Three Areas of Business Opportunities for Japanese Companies and the Role of Economic Cooperation to Neighboring Asian Countries
Consulting Fellow, RIETI
As the world economy remains unable to rise from the stagnation following the collapse of Lehman Brothers, emerging and developing economies are attracting a great deal of attention. Companies from around the world see huge business opportunities in: (1) the rapid expansion of the so-called volume market, which typically refers to the medium income population in China, Southeast Asia, India, and so forth; (2) potential products and services for the so-called base of the economic pyramid (BOP) market, which refers to the low-income population in developing countries in mainly South Asia and Africa; and (3) rapidly expanding demand in developing countries for hard and soft infrastructures, which will serve as a foundation in the growth of these emerging markets. However, these areas are, as a rule, outside the bailiwick of Japanese companies.
In what follows, I will first clarify the current state of Japanese companies and the new challenges they face in moving into these areas, and then discuss what roles the government should play to support private-sector efforts with particular focus on economic cooperation, an area of my expertise(*1).
Can Japanese companies survive in the volume market?
Led by automobile makers and manufacturers of electrical and electronics products, Japanese companies had established their brands in the U.S. and European markets by the mid-1980s. Then, by leveraging this brand power, they moved full swing into the Asian market from the latter half of the 1980s, that is, after the Plaza Accord of 1985. By the mid-1990s, Japanese companies secured large shares for high-end products in Southeast Asia and China. But things began to change in the late-1990s, first in the rapidly expanding Chinese market. Through technology tie-ups with companies from developed economies (or through the copying of this technology), Chinese companies acquired a certain degree of technological capability. They also built up their cost competitiveness and product planning ability in order to flexibly respond to changing market needs. As a result, electrical appliances bearing Chinese brand names gradually expanded their shares, primarily in the low- and medium-end market segments, but also to some extent in the high-end market segment, and began to drive Japanese brand products out from store fronts(*2).
In the wake of this turn of events, Japanese companies embarked on the gradual localization of their overseas operations in all aspects - i.e., human resources, goods and products, technologies, and management - and made desperate efforts to develop products geared toward local consumers and sell them locally. In the process, there were heated and sometimes bitter exchanges between overseas staff, who called for lowering the level of specification requirements so as to enable them to reduce costs, and engineers at headquarters in Japan, who refused to make any compromise in product quality levels. However, over the course of the global economic downturn, Japanese companies were reminded of the risk of relying solely on the high-end, advanced economy markets such as the United States and Europe. Today, Japanese companies seem to have finally realized that they have no other choice but to make a fully committed move into the volume market, breaking free from the preconceived notion that they are not suited to those markets(*3).
However, awaiting them in ambush when they proceed to implement their volume market strategies is rivalry with their counterparts from South Korea and China. Samsung of South Korea, a prime example of a bitter rival, has its strength in quick decision-making on investments and well-focused intensive advertisement expenditures on a global scale, low-cost production by minimizing expenditures on basic research, the development of regional specialists and locally oriented marketing(*4). In the 1990s, Samsung successfully advanced into some of the markets hardly penetrated by Japanese brands, such as India, Vietnam, and Eastern Europe. Then, from around 2000 onward, they went on to make a full-fledged foray into the U.S., Europe, and Southeast Asia. For example, the TV market in Thailand, where Japanese companies used to have an impregnable stronghold, Samsung now holds the No. 1 position with a 30-40% share, followed by another South Korean company LG with 20-30%, whereas Panasonic and Sony settle for only 8% each(*5). And unfortunately, this is not the end of the story. In many other markets, including those for motorbikes, automobiles, communication devices, and plants, South Korean and Chinese companies are catching up fast. For instance, the remarkable rise of Chinese automakers in the local market over the past several years is reminiscent of what happened in the Chinese home appliance market a dozen years or so ago. Will Japanese companies be able to gain a stronghold in the volume market amid this situation? The success or failure of their endeavors hinges, more than anything, on whether or not they can change their once-successful business model.What the public sector should do first and foremost in support of Japanese companies' efforts to explore the volume market is to help improve the business environment in developing countries. Specific steps toward achieving that end include initiatives to promote economic integration through the conclusion of Economic Partnership Agreements (EPAs) and investment treaties(*6), as well as trade and investment consultation and business matching services offered by quasi-governmental agencies such as the Japan External Trade Organization (JETRO). Furthermore, given the prospect of an increase in the risk of imitation resulting from the localization of development and technologies, the government needs to take necessary steps, including technical cooperation for the relevant authorities of host countries, to ensure the protection of intellectual property rights.
