HOW TO RE-THINK AND CREATE A WINNING JAPAN STRATEGY

Transcription

1 HOW TO RE-THINK AND CREATE A WINNING JAPAN STRATEGY FOUR KEY STRATEGIC SUCCESS FACTORS IN JAPAN BUSINESS SWEDEN, DECEMBER 2016 FOUR KEY STRATEGIC SUCCESS FACTORS IN JAPAN BUSINESS SWEDEN 1

2 HOW TO RE-THINK & CREATE A WINNING JAPAN STRATEGY A re-evaluation of your strategy and organization in Japan could reveal new opportunities for growth and impact the rationale for different modes of establishment or collaboration with Japanese companies as the Japanese business landscape is undergoing change. COMPANIES SHOULD RE-EVALUATE THEIR JAPAN STRATEGY TO REACH THE FULL POTENTIAL IN A CHANGING JAPANESE BUSINESS LANDSCAPE There are reasons for Swedish companies to reevaluate their approach to Japan. The world s 3 rd largest economy is still highly interesting with a large consumer market and advanced manufacturing industry. Still, we observe a tendency among many Swedish companies to fall into somewhat of a passive status quo mentality in Japan. The Japanese market has never been (and still isn t) an easy market for foreign companies to penetrate, but it can be very rewarding as long as you dedicate enough attention to its management. And there are signs that the market is becoming more accessible. There is a changing attitude towards international business practices and increased openness towards foreign collaboration (including M&A) among Japanese companies. A re-evaluation of your strategy and organization could reveal new opportunities for growth. While general news reports on the Japanese economy often are quite gloomy are Swedish companies generally doing better than the market on average. Swedish subsidiaries in Japan have a predominantly positive view on the Japanese business climate. A majority of Swedish subsidiaries have seen positive sales, increasing market shares and are generally satisfied with the Japanese market development. Even with many years of experience in Japan there might be reasons to re-visit your strategy. Japanese companies are indicating an increased openness towards collaborating with foreign companies, a more accepting attitude towards M&A and international business practices. Increasingly faced by international competition, companies have heavily invested in acquisitions of foreign know-how in order to remain at the forefront of innovation. 2 BUSINESS SWEDEN FOUR KEY STRATEGIC SUCCESS FACTORS IN JAPAN

3 Billion USD Number of cross-border M&A deals Key take-away: There are no one-size-fits-all solutions for success on the Japanese market, but having the right local organization in place and making regular visits are key success factors. Reevaluating the rationale for establishing a whollyowned subsidiary, expanding sales through inorganic growth or collaborating with Japanese partners are potentially interesting options to consider as the Japanese business landscape is undergoing change. This paper aims to briefly describe the changing landscape and offer some strategic alternatives regarding modes of establishment and partnerships during different phases of market development in Japan. JAPANESE COMPANIES ARE KEY STAKEHOLDERS GLOBALLY & RELATIONS TO HQ IN JAPAN IS CRUCIAL TO COLLABORATION WORLDWIDE Japanese companies are important stakeholders in Asia and increasingly connected to transnational production networks. Established relations to the head office in Japan might prove crucial to cooperation on other markets. Being recognized as a trustworthy partner to a major Japanese company also adds a strong track record of collaboration and shows long term commitment. This will strengthen inter-firm relations with the Japanese company globally and strengthen other relationships in Japan. One might receive proposals from other companies as a result of cooperation with one company. Part of the explanation to why Japan increasingly is becoming connected to transnational production networks is that Japanese companies have heavily invested in cross-border M&A. Foreign Direct Investment (FDI) outflows reached almost 130 billion dollar in 2015, with outflows exceeding 100 billion for 5 consecutive year. Japan was second only to the United States in FDI outflows in This is a result of many Japanese companies experiencing record profits, partly due to favorable exchange rates. Japan was also leading in signing bilateral and international investment agreements in Cross-border M&A statistics is part of FDI balance-of-payments. It involves cross-border transfer of funds when a company in one country acquires the equity of a company in another country. The following table shows the nominal value and number of acquisitions by Japanese companies abroad. Japanese acquisitions have been at record levels in recent years even though the nominal value varies year by year. Japanese companies used to mainly invest in high growth emerging economies. However, in the first half of 2016 was more than 90 percent of the value of acquired companies located in developed economies. North America accounted for 35%, Europe 25% and Asia 24%. Already in 2015 were two thirds of acquisitions in developed countries, implying that Japanese companies increasingly seek acquisitions to obtain knowhow of foreign companies, access to supplier/ customer networks, international experience etc. Figure 1 - Nominal value & number of cross-border M&A deals with a Japanese company as buyer M&A value Number of deals Source: UNCTAD World Investment Report 2016 FOUR KEY STRATEGIC SUCCESS FACTORS IN JAPAN BUSINESS SWEDEN 3

