My book, The Business Reinvention of Japan is now available at Stanford Business Books and Amazon.com. It is written for people with a business interest in Japan and in the Pacific Rim who haven’t looked at Japan in a while. It updates on Japan’s new business architecture, corporate strategies and management change, as well as new emerging business patterns in Northeast Asia. How have Japanese companies responded to the rise of China? And, how has their strategic repositioning affected business relations and the competitive dynamic within Asia?
The book begins with a simple question: For the past 20 years, we have heard mostly bad news from Japan, from economic stagnation and ageing society to government debt. Readers interested in Japan’s stagnation will find a large selection of things to read. But after 20 years of bad news, Japan is still the third largest economy in the world, with a workforce the size of China’s three largest cities. This book explains how that’s possible.. Who are Japan’s successful companies today, what are they doing , and what explains their successes?
Japan’s system of “balanced capitalism”
In addition to being a large economy, Japan is also one of the richest yet most egalitarian societies in the world. Per capita, there are more “high net worth individuals” in Japan, yet income inequality, while rising, is still lower than elsewhere. This means the poor are not as poor. My explanation is that Japan continues to offer a different system of capitalism, where companies have a social responsibility for employees, smaller suppliers and society overall. The outcomes reflect different trade offs that Japan makes. To this day, there is a strong preference for social cohesion, even at the expense of economic growth. Over time, this has resulted in high level of affluence. But the price is that it also means very slow reforms and corporate reorganization — so slow that few Westerners would have the patience for it. My interpretation is that “slow” is the price Japan is willing to pay for societal stability.
At its own pace, Japan is showing is that corporate reinvention need not be messy or disruptive. It can be done without layoffs or bankruptcies. This is informative for our current discourse in America regarding the shortcomings of the U.S. system with its focus is on the stock price and shareholder gains, at the expense of social infrastructure and inequality. The COVID-19 situation in Japan underscores this: the numbers on unemployment and small firm failures in Japan will be much lower than in the U.S.. Thus, Japan’s more caring and balanced systems, where employees come before dividends, may result in cost savings overall.
What is Japan’s business reinvention?
A business transformation is taking place in Japan that has opened up new business opportunities, new markets and new competitive dynamics. It began in the late 1990s, with the rise of companies in South Korea and Taiwan, and then China, as high-quality mass-production assemblers. They basically ate Japan’s lunch – i.e., Japan’s former predominance in household and office electronics, and everything that goes into it, such as semiconductors. This has forced Japanese companies to move up the value chain, and to invent and produce things that more difficult to make or to imitate. Over the past two decades, Japan’s leading companies began to vacate consumer end markets and simple manufactured items. At the same time, they pivoted to become the suppliers of deep-technology, highly innovative and advanced materials and components that feed into those goods. The chemical industry stands out in this process, but it is also happening in product categories ranging from glass and steel to electronic and automobile components, semiconductor manufacturing equipment and smart city infrastructure. In all of these areas, Japanese companies have moved into difficult-to-make, specialty segments.
This strategic pivoting by Japan’s leading companies away from end products to input materials has gone largely unnoticed in the West. But even though there is no “Japan Inside” sticker on the final items, let me challenge you with this statement: Not a single day goes by when you do not use at least 5 products that could and would not function in the way they do without at least one Japanese input part or material. Here are a few examples: Have you used your cellphone today? Driven a car? Printed out a page? Taken a picture? Used a microwave? Looked at a computer screen? … Each of these products relies on a set of advanced materials and components, or are made with a certain production equipment, where Japanese companies occupy a 100% global market share. This includes critical inputs to semiconductors, microcontrollers, cell phone parts, monitors and batteries.
New Japan’s aggregate niche strategy
I have labelled Japan’s dominance in these inputs the “aggregate niche strategy”. In a study of roughly 900 input and end products – from robots to batteries to trains LCD screens – it was found that Japanese companies combine to a global market share exceeding 50% in half of these segments, and 100% in over 50 products. These are critical components, and the quality of Japan’s parts is the best in the world. On average, these global markets have a size of about $5 billion, which is not that big. But in the aggregate, it adds up very nicely. Importantly, the makers of these products are among Japan’s largest companies, and many occupy several of these markets and produce globally. So this is not a story about small companies, or hidden pockets of invention. It describes the new face of Japan’s large-firm competitive thrust.