Are Japanese companies ready to venture into the BOP market?
Defined as a new and sustainable business model targeting a low-income market segment in developing countries - i.e., consumers with an income level lower than those in the volume market - and being counted on to contribute to the solution of various development issues in those countries, is the BOP market strategy(*7). In the U.S. and Europe, such a strategy has been theorized and put into practice since the late 1990s. It is now drawing much attention in Japan with a series of relevant seminars organized since last year, for instance, by the Ministry of Economy, Trade and Industry (METI) and the Japan International Cooperation Agency (JICA).
One the most successful examples of BOP business known to the world is a yogurt retail business launched by Grameen Danone Foods in Bangladesh. By selling yogurt in small containers, Grameen Danone has made its products available at a price significantly lower than the unit price for regular-size products. This price strategy, combined with the painstaking efforts of individual salespersons to explain to customers about the high nutritive value of the products, led to a successful business expansion. Among Japanese companies, Sumitomo Chemical Co., Ltd. developed mosquito nets treated with insecticides for malaria prevention. The company's factory in Tanzania produces 20 million units of mosquito nets every year and sells them in countries across Africa. What is common to these cases is that while having a developmental impact by way of contributing to an improvement in the nutrition, hygienic conditions, and living standards of poor people in developing countries, their business is being successfully operated as a for-profit business, a distinct difference from conventional official development assistance (ODA) projects or corporate social responsibility (CSR) activities.
One may rightly question whether this kind of novel initiative, which is new not only in Japan but also elsewhere in the world, will take root in Japanese companies that are having a hard time capturing the minds of even medium-income consumers. However, Grameen Ladies, sales women who visit local villages and sell yogurt hand to hand to villagers, are actually modeled after Yakult Ladies, a network of door-to-door female sales staff initiated by Yakult Honsha Co., Ltd. in Japan. Also, the sale of products in separate small packages is an approach that has been long and successfully practiced by Ajinomoto Co., Inc. of Japan. Thus, I believe that Japanese companies have a fair chance for success, particularly in the area of consumer goods, so long as they have innovative products or marketing products unique to themselves. But again the greatest challenge would be how they can localize development, production, sales, and services in an even more thoroughgoing manner than under a volume market strategy.
Another area in which the public sector can play a role to help companies explore the BOP market - that is, in addition to the aforementioned improvement of the overall business environment in developing markets - is to provide support from the viewpoint of economic cooperation focusing on the developmental impact of BOP business. In this regard, preparation is underway at JICA for a new BOP initiative, under which BOP business research projects will be carried out, starting later this fiscal year, based on private-sector proposals selected through a public solicitation process.
Will Japanese companies be able to win their place in infrastructure markets in Asia?
Emerging and developing countries, particularly in Asia, are now witnessing an explosive increase in demand for hard and soft infrastructures as a basis for economic activities. Specifically, they lack hard infrastructures such as roads, railway systems, ports, airports, power generation plants, power grids, energy-saving systems, recycling facilities, water and sewerage systems, and information and telecommunication systems. They are also seriously short of related soft infrastructures, namely, adequate know-how, institutional capacity, and human resources for the operation of such physical infrastructures.
Traditionally, such infrastructures have been provided as public goods. Even today, the majority of infrastructures across the world are owned and operated by the public sector. However, in the 1990s, developed countries began pursuing public-private partnership (PPP) arrangements in infrastructure operations, whereby a government typically entrusts an efficient private-sector company with the task of developing and operating a certain infrastructure. Then, since the 2000s, the concept of PPP has rapidly spread in developing countries where the public sector lacks sufficient financial resources for development.
