Japanese firms struggle to make impact in China

30 September 2009

BEIJING: Japanese companies are struggling to make in-roads in China when compared with their rivals from the US and Europe, with Procter & Gamble one multinational giant showing how this goal can successfully be achieved, a new study by McKinsey has found. 
Some of the biggest global corporations are currently attempting to develop their operations in China, with one prime example being Coca-Cola, which plans to invest $2 billion (€1.37bn; £1.25bn) in the country.

GlaxoSmithKline has also just launched one of its largest consumer brands, Lucozade, in the world's most populous nation, as it seeks to tap into the £16 billion cold drinks sector.

McKinsey estimates that almost half of urban Chinese households will be in the upper middle class segment in five years time, and consumption levels are expected to dramatically increase as a result.

Many Japanese firms, including Dentsu, the advertising holding group, are also now seeking to expand outside of their home market, which has been hit particularly hard by the economic downturn, and where the population is ageing.

However, in a ranking of 24 companies McKinsey believes have performed particularly well in China, just four – Sharp, Shiseido, Suntory and Toyota – are Japanese.

Furthermore, it found that Japan's PC manufacturers only hold a share of between 2% and 3% of all computer sales in the BRIC nation, measured against a worldwide average of 12%.

Moreover, businesses headquartered in Japan take just 6% of revenues for white goods, a total that falls to 3% for mobile phones.

A poll of Japanese executives also found that this group expects China to deliver just 5% of their revenues in the next five years, and a number argued it was already too late to improve their position.

One reason for this comparative lack of success is that "the Japanese lifetime employment system ... is unappealing to Chinese employees, and the Japanese workplace is typically much more hierarchical than in Chinese or western companies," McKinsey said in a report.

Similarly, Japanese firms often “export” their managerial teams and structures, and frequently use their native language rather than Chinese for business purposes.

Many manufacturers have also failed to adapt their products to suit local tastes, ignore smaller cities, and fail to build solid distribution networks.

Brian Salsberg, a McKinsey principal based in Tokyo, said "not only is Japan Inc missing a huge consumer base for its products, but it risks forfeiting local Chinese talent to western and domestic Chinese players who inevitably will make their debut on the global stage – likely in those very areas where Japan has heretofore had some success."

By contrast, the best-performing European and American organisations have proved considerably more adept at meeting the unique demands of the rapidly-growing economy.

Procter & Gamble was identified as an example of a brand owner that has displayed a suitably flexible approach, and as having succeeded in attracting a large amount of local "talent".

Similarly, the consumer goods giant has secured around a third of the haircare category through developing a range of premium and mass-market brands covering a variety of price points.

Data sourced from Financial Times/Forbes; additional content by WARC staff