wares are ill-suited for the new frontier. Many are costly, complex and easily undercut by simpler gadgets from South Korea, Taiwan and China. Japanese firms have long used poor countries merely as production bases and then shipped their products to rich ones. That model no longer works.
Over the past decade the share of Japan’s exports that go to America halved; those to Europe fell by a third. Japanese firms are now scrambling to tailor products for the BRICs (Brazil, Russia, India and China) and what salarymen call the MINTS (Malaysia, Indonesia, Nigeria, Turkey and Saudi Arabia) as well as Vietnam and the Balkans. The share of exports to China almost trebled and trade with resource-rich regions such as the Middle East nearly doubled, before falling back during the recession (see chart).
Demand from emerging consumers has helped firms in many sectors, from consumer goods to technical components. At Shiseido, Japan’s biggest cosmetics maker, sales in China have doubled over the past five years. This year the firm entered the Balkans and Mongolia. It also opened a factory in Vietnam, where newly prosperous lips are crying out for gloss. Shiseido expects half of its revenue to come from overseas by 2017—up from 40% today.
To prosper on the new frontier, Japanese firms must adapt. Panasonic, an electronics firm, is overhauling both its products and its organisation. Instead of maintaining strict management divisions by territory, the company now thinks about product lines by temperate and tropical climate zones. Executives from South America visit their peers in Malaysia each quarter to swap ideas.
The firm increasingly relies on local engineers to redesign products for local tastes. “If Japanese engineers did it, they would create a Japanese product,” explains Hitoshi Otsuki, who heads Panasonic’s overseas operations. Now, only 10-20% of the products it sells in emerging markets are developed by Japanese teams, down from nearly all. “This is totally revolutionary for us,” says Mr Otsuki.
In Indonesia, Panasonic found that fridges need big compartments to store lots of two-litre water bottles: Indonesians boil water to purify it in the morning and then place it in the fridge to cool. They need less space for vegetables, however, since they tend to buy and eat them on the same day.
In India, where power is unreliable, Panasonic is developing air-conditioners that operate with little energy. And because Indians tend to run the air-con all the time, the motors are designed to be quiet. In China, air-conditioners are a status symbol, so Panasonic’s are big and colourful enough to catch the neighbours’ envious eyes.
In the most recent quarter, emerging-market sales helped Panasonic post a profit of ¥84 billion, reversing a ¥52 billion loss in the same period a year earlier. The firm expects revenue for electronics and appliances from emerging markets to increase from 25% of its total today to 31% in 2012.
Japan’s carmakers are doing well, too. Toyota designed a model called the Etios for India, where it sells for $10,000. Nissan builds a compact car called the March in India and Thailand, where it procures 87% of the parts locally. The firm will start making the March in China this year and in Mexico in 2011. Nissan recently discontinued a Japanese version and started importing the cheaper Thai model instead. Such things are still rare in Japan, but soon won’t be. Frugal innovation travels well.
Difficulties still lurk. The strong yen—which has gained 14% this year to touch ¥86 for $1—hurts exports. However, it makes mergers and acquisitions cheaper: Japanese firms have spent more than $11 billion on deals in poor countries so far this year, according to Dealogic, already surpassing the total in 2009. By shifting production abroad and sourcing locally, Japanese companies can probably cope.
Another difficulty is managing a global workforce. Labour unrest forced Toyota and Honda to suspend operations in China this summer. At home workers are so docile that Japanese managers are often unprepared for such spats. So Japanese firms are rushing to hire foreign talent. Relatively low pay for bosses and a lack of English-speaking staff make this hard, but some firms are making progress. Of the 1,390 new graduates Panasonic plans to hire next year, only 290 are Japanese.
Having reengineered their products for emerging markets, Japanese firms may now have to shake up their corporate culture. They devolve too little power to local staff and rarely promote non-Japanese to top management. They take decisions slowly, by consensus and after endless memos to head office. To survive in emerging markets, corporate Japan must learn to be nimble.