4 R&D expenditure (% of GDP in 2014) JAPANESE COMPANIES INDICATE INCREASED INTEREST IN COLLABORATION WITH FOREIGN COMPANIES Japan is one of the leading countries in terms of innovation and at the same time struggle to remain at the forefront of innovation, indicated by the increased openness towards foreign collaboration and introduction of international business practices. This might seem like a contradiction but one might attempt to explain this trend by looking at differences in national innovation systems. Japan's national innovation system relies less on public research and international collaboration, but is rather dominated by open innovation within Japanese corporate groups. Private sector accounted for 77% of Japanese gross domestic expenditure on research and development (GERD) in 2014, one of the highest shares of private sector contribution out of all OECD countries. Japanese companies rank among the world's largest corporate R&D investors while participation of small enterprises in national research and innovation policies is limited. While leading in triadic patent family output globally (patents recognized by Japan, the European Union and the United States), Japan is increasingly challenged by rivals from mainly China and South Korea. One observation is that Japanese companies seem very skilled at making slight (albeit advanced) product improvements within existing technologies but less capable of delivering groundbreaking developments in new technological areas, typically discovered in basic research. Figure 2 - R&D expenditure (% of GDP), basic research (% of R&D) & patent grants of selected countries China Japan Korea Size of bubble equals number of patent grants in 2014 By office (not triadic patents) USA Basic research (vs. applied) (% share of total R&D expenditure in 2013) Source: World Bank 2016, World Intellectual Property Organization 2016, OECD Science, Technology and Industry Scoreboard THERE IS INCREASED RATIONALE FOR INORGANIC GROWTH IN JAPAN Another trend that can be seen is that Japanese companies are increasingly willing to divest noncore businesses to foreign investors in a push to remain internationally competitive. High profile acquisitions such as Foxconn s acquisition of Sharp and divestments of non-core businesses at Sony, Panasonic and Toshiba have set a new norm. In the smaller perspective, many small and medium-sized companies in Japan are lacking natural successors. With Japanese businesses traditionally being inherited through bloodlines, the fact that about two-thirds of Japanese companies do not have a successor lined up is quite astonishing. Traditional attitudes towards selling your life s work as something shameful are gradually changing. Cultural fit and mutual understanding of buyer and seller are just as important as financial strength, which could prove valuable for potential acquirers as there is a good cultural fit between Japan and Sweden. Inorganic growth is an increasingly viable option in Japan. It used to be difficult to enter the Japanese market through acquisitions as usually only companies on the brink of bankruptcy were acquirable, which is not necessarily true anymore. The typical Japanese company available to acquire or open to collaboration is changing not only to include companies with financial difficulties. Of course, if the acquisition target had everything going in its favor it most likely would not be up for sale. But Japanese companies are increasingly looking to be 4 BUSINESS SWEDEN FOUR KEY STRATEGIC SUCCESS FACTORS IN JAPAN

