Japanese firms remain technological leaders, but the Chinese are catching up.
Often this is driven by the Government. In areas where it feels the nation should develop its own industries, foreign firms cannot operate independently and must share some technology with local firms via joint ventures.
As the Chinese market has become so important to Japanese firms, there is little choice but to comply. The implication is increasing competitiveness in the Chinese markets and lowered market share and returns for the Japanese.
Chinese firms still have a considerable way to go to match the durability and quality of the Japanese. It is also simplistic to believe technological catch-up marks the end of Japanese competitiveness.
Many Japanese manufacturers have outsourced production and are not at a significant cost disadvantage in China. With the use of manufacturing techniques and experience developed in Japan, there is potential for Japanese firms to improve overseas worker productivity relative to local firms and so maintain their competitive position.
Japanese companies have had some success in establishing their names in China. The labels ‘Japanese’ or ‘made in Japan’ have positive connotations with regard to goods and services, with Japanese products ranking above other foreign and local equivalents in terms of quality, stylishness and originality.
However, Japanese brands that invariably emerge in surveys are those involved in manufactured goods. In ‘softer’ areas, such as fashion and cosmetics, European and American names are better known, though there is growing interest in Japanese products here too.
Japanese firms need some understanding of the relevant aspects of Chinese ‘culture’ to succeed there. This seems obvious, but is an area where some Japanese firms have failed, and will become more important as China modernises and changes.
Many Japanese-owned subsidiaries still prefer to appoint Japanese over Chinese nationals to managerial positions. Chinese graduates voted 27 non-Chinese firms in their top 50 employers, but did not include a single Japanese company.
To succeed in China, Japanese companies must establish local connection, networks and research centres, build brand equity, differentiate and focus on the higher end where technology and tastes are still evolving.
Challenges are numerous, not least the rising tide of Chinese technology and domestic brands. However, there is still scope for many Japanese companies to succeed.
Donald Farquharson is investment manager at Baillie Gifford
