China in Transition

The Conditions for Successful Business Operations in China - The Case of Komatsu

Chi Hung KWAN
Consulting Fellow, RIETI

In recent years, Japanese firms have been placing increasing importance on China as a base for their overseas operations. However, examples of failure are not few in number. Here, I would like to examine the conditions needed to successfully operate a business in China based on the example of construction equipment manufacturer Komatsu, which has made good use of excellent timing, geographical advantage and a harmonious workforce.

The first requirement for success is to be blessed with good timing. The scale of China's construction equipment market has expanded by some 2.7 times over the past four years, from 25,000 units in 1998 to 68,000 units in 2002. The rapid growth in hydraulic shovels, in which foreign firms have more than a 90% market share, is also serving as a tailwind for Komatsu, and demand is growing rapidly. In addition to this growth in demand, it should be noted that around the time of its entry into the World Trade Organization, China was in the midst of deregulating its economy. The growth in demand over recent years is also the result of both the fact that from 1998 China's commercial banks have become able to extend consumer loans for construction equipment purchases, and that interest rates are lower than those in other countries. As a result, not only have customers become able to procure funds to purchase machinery more easily, but the risks involved for machinery manufacturers have greatly diminished because they only need to deal with banks when collecting accounts. Furthermore, we must also not overlook the fact that it has become easier to procure yuan-denominated funds because banks are seeking to expand lending ahead of the opening of the financial sector to foreign financial institutions. Huge improvement in the business environment in China, such as increased transparency in import and export procedures, is also a factor supporting Komatsu's operations.

The second condition for success is geographical advantage, secured through careful consideration of the characteristics of the area in which the business will be based. Komatsu noticed that one characteristic of the Chinese construction equipment industry was that both manufacturers and users were mainly state-owned enterprises. Because manufacturers were mainly state-owned firms and had a weak understanding of the concept of competition, quality control, cost and delivery deadlines, the situation proved to be a business opportunity for foreign manufacturers such as Komatsu. In fact, domestic manufacturers were no match for foreign firms in the production of hydraulic shovels, which require a high level of technology, and the market is now an oligopoly of some seven or eight foreign firms. From the viewpoint of sales, the concept of service has yet to catch on, and this is working to the advantage of foreign firms. For such durable consumer goods as construction equipment, after-sales servicing is just as important as sales, and thus the market is unlikely to lapse into a simple price war.

On the other hand, it is also worth noting that Komatsu presently does not necessarily see its costs reduced by using China as a production base. Komatsu makes the exact same products worldwide, but because of such factors as the need to import high value-added parts such as precision parts from Japan, in reality it is more costly to manufacture overseas than in Japan. However, Komatsu manufactures equipment in China because when China's high import tariffs and various preferential treatment measures given to foreign companies are taken into account, it becomes more expensive to export finished products from Japan.

The third key to success is to secure harmony among employees, ensuring that they are fully utilized. Of particular note is the fact that Komatsu did not stick to the Japanese style of personnel and labor management in conducting its business in China. Apart from the sections handling management planning and contact with company headquarters, Komatsu has adopted a personnel policy under which the main players are Chinese with Japanese providing support. Since 2002, the CEO, as well as the head of the personnel division, has been Chinese. In addition, Chinese staff forms the core of its sales and marketing operations, and there has been considerable progress in the localization of human resources.

When implementing human resource localization, it is important to first foster people who can become senior officials. Komatsu trains people with such a desire, and actively gives candidates opportunities. Its personnel system in China is also different from that in Japan, and being transparent and open, it adopts a job grading system that places priority on performance. In order to train people involved in services operations, it has set up a training program tailor-made for employees in the services department. Furthermore, in 2003 it launched a training program for engineers in collaboration with Shandong University.

When expanding a business overseas, a firm must fight in the opponent's ring and this puts it at a disadvantage. In order to win the battle on the business front, a company must do away with inherent disadvantages by making use of the aforementioned "providential timing," "geographical advantage" and "human harmony." Without these conditions, there is little prospect of success if a foray into an overseas market is made without much thought and planning.

January 9, 2004
  • This column is based on a report that was delivered by Komatsu executive officer Taizo Kayata at the Global Industrial and Social Progress Research Institute on Oct. 21, 2003.

January 9, 2004