Growing demand in developing countries for infrastructure projects, whether traditional or PPP, has been drawing the attention of companies from around the world. Indeed, those companies have been teaming up with their respective governments to compete for contracts. Japan is no exception. Two recent government reports - the New Growth Strategy endorsed by the Cabinet in June and the Industrial Structure Vision 2010 put forward by METI - have pointed to the need to enhance Japan's infrastructure exports to developing countries as part of priority policy measures. More specifically, the reports call for promoting infrastructure-related industries and businesses engaged in the export of infrastructure and related services as an integrated system, and facilitating infrastructure exports in a package with the government's development assistance to importing countries(*8). Underlying those policy recommendations is the recognition that Japanese companies are generally good at selling specific infrastructure hardware on an item-by-item basis, but they are weak at selling them as a system in a comprehensive deal that involves the integration, operation, and maintenance of multiple infrastructure systems. This weakness is obvious as demonstrated by the fact that a Japan-U.S. consortium led by Hitachi and GE was defeated by one headed by Korea Electric Power Co. (KEPCO) in December 2009 in bidding for a major nuclear power plant project in the United Arab Emirates. However, in the area of power generation and supply business overseas, some Japanese companies, including Electric Power Development Co., Ltd. (J-POWER), have already steered toward a business model pursuing comprehensive deals as a potential big earner. Similar moves are being made in some other areas including ports, railways, and water and sewerage systems. Needless to say, to be successful in those areas, Japanese companies must overcome fierce competition with those from South Korea, China, U.S. and European companies.
Against this backdrop, the need for government support in the infrastructure business has been emphasized in the aforementioned reports, namely the New Growth Strategy and the Industrial Structure Vision 2010. Regarding the specific steps the government needs to take in the area of economic cooperation, the reports call for: promoting ODA loans for PPP infrastructure projects; utilizing ODA loans in the form of viability gap funding (VGF), a scheme designed to strengthen the commercial viability of infrastructure projects; and resuming JICA's private-sector investment finance program at an early date. All of these are matters of urgent importance for which the business community has been calling. Meanwhile, as part of the technical cooperation projects, JICA has been assisting developing countries with the formulation of master plans for infrastructure development and the education and training of relevant human resources. These initiatives may lead to the formulation of infrastructure projects that put Japanese companies at a competitive advantage by creating an institutional environment compatible with Japanese systems. It is encouraging that a number of proposals have been submitted for the JICA's new initiative, a research consignment program launched at the end of the last fiscal year with an aim to explore and formulate new PPP projects.
Japan is well known for being economically and socially inward-looking and we can hope that the three areas of massive business opportunities in neighboring Asian countries will prompt public and private sectors to join forces and vigorously pursue them.
- For details, see Kuroda, A. (2010) July-August edition of Sekai Keizai Hyoron (World Economic Review). Association for World Economics Studies (AWES).
- Kuroda, A. (November 2001) "Made in China." Toyo Keizai Inc.
- "White Paper on International Economy and Trade 2009" (June, 2009) Ministry of Trade, Economy and Industry (METI).
- Yoshikawa, Ryozo. (February 2010) "Nihon wa Naze Samsung ni Maketsuzukerunoka (Why are Japanese companies continuing to be defeated by Samsung?)." Bungei Shunju,
- Survey conducted by Japan External Trade Organization's Singapore Office.
- Kuroda, A. (January 2009) "Higashi Ajia Keizai Togo no Shinten to Nikkei-Kigyo (Deepening Economic Integration in East Asia and Japanese Companies)" Financial Review. Policy Research Institute, Ministry of Finance.
- METI. (June 2010) "The Frontier of BOP Business" Keizai Sangyo Chosakai (Rieti: Research Institute of Economy, Trade and Industry).
- Cabinet resolution on "New Growth Strategy" and Industrial Structure Council's report entitled "Industrial Structure Vision 2010." Both released in June, 2010.
July 20, 2010