Chapter 8
Rebuilding Japan's International Competitiveness and
2011-2012 JIIA Research Project: Policies Needed to Ensure Japan’s International Competitiveness
1. Collapse of the competitive advantage of Japanese companies 1.1. Structural changes in the late 2000s
The division of labor between Japan and East Asia had long been "vertical". This is due to the fact that the structure where Japan supplied the mother machines requiring complex changes in design depending on the intended usage, as well as the materials and components that are indispensable for ensuring high quality, and East Asia assembled them together had not changed overall in spite of the dynamic development of trade with East Asia. Also, in the electric apparatus and electronics industries, which are the largest industries in the world amassing cutting edge technologies, the division of labor still is such that South Korea manufactures devices using Japanese manufacturing equipment and materials, and China incorporates the devices into the end product. The cross-border division of labor had been understood by Japan, as well as East Asia, to be attributable solely to difference between technical capabilities between the two; in other words, as the difference in the accumulation of human resources capable of performing everything from research and development to production (skilled labor). In particular, South Korea, which is located between Japan (= holder of advanced technologies) and China (= holder of mass production technologies), has traditionally been afraid of being subjected to a pincer attack and the public, including the leadership, still is unable to overcome the belief that its tremendous deficit in the trade with Japan1 is an indication of the difference in technical capabilities.
However, it was none other than the South Korean companies, which had experience-based understanding of the true nature of globalization due to a currency crisis, who were the first ones to notice the three mutually-interacting structural changes in the global market during the late 2000s and promptly took action. South Korean conglomerates pushed through with a thorough "selection and concentration" of business and restructured their business organizations accordingly. Consequently, Samsung Electronics, LG Electronics, Hyundai Motor Company, POSCO and other large South Korean companies became global companies within a short period of time.
The first structural change was that, as is often said, the introduction of IT led to rapid digitization of technical systems and rendered analog processes meaningless. The significance of skills that largely dictated precision and quality, such as suriawase (designing and mutually making adjustments to multiple components to ensure the right fit) and tsukurikomi (building in of quality through detailed customization of specifications), declined greatly, and the use of modules led to considerable cost reduction in the case of mass-produced industrial products. As change progressed mainly in the PC and the digital home appliance segments, Japanese companies that had vertically integrated their business
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through highly skilled labor gradually lost cost competitiveness, being unable to undertake reform based on self-denial. Meanwhile, South Korean companies that expanded their shares not only of semiconductors but also liquid crystal display panels and major devices through enormous concentrated investment proceeded with modularization to expand production and maximize profit, while self-manufacturing the products at an "appropriate" level. Because many Chinese companies, which were dependent on Japan and South Korea for many devices and a majority of whose business is OEM exports, are not yet ready to engage in the sophisticated global marketing of their own brands, South Korean companies were able to make impressive leaps in the global market by driving out Japanese companies.
The second change is the appearance of emerging markets led by China, India and Brazil, which are completely different from the profound and highly diverse mature markets and consume large quantities of products with functions and designs that are commensurate with price. Because Japanese companies with strong brand names still had a hold on developed markets during the first half of the 2000s, South Korea had no choice but to advance into emerging markets from early on. All the more because of this, they were able to execute dynamic marketing strategies targeted mainly at the middle class when consumption began to increase in earnest in emerging countries, where Japanese brands have little presence. While many Japanese companies were hesitant or failed to proceed beyond the planning stage given the swift changes and instability of emerging markets, South Korean companies, a majority of which are managed by owners, took on the challenge with speed typical of top-down business management. Meanwhile, they were able to differentiate themselves in competitions with Chinese and other local companies through designing capabilities and advertisement strategies that they had been focusing on in investing and strengthening. By hiring graduates of European and American business schools and giving local human resources well-defined goals and considerable discretion, South Korean companies also cleared the way for recruitment of competent human resources.
The third change was the dawning of the age when "technology can be bought" in two ways without corporate acquisitions that involve the transfer of ownership and control and when revenue is affected not by technical capabilities per se but by the different combinations of technologies and the establishment of business models. Until the 20th century, many companies, including IBM and Kodak, ensured their advantage in production through vertical consolidation by containing innovative technologies using patents. Large Japanese companies that came after them and are extremely particular about their technologies still retain this inclination. However, in this day and age of
2011-2012 JIIA Research Project: Policies Needed to Ensure Japan’s International Competitiveness
progressive digitization, many companies, such as Intel, are implementing the open strategy of keeping only the core technology in the black box and actively releasing peripheral technologies. In addition, rapid globalization of researchers in the areas of research and development, where the entire world is fiercely competing against each other, rendered it possible to acquire a certain level of technical capabilities by cross-border recruitment on an individual basis. Japanese companies with low fluidity of human resources have been developing their research and development staff in-house and containing them, whereas large South Korean companies took in and added their own development work to the now openly available technologies. They also promoted rapid globalization by promptly initiating external recruitment of development staff. A vast majority of large companies, a representative example being Samsung, eliminated the seniority-based personnel system from their head offices at the time of the currency crisis for the thorough implementation of the merit-based system, allowing for considerable flexibility in the recruitment of foreigners and other human resources.
1.2. Changes in the competitive positions of Japan, South Korea and China 1.2.1. Reversal of the performance of Japanese and South Korean companies
How did the competitive positions of major Japanese, Chinese and South Korean companies change amid structural changes? Table 1 shows a comparison of the top 50 companies in the Asian region in 2005 and 2011 according to data indicated in Fortune 500, which is a well known list ranking the top global companies. While Japanese companies accounted for 38 of the total in 2005, the number dropped to as low as 22 in 2011. They were largely replaced by Chinese companies, which increased from a mere six to 16 and took over the first through the third places from Japanese companies, which had monopolized the first through the sixth places in 2005. The number of South Korean companies also increased from the usual four to five with the comeback of POSCO.
However, in the case of Chinese companies, only two automotive companies fall in the manufacturing segment with a vast majority being national or municipal government-owned companies falling in the financial segment or the infrastructure segment, such as oil-based energy, power generation, railroads and communication. Moreover, the two companies are yet to compete for shares with Japan and South Korea in the global market, their shares in the global market outside of China still being minimal. In contrast, the five South Korean companies, with the exception of SK that is in the business of communication and energy, are all manufacturers dealing in electrical goods and electronics, automobiles or iron and steel. Given that the South Korean market is only about one fifth of the Japanese market, they achieved their extensive business growth in the course of globalization.
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