5 acquired, and increasingly not only loss-making companies. Many companies, competitive in certain areas, might lack expertise in new technologies or have no international expertise. These companies typically seek collaboration to access new products, technologies and help to develop international markets. Regardless it is important to consider the rationale for any Japanese company seeking collaboration. THERE ARE REASONS TO RE-EVALUATE YOUR OVERALL STRATEGY IN JAPAN We encounter many Swedish companies that have been in Japan for a long time with the same set-up. There is a tendency to have a rather passive maintain status quo strategy in Japan. Typically companies neglect to re-engage with the market after a product segment has reached maturity. The Swedish HQ might be satisfied with turnover in the Japanese market relatively to the effort, which might slide companies positions drifting as more attention is needed to be able to move to the next step. There might have been no expats present for years and knowledge in Sweden might be limited about the operations in Japan. Active involvement from the HQ in Sweden could discover areas for improvement and re-ignite the market development. Figure 3 - Phases of Japanese market development typical features of different modes of establishment Sales Problematic phase for Swedish companies Beginning New chapter New trajectory Maturity Change Growth Drift 1 year 1-5 years 5-10 years 10- years Time Source: Business Sweden Business Sweden recently published a report called Dare your distributors 1 that encourages Swedish companies to more actively manage distributor relations implying that solutions lies as much with the Swedish principals as with the distributors. As distributors are significant sales channel partners does distributor management deserve more attention but also management of all business partnerships. Swedish companies in Japan specifically struggle to re-engage once a market has reached maturity, visualized by the change phase in the graph above. Active partner management could enable the start of a new chapter in Japan. The main flaws of all partner relationships are typically lack of clear-cut governance structures, regular follow-ups and different expectations regarding performance. Japanese companies are typically excellent at maintaining existing partner and client relations but significantly worse at acquiring new contacts, which is necessary to gain access to new networks and customer segments. Distributors and partners alike need continuous feedback to guarantee desired outcome. Regular face-to-face communication, involvement from HQ and a good balance of control vs. autonomy are key components of successful collaboration. 1 Dare your distributors FOUR KEY STRATEGIC SUCCESS FACTORS IN JAPAN BUSINESS SWEDEN 5

6 Low High Size of market potential Established knowledge often proclaims that foreign companies have to enter Japan in some sort of partnership with a Japanese company, whether it might be a joint venture, strategic alliance, or other forms of collaboration. Even international companies with significant experience of entering new markets through Greenfield ventures might have found themselves inclined to investigate forming local partnerships or strategic alliances when entering the Japanese market. There are numerous examples of both successful and unsuccessful partnerships in Japan. There are examples of foreign companies finally succeeding in Japan after entering a local partnership after struggling for many years as a wholly-owned subsidiary. There are also examples of companies finally succeeding in Japan after establishing a wholly-owned subsidiary after a stagnant partnership and sufficient resources have been invested. As long as the size of the potential Japanese market is large enough in comparison to ease of entering the market, establishing a wholly-owned subsidiary is likely to be the best long-term option to maximize return on investment for a large enough company with available resources. However, if the potential market size is unclear, entry barriers judged to be too significant or other partner benefits exist, there could be reasons to investigate some kind of partnership with a Japanese company, whether licensing, agent, distributor agreements or more elaborate strategic alliances or joint ventures. Figure 4 - Typical mode of establishment in Japan based on market potential, entry barriers (and phase) SUBSIDIARY (Growth/Maturity/Change) Low Source: Business Sweden CONDUCT A STRATEGY RE-EVALUATION Whether your company is considering a joint venture, already has a distributor or other type of partnership, self-assessment is critical. Are you working with the most suitable partner? Have you evaluated different forms of collaboration? Do you have a clear governance structure? Have you assigned enough resources (human & financial)? DIRECT SALES (typical first step) Do you provide adequate support and guidance to your Japanese partner Entry barriers JOINT VENTURE, M&A, STRATEGIC ALLIANCE (Maturity/Change) AGENT, LICENSING, DISTRIBUTOR (Growth) High Figure 5 - Overview of strategic alternatives in Japan (based on mode of establishment) Key strategic issue Swedish company rationale Japanese company rationale Main reasons for not reaching full potential Key success factors Subsidiary (K.K) Distributor Joint venture M&A Strategic alliance Control vs autonomy of Japan operations Incr. sales to new & existing customers Expand network - Inactive market dev t Lack of market knowledge (SE HQ) Active involvement from HQ (regular visits) to update market knowledge Partner performance & enhancement Sales representation Limit risk/investment Access to contacts Sales potential Product line-up New segments Passive distributor relation. Lack of due diligence Build long-term relations & trust Get to know partner Regular visits Overcoming market (entry) barriers Becoming part of JP business ecosystem Stamp of approval Sales potential Knowledge sharing Int l experience Division of tasks & responsibilities Cultural mismatch Clear governance structure, proper due diligence, exit option agreement Creating value through inorganic growth Enabling inorganic growth (sales & after-sales services) Financial rescue Technical know-how Int l experience No suitable targets Cultural mismatch Lack of trust Long-term intent Respectful M&A behavior can lead to other proposals Available synergies/ collaboration areas Access to JP market Tech. collaboration JP partner company relations worldwide Obtain key technical expertise & int l experience Unclear synergies & performance indicators Limit scope, proceed slowly. Gradually incr. depth/width of cooperation Source: Business Sweden 6 BUSINESS SWEDEN FOUR KEY STRATEGIC SUCCESS FACTORS IN JAPAN

