The Foreign Company in Japan

The Foreign Company in Japan

          
Article image

The Foreign Company in Japan

1977
  • Add To Interests
  • SAVE CONTENT
  • PRINT
  • PDF

    • JamesAbegglen
    more about James

     

    “How can I get more in Japan?” Fashions change rather quickly, and so also do the views of foreign companies regarding Japan. We have just been through several years during which the main theme was the withdrawal of foreign companies from Japan. But Japan has not, despite the warnings of a popular novel and a great many foreign economic observers, sunk beneath the Pacific. Once again, Japan leads the growth race and the observers that earlier predicted demise mutter darkly again about intolerable trade surpluses and competitive strength in world markets. And again managements of companies abroad seek to build a stronger position in Japan's market.

    The desire for a larger position in Japan is natural enough. Companies in which foreign interests have a 25 percent or more share account for less than 4 percent of total sales in manufacturing, and only about 2 percent of total business sales in Japan. While individual companies like IBM, Coca Cola, Nestle and others have developed major positions in Japan over the years–and positions that are wholly foreign owned–foreign companies as a whole are very much marginal to the total economy.

    The earlier quite stringent restrictions on foreign investment that helped cause this limited foreign position are now almost entirely removed. The apparatus of Japanese government barriers has been dismantled. Still, there is no indication that foreign participation in the Japanese market is increasing. Why not?

    The all too easy answer is to blame it on Japan–on non-tariff barriers, recalcitrant bureaucrats, and conspiratorial local competitors. True enough, the Japanese do not generally invite in or welcome additional competitors in their market. Nor yet do any other countries. It is the task of the foreign competitor to enter, not the obligation of the Japanese to smooth the way.

    Trying to look past the political uproar about Japanese anti-foreign plots, there appear to be two substantial business or economic reasons why foreign penetration of the Japanese economy is limited. One is self-imposed by the foreign firm and has to do with its willingness to price product and expense invest in market entry as necessary to penetrate Japan. The second reason is a result of Japanese business practice and has to do with the fact that acquisition of successful Japanese firms is virtually impossible.

    Is “Dumping” a One Way Street?

    The pricing issue can be approached by asking an awkward question. Start by noting the frequency with which Japanese firms are accused of pricing unfairly and unreasonably into their export markets. Go on to note the considerable success of Japanese firms in export markets. And note finally that it is Japan's largest exporters, companies like Matsushita and Toyota, that are at the same time the most profitable companies in Japan. The question: Why are there no complaints from the Japanese about price cutting and dumping into the Japanese market?

    The answers are several, of course. First, many companies, especially American ones, focus on their very large domestic market and treat export markets as marginal. Sustained export efforts in the face of strong domestic demand are difficult. For Japanese firms, exports are often critical. Second, inappropriate profit center organizations often impose a transfer price level on export sales that makes effective price competition impossible. Given the large scale of many foreign producers compared with their Japanese competitors, it is clear that the foreign producer often has a lower marginal cost position. It is also clear that he is often not willing to price marginally to gain export share. Finally, “penetration pricing” into Japan at a level that would gain share means foregoing near term profits in order to build a market position in Japan. A great many foreign companies are not willing to pay that price for market entry.

    The fact remains however that competitive equilibrium with Japan will come about when Japanese complaints about foreigners' “dumping” are at least as frequent as foreign complaints about Japanese “dumping.”

    The Acquisition Problem

    Frequent explanations offered for foreign investment difficulties in Japan include the difficulty of obtaining first class staff owing to the employment system, the complexities of dealing with the government, and the even greater complexities of dealing with Japan's distribution system. These are all very real problems.

    Yet staffing problems, difficult bureaucrats and complicated marketing systems are hardly unique to Japan. One thinks of U.S. companies entering France and Germany in the 1950's and 1960's, of European and Japanese companies entering the U.S. market more recently, and realizes that these same problems exist to a considerable degree but that entry seems on balance to have been less difficult. Where is the difference?

    The essential difference may well lie in the fact that the most effective route to market entry in most sophisticated economies has proved to be that of acquisition of a successful company in that economy. Barriers of language, staffing, government relations, pricing, promotion and product adaptation are terribly formidable when faced by a foreign newcomer to the market. However, they become routine business decisions when the foreign investor has in hand a going business with management, distribution channels and community relations in place and functioning.

    However, in Japan the acquisition of a successful company or well run part of a company is for all practical purposes impossible. Acquisition as an entry device is not available. It should quickly be added that the inability to make acquisitions of successful businesses is not another item for that list of conspiratorial Japanese behavior that European governments in particular have recently been prone to draw up. It is a fact that in Japan buying and selling companies or even parts of companies is resorted to only when the remaining option is bankruptcy. The nature of the capital market, the nature of personnel practices, and indeed the very concept of the company, make sale and purchase of a successful company unacceptable. And there are few foreign companies in a position to turn around a failed Japanese business in order to effect their entry into the economy.

    Capital Investment vs. Expense Investment

    The advantages in terms of speed of entry and effectiveness of operations that derive from acquisition can only be substituted for by massive and sustained expense investment. Here one encounters an irony of corporate bookkeeping. A capital investment for acquisition purposes need not depress the operating statement and, indeed with some skill and luck, can enhance it. A comparable expense investment has a most depressing effect, to the peril of careers. It is then not surprising that foreign companies complain of barriers to entry into Japan. The Japanese market is very large, it is terribly competitive, and it is very highly developed. It is therefore, and naturally enough, very expensive to enter. Lacking the acquisition route, that expense is difficult to accommodate, but the importance of the economy may well make the expense investment necessary.

    Given this set of issues, the considerable number of recent cases of foreign withdrawal from Japan are the more surprising. It would seem to follow that those foreign companies that have already undertaken a considerable expense investment in entering the Japanese market should calculate carefully, and from a long term point of view, before deciding to withdraw. The short term pressures on operating profits are obvious. But Japan will not become a smaller market, nor a less attractive one. On the contrary. And it will not become a less expensive market to enter in the future.

    Further, Japan is a critical strategic center in the world for many companies. The ability to compete within Japan with Japanese firms that are or may become international competitors has a very high value. Both in a positive sense, then, and also from a defensive view, expense investing in Japan for the longer term may well be the proper strategy despite the temptation to improve short term results by withdrawing or failing to enter.

    Companies that now regret that they were not more agressive regarding investment in Japan in the 1950's and 1960's need to take careful note of Korea. In a great many regards, the Korean economy is now in the position that Japan's was around 1960. High real growth – 10 percent from 1970 to 1975, 15 percent in 1976. Birth rate low and falling. Savings rate rising. Exports large and rising. Trade balance in good shape. A large (35 million) population with high literacy. A government determined to grow fast economically and using sophisticated methods to achieve growth.

    At the same time, Korea is a difficult economy to enter on terms most companies find attractive, e.g. local participation is generally required. There are political risks whose level is hard to determine. Organizational approaches, government relations, and business practices differ from those of the West. It is fairly easy to make the case that Korea is too hazardous to warrant direct investment and that licensing and other indirect methods are appropriate.

    The parallels to foreign companies' views of Japan in the late 1950's are clear.

  • Add To Interests
  • SAVE CONTENT
  • PRINT
  • PDF