Global Business 4th Edition by Mike Peng

Exercise 40

Japanese Multinationals in Emerging Economies1
Mike W. Peng (University of Texas at Dallas)
What is behind the success and failure of Japanese multinationals competing in emerging economies
How Do Japanese Multinationals Compete
Generally speaking, Japanese multinationals have struggled in emerging economies. In five major economies (Brazil, China, India, Indonesia, and Russia), Boston Consulting Group (BCG) studied seven industries in which Japanese multinationals are traditionally excellent: automobiles, beauty and personal care, beverages, home appliances, packaged food, retail hygiene, and TVs. BCG identified a market share leader in every industry in every economy studied. Of the total of 35 industry leaders (seven industries X five economies), only four were found to be Japanese. Western multinationals were identified to be leaders 20 times, and local firms from emerging economies 11 times.
Clearly, given the sluggish economic growth in Japan and other developed economies, emerging economies represent the future for the growth of Japanese multinationals. However, mosljapanese multinationals have failed to appreciate the scale, scope, and speed of the transitions in these rapidly moving economies, while their Western and local rivals have rocketed ahead. Intense soul searching has identified three common problems:
• A distaste for low-end markets. For example, inexpensive but bulky cathode-ray-tube TVs still account for 65% of the sets sold in India. Butjapanese electronics firms focus on more expensive flat-screen TVs, leaving LG, Samsung, and India's own Videocon to have the entire low-end market for themselves. Of the entire Indian TV market (high-end and low-end combined), each of the two Korean rivals has a 25% market share, followed by Videocon's 19%. The top three Japanese players-Sony, Panasonic, and Toshiba-only manage to grab a combined total of 13%.
• A lack of commitment. Still focusing on Japan as well as other developed markets, most Japanese multinationals are not as aggressive as some of their rivals in channeling resources to emerging economies. Honda's CR-V SUV sells very well in Europe and North America, but very poorly in India-only about 13,000 cars in ten years (2003- 2013). A major reason is that most Indians prefer diesel, but Honda has refused to commit resources to develop a diesel-powered CR-V, claiming that its diesel engines would not work with Indian fuel quality. The upshot . Very poor sales (a mere 100 CR-Vs per month) for a very capable car.
• A lack of talent, which results in a lack of localization. The traditional norm of sending a large number of expats to staff overseas positions has created a shortage of capable local managers. But Japanese firms are reluctant to send high-caliber executives to emerging economies, and these individuals are also reluctant to go even when asked. The net result is a large number of relatively mediocre expats. At one leading Japanese electronics firm, 20 expats-due to their compensation-eat up a large chunk of the budget for the 350-person workforce in India. In contrast, LG only has 15 expats to manage its 5,500-person workforce in India.
Panasonic in China and Beyond
Of course, not all Japanese multinationals are hopeless. Some are aggressively adapting to the new realities by rapidly learning and transforming themselves. Panasonic's experience in China serves as a case in point. Although Panasonic started having manufacturing operations in China in 1987, most product development and engineering had been done in Japan, and local adaptation had been minimal. In a radical departure from its traditional practice, in 2005 it set up the Shanghai-based China Lifestyle Research Center, which was its first serious effort to gain a deep understanding of consumer lifestyles anywhere outside of Japan. Led by a high-caliber executive, center staff undertook a series of meticulous research. For example, visits to Chinese households uncovered that the kitchen space for a refrigerator was small, typically only 55 centimeters wide. Panasonic's standard refrigerator was 65 centimeters wide. In response, Panasonic's engineers in Kusatsu, Japan, and Hangzhou, China, worked together to downsize refrigerators-especially low-end ones-for China. The market reaction was swift. In one year, its most popular model of refrigerators increased its sales ten times compared with the sales in the previous year.
In another example, the Shanghai-based center found that in more than 90% of Chinese households with washing machines consumers still washed their underwear by hand. Consumer interviews revealed a fear that bacteria picked up by other clothing would spread to underwear during the wash, resulting in infections. Although the fear was never proven, the solution clearly was to sterilize the clothing in the wash. Close collaboration between China-based and Japan-based teams led to the 2007 launch of Panasonic's sterilizing washing machines in China. In less than a year, its market share for front-loading machines rose from 3% to 15% in China. In a departure from the conventional flow of innovation from Japan to emerging economies, Panasonic brought the sterilization concept from China back to Japan.
While these two examples are high-profile successes, they have been enabled by numerous efforts to foster formal and informal relationships among the Shanghai-based market researchers, engineers, and managers throughout the over 40 operations in China, and engineers and managers throughout Panasonic units in Japan and beyond. Overall, knowledge flew in both directions: from the rest of Panasonic to China and from China to the rest of Panasonic. To better manage the extensive flows of knowledge, Panasonic set up a China headquarters: Beijing-based Panasonic Corporation of China. China operations were gradually given more autonomy-rare among multinationals in general and among Japanese firms in particular. Since 2008, the China subsidiary, which has a high level of localization in staff, has had almost complete autonomy in new product decisions for China.
Going beyond China, Panasonic has leveraged its learning from the China experience by transforming its organization on a global basis. Encouraged by the fruits from paying close attention to local consumer needs in China, Panasonic also developed air conditioners in India and refrigerators in Vietnam. In 2009, Panasonic established a lifestyle research center for Europe (in Wiesbaden, Germany) and in 2010 it set up a similar center for India (in Delhi). In 2012, Panasonic created the Global Consumer Marketing organization to facilitate the diffusion of learning from the most insightful research and best practices outside Japan, especially in emerging economies. While the outcomes of these tremendous efforts are encouraging, they are far from reaching their full potential. In China, although Panasonic is the top Japanese (and foreign) brand of washing machines, it still trails behind Haier and White Swan, the two domestic market share leaders. Therefore, the BCG study has not identified Panasonic as an "industry winner." Whether Panasonic will emerge as a true winner in China and other emerging economies remains to be seen.
1) This research was supported by the Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the author. © Mike W. Peng. Reprinted with permission.
Sources: Based on (1) S. Ichii, S. Hattori, D. Michael, 2012, How to win in emerging markets, Harvard Business Review, May: 126-130; (2) T. Wakayama, J. Shintaku, T. Amano, 2012, What Panasonic learned in China, Harvard Business Review, December: 109-113; (3) www.panasonic.co.jp; (4) www.panasonic.com.cn; (5) www.panasonic.net.
What contributions have Panasonic's China operations made to the rest of Panasonic