Evolving approaches of Japanese MNCs to global management: implications for European subsidiaries and JV partners
AUTHOR
Dr. George Olcott
Board Member,
Dai-Ichi Life Holding
Denso Corporation
Kirin Holdings
J.P. Morgan Japanese Investment Trust
Japan is increasingly looking to European companies to take a leading role in globalising their companies’ operations and enhancing global competitiveness. While in many sectors, such as automotive, Europe lags other key markets such as North American and Asia in the mindset of Japanese business executives, Japanese companies are beginning to understand and appreciate the unique characteristics of European companies. It is becoming increasingly obvious that in an era of rapid technological change and intensifying global competition that relying on the traditional ‘all-Japan’ solution has its limitations. Attracted particularly by the innovative qualities and global outlook of European companies, the Japanese are turning to Europe for solutions.
During the past two years, I have been carrying out research, along with a colleague from Meiji University, of the activities of Japanese multinationals in Europe. We have carried out a large number of interviews with senior Japanese executives in Japan and in Europe, as well as senior local European managers. It is clear from our research that the Japanese are shifting away from greenfield operations, which have been the traditional way Japanese firms have expanded overseas. While some industries, particularly automotive, will continue broadly with the ‘copy and paste’ formula, whereby manufacturing processes of a ‘mother factory’ and key elements of the supply chain back in Japan are faithfully replicated overseas, there has been an increasing emphasis on acquisition as the preferred mode of entry.
What is more noteworthy, however, is the way Japanese are managing the acquisitions. Whereas in the past, Japanese firms have tended to keep acquired firms and their management at arm’s length, the rapidly growing contribution of overseas operations relative to a shrinking domestic market and the need to acquire global know-how means that they can no longer afford to keep non-Japanese management teams at such a distance.
M&A has given Japanese firms platforms not just to promote more independent manufacturing practices but to build entire business strategies for global business. Nippon Sheet Glass, on whose board I served between 2008 and 2014, transformed itself completely from a predominantly domestic glass manufacturer into a global player through the acquisition of the British firm Pilkington in 2006. Instead of keeping the firms separate, the Japanese management bravely decided to integrate the two operations completely. While the CEO is Japanese, the senior management of the firm is predominantly European. This process has not been easy, but it is made NSG a viable global competitor.
Another formerly domestic-only company that has transformed itself is Japan Tobacco (JT). JT’s international business, which now accounts for roughly two-thirds of total company revenues, is run by JTI, a Geneva-based subsidiary. The senior management of JTI, which is almost entirely non-Japanese, consisting largely of executives from the UK firm Gallaher and the non-US operations of RJ Reynolds, acquired by JT earlier, has turned JT into one of the top three global tobacco companies in a relatively short space of time.
Finally, Hitachi Ltd has moved the global rolling stock HQ away from Japan to London. Recognising that there will be few new rail projects in Japan, and given that there is limited scope for a ‘copy and paste’ manufacturing strategy in rolling stock (owing to the very different ways in which Japanese rail operators manage relationships with their suppliers), this is a totally logical move, but one which Japanese companies in the past have been reluctant to make. Through the acquisition of the rolling stock and signalling operations of the Italian firm Ansaldo, Hitachi has also built a solid European manufacturing base and although the CEO of Hitachi’s rail business is British, many of the senior management team are Italian.
The proportion of Japanese FDI stock in the EU resulting from M&A is increasing year by year. Without exception, managers of acquired European firms note the long-term orientation of the Japanese management towards new markets, including strong commitments to research and development. The fact that the European operations of Japanese firms are playing a wider strategic role is therefore a welcome development. However, enhancing the potential for European managers to contribute will require a much higher level in both the quantity and quality of communication between headquarters and subsidiaries.
There will be a premium on European executives who not only understand their businesses, but who are capable of communicating effectively with the Japanese. They may be expected to spend some part of their lives in Japan as part of overall career development, to forge effective networks in headquarters and to gain a deeper understanding of the company’s culture. Japanese companies, in turn, must