7 There are no one-size-fits-all solutions for success in the Japanese market, but there are four key success factors when re-evaluating your strategy on the Japanese market: 1. Thorough partner evaluation It is important to conduct a thorough partner evaluation prior to entering any agreement to examine what distribution channels, after-sales network and technical expertise a potential partner has. It is especially crucial in Japan to distinguish between a partner s customers and contacts. Potential partners might have the right customers but the wrong contacts. It is necessary to confirm the level of contact a potential partner has as separate divisions of the same company might be completely unrelated. Established relationships should be specified or the partner might not be able to realize expected results. As mentioned, Japanese companies are excellent in maintaining existing relations but less capable of establishing new contacts. 2. Clear governance structure In any kind of distributor or partnership agreement, it is important to have a clear governance structure. Clearly specify responsibilities and limitations of the partnership, whether it might be product segment, region, sales channel or time period. The agreement should also specify performance indicators and under what conditions the partnership expires. Should the product in itself no longer be feasible to sell in Japan you can always cancel the product (and thereby the partnership expires) but you cannot or should not change partner as a general rule. There is no such thing as moving up the value chain among partners. However, getting a stamp of approval as being recognized as a trustworthy partner to a wellknown Japanese company will open up for other new business opportunities. 3. Active involvement from Swedish HQ Regardless of type of establishment, it is important for Swedish companies with active involvement the Swedish HQ in order to own the customer dialogue. Companies need to listen to and understand the Japanese customer s requirements and not only listen to your partner s interpretation. The customer will only ask for what they understand and know. This is not least important when partnering with a large company. It is quite easy to lose control over a Japanese partnership and it can be very exhausting to try to change the governance, organizational structure and culture of Japanese companies. 4. Long term perspective and enough resources provided Most Japanese companies will only enter into comprehensive partnerships with companies that they know well and have been working with for a long time. Partnership and business discussions might progress slower than in other markets, but it is worth all attention as the cost of a bad partnership might ruin a company s chances of reaching its full potential in Japan by complicating future partnerships. There is typically a lot of consideration to soft values, such as cultural fit. Japan can be very rewarding if you have enough patience as Sweden has a cultural advantage and positive image. It is important to have a long-term perspective and provide enough resources, including support to existing partners. By Carl Norsten & Cecilia Öberg Leiram. The authors thankfully acknowledge input and support provided by Business Sweden colleagues as well as companies and other industry professionals interviewed for this paper. This paper is based on Business Sweden s market knowledge and the outcome of in-depth interviews with 15 industry professionals with experience of partnerships in Japan; country managers of Swedish subsidiaries, industry organization representatives and academia. FOUR KEY STRATEGIC SUCCESS FACTORS IN JAPAN BUSINESS SWEDEN 7

8 BUSINESS SWEDEN Box 240, SE Stockholm, Sweden World Trade Center, Klarabergsviadukten 70 T F info@business-sweden.se Business Sweden s purpose is to help every Swedish company to reach its full international potential and help companies abroad to reach their potential by investing in Sweden. The purpose is operationalised through 450 staff deployed at 14 offices in Sweden and at 55 offices in 49 key markets abroad. Feel free to contact us for any questions regarding Swedish international trade or foreign investments in Sweden.