Strategic localization of japanese enterprises in China - an empirical approach

AuthorKeikoh Ryu Waseda University, Japan
Pages89-97

Page 89

Introduction

The People's Republic of China has gained increasing importance as a market and production base for the internationally active Japanese industry. At the same time Japanese companies represent one of the most important backers of China's economical and technological development. Simultaneously, complicated political issues that are difficult to deal with exist between Japan and China, such as historical issues, issues related to Taiwan and so on. Those issues are not ones that can be settled if one party compromises, and cannot be settled easily. In other words, the concern of anti-Japan moods consequent from these problems as a background situation will persist for some time.

Therefore, what sort of localization strategies should Japanese companies pursue in China; a country that is undergoing drastic economic development and with a physically powerful anti-Japanese mood? In this paper, the analysis starts from the question of why Japanese companies are attracted to China and focuses on discussing how these new developments and changes in the Chinese market will impact on Japanese companies' localization process based on the analysis from my research and the filed survey of Japanese companies in China, which was done during April 2006 through September 2007.

Page 90

Literature Review

Basic theoretical understanding tells us that a company must manufacture a product that is valued by consumers in order to make a profit. Thus, we say that companies should engage in the activity of value creation. A firm's business strategy is defined as the actions that managers take to attain the objectives of the company (Porter 1986), that are actions to reducing costs of value creation (low-cost strategy) or to differentiating its product (differentiation strategy) (Porter 1980, 1985).

For a theoretical approach to the complex subject of localization strategies towards the Chinese market, it is useful to think of the company as a value chain composed of a series of distinct value creation activities including production, marketing, materials management, research &development (R&D), human resources management, information systems, and the firm's infrastructure. We can categorize these value-creation activities as primary activities and support activities (Porter 1985). Both the primary and the support activities are important to improve a firms' profitability: business strategy is the key. It is the most important consideration that the company and its employees have to bear in mind, in order to attain the fundamental objective of any business, to make profit.

If we are following Porter's theoretical understanding, expanding to international markets (in our case to China) allows companies (in our case Japanese companies) to increase their profitability in ways not available to purely domestic enterprises. Therefore Japanese firms are able to earn a greater return from their distinctive skills, or core competencies, and realize a greater experience curve economies, which reduces the cost of value creation. Also, Japanese companies can realize local economies by dispersing particular value creation activities to those locations in China where they can perform the value creation most efficiently, for example labor-intensive industries in western China with a huge supply of unskilled and inexpensive labor. The term 'core competence' refers to skills within the firm that the competitor cannot easily match or imitate (Hamel and Prahalad 1989). These skills may exist in any of the firm's value creation activities, that is R&D, production, human resource management, marketing, general management, information system and technology, and so on. Such skills are typically embodied in products that other firms find difficult to match or imitate: it is difficult, for example, for Chinese companies to imitate products, production technology or the management know-how from Japanese companies operating in the Chinese market. Once again, according to the theoretical view of Porter (1985), the core competencies are the bedrock of a firm's competitive advantage. They enable a firm to reduce the costs of value creation and/or to create value in such a way that premium pricing is possible.

What does all this mean for the internationally operating Japanese Company that is trying to be successful in China? In brief, it means, that the Japanese firm will benefit by shifting each value-creating activity it performs to the location in China where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that particular activity.

Theoretical Background

We can classify the motives for Japanese companies to develop and implement business strategies towards China as resource-seeking and market seeking. These two basic motives of Japanese companies towards China stand behind the fundamental purpose of any business firm to make a profit. We had a theoretical approach on the two basic business strategies to attain the main objective of any firm: reducing costs of value creation (low-cost strategy) or differentiating the products (differentiation strategy).

Page 91

Many Japanese companies have moved into China as the Chinese economy has grown. Before the 1990's1 the so-called "taking-back type business" constituted the mainstream in which products assembled in China are exported to Japan and third countries. However, when two-digit growth was achieved for four consecutive years, from 1992 to 1995, companies emerged that moved into China by regarding China as a market for sales.

At the beginning of 2000, China joined the WTO2 which means that the Chinese market was totally opened. This has led to a consumption boom chiefly in the coastal areas. Recently, most Japanese companies moving into China intend to promote sales activities with the Chinese market as their target. However, sales activities for the changed Chinese market are significantly different from the "take-back type" business style. To promote sales activities in the Chinese market, business localization must be resolutely implemented. With respect to the personnel management as well, a transition from the labor management type to the human resource development type is also necessary.

There are many cases that the delays in becoming aware of the nasality of localization3 exist among Japanese companies nowadays. Obviously, the reason is because the successful experience in the "take-back type" management is too strong. The construction of factories in China in a "take back type" business style essentially means the operations of factories in China, even though such operations are part of the management of a company moving into China.

While this is not the only issue, many Japanese companies are facing tough challenges in the business of selling products in Chinese market. In other words, although China's attractiveness as a market is increasing as the result of a growing economy, many Japanese companies are not benefiting from such growth. They should lose no time in drastically changing their management style.

Current Status of Japanese companies in China

1 A Contradiction Feeling about Japan

As we all know, anti-Japanese demonstrations occurred in Beijing on April 9, 2005. It then spread to Shanghai...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT