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APR 25, 2017

The Third Wave: The Progress of Japanese Companies in China

By Reika Cho

The first wave of this trend took place between the late 1990s and early 2000s. As China opened up its market in order to join the WTO, many Japanese companies were able to manage businesses in China with independent capital from joint ventures. A drive for localization began, but very few companies could actually achieve it.

The second wave took place around 2010. Following the 2008 financial crisis, China started shifting from “export-driven economic growth” to “growth driven by domestic demand.” In other words, it shifted from being a “factory” to a “market” economy. During this shift, Japanese companies also rapidly increased the amount of resources invested in training local managerial personnel. The focus of this training was on mastering the fundamentals of management and marketing.

Finally, we are seeing the third wave in 2017. Companies that failed to catch on to the second wave are focusing their resources on training local management personnel, while companies that took rode the second wave are entering a new stage. Chinese executives are becoming core members of management, and local subsidiaries’ strategies and mid-term management plans are starting to be made under their leadership. The jobs that, until now, were done by Japanese representatives sent from Japan are being passed on to their Chinese counterparts.

Although this change is difficult to observe from the outside, it is causing fundamental changes to the management of Japanese companies in China. It signifies a fundamental shift in the target market and strategy. Roughly speaking, until now, Japanese companies in China targeted the Japanese expatriate market. However, from now on and in the years to come, we will enter a new management phase in which Chinese executives target the local Chinese market. The network of Japanese companies in China will expand and deepen considerably.

This is a very positive change for Japanese companies, as new markets will develop, costs will decrease, and profits will increase. Although many Japanese companies established themselves in China—”the world’s factory” as it was known—initially in order to manufacture products at low cost, China’s importance as a market will increase significantly in the years to come. There will be a shift from “made in China and sold throughout the world” to “made in China and sold in China.” Within China, sales and production will continue to integrate, and value chains will link up.

Personnel who can understand purchasing, manufacturing, logistics, sales & marketing, service, and research & development, as well as perform management roles, particularly those who can lead local personnel and are familiar with the Chinese market, will be indispensable. More talent like this is becoming available. The focus of training will shift to simulating management-level experiences.

Getting to this stage has certainly not been easy. Although many Chinese executives were promoted in many Japanese companies, there were also some failures. Among these failures were cases in which significant losses were sustained due to investments in new businesses, bankruptcies caused by the Japanese side’s lack of understanding of the Chinese way of doing things, and even tough cases in which Japanese headquarters were forced to make very difficult decisions.

Thus, although there are certainly some aspects to be feared as the transformation proceeds, companies have learned a lot from their failures. Several Japanese companies in China that GLOBIS China is training are designating 2017 as the first year of this transition.

Although more tangible results will likely only emerge in or after 2018, the transition is a rational move based on trial and error. It can be said to be a major step forward for Japanese companies in China.

This article is translated and edited from the original Japanese.