Here is a visualization of the “aggregate niche strategy”. The vertical axis is the global market (hence the big orange bubble), and the horizontal indicates the combined share of Japanese companies in that industry. Japanese companies combine for a 100% global market share in many small “bubbles”. And while each of these dots may be small, at about $5 billion per market, these dots add up to significant resource dominance. Each dot represents a product category, and color indicates industry (yellow: car parts, blue & teal: electronics). Orange are automobiles, an industry that Japan has long co-dominated. Blue are intermediate or end products in electronics.
[This chart is sourced from NEDO’s 2017. For details, see citations in the book.]
New Asian Trade: Supply chain dependencies
One effect of the aggregate niche strategy is that it has created new trade dynamics in Northeast Asia. As I show in more detail in this blog, South Korea and Taiwan have a trade deficit with Japan, driven by demand for input components and advanced materials and chemicals, and China has a trade deficit with South Korea and Taiwan, driven by the intermediate products for the assembly of TV, cell phones, batteries, etc. The newly arising dependencies in this trade setup are already beginning to influence the overall dynamics of Asia. It is unlikely that the current COVID-19 situation will change these dependencies, because these trade ties run deep. And even if “decoupling” and other geopolitical developments progress, and even if companies remove some of their production processes from China, these dependencies will still endure. And incidentally, Korean companies are watching Japan’s reinvention very carefully: Samsung and LG Electronics are facing the exact same challenges. They are currently largely dependent on Japanese inputs as well as construction machinery. If you look at a map like the above for South Korea, the lower right hand corner of the chart is empty.
• Managing reinvention and culture change in Japan
Within Japan, the challenge with the aggregate niche strategy is that companies were not traditionally built for it. Rather, in the 20th century Japan’s leading companies had grown into highly diversified conglomerates geared toward mass-manufacturing. This is why they have to reinvent themselves internally as well: They have to go on a “diet”, by choosing and focusing on a handful of niches where to dominate globally, and exiting the rest. Management processes have to be reoriented away from incremental and toward breakthrough innovation. This transformation has already taken two decades and will probably take at least another 10 years.
The short explanation is that this pace reflects societal expectations in Japan: “Slow” is the price Japan is willing to pay for societal stability and safeguards against unemployment and inequality. By proceeding methodically, within significant constraints and limitations on layoffs, spinoffs, cut-offs and sell-offs, Japanese companies are now showing the world that corporate reorganization need not be messy or socially disruptive. Americans probably would not have the patience for such a slow pace. In other words, Japan’s more caring and balanced capitalism that values social stability as much as corporate profits, is producing outcomes that are very different from the U.S. or Europe.
Another reason for the slow pace of change is that it has be managed within the so-called “tight culture” setting of Japan. Tight business settings are characterized by strong behavioral norms of what constitutes the “right” behavior, and strong agreement that deviants from those norms ought to be reprimanded. For example, it would be considered socially and morally wrong of a company to lay off employees during a crisis unless bankruptcy is imminent; companies that do such a thing would have difficulty selling products or attracting new talent when the economy rebounds. In the book I lay out what tight culture means for doing business in Japan generally, and the pace and scope at which senior management can bring about the business reinvention.
• Japan’s reinvention and the COVID-19 pandemic
The strategy changes I describe are still happening in Japan, and if anything, are accelerated by COVID-19. One reason is that the interconnectedness through the supply chains will help Asia rebound faster, especially the Japan-Korea-China triangle. Or, the crisis may change the trajectory of Japan’s transformation. But it will not unravel it. Another factor is that the COVID-19 self-restraint — Japan’s version of the lockdown and telework — has further propelled some of the workplace reforms that the book analyzes. Japan’s “tight culture” and more balanced capitalism is also visible in corporate developments during the current COVID-19 crisis.
There are no news of mass layoffs from Japan, even though the situation is not good at all. And, even though there have been increases in the contagion rate lately, the fatality rate remains low, thanks to the excellent general health care that all Japanese enjoy, and their practice of “self-restraint” – doing their part to contribute. Japan also has strong behavioral norms about self-awareness, not bumping into other people, not cutting in front of others, etc. The response to the crisis is very different from what we have seen in the U.S.
It is unclear how long the “aggregate niche strategy” will be a valuable approach for Japan to compete in Asia. But as of 2020, it’s safe to say that it is working well and has already greatly changed the competitive thrust of New Japan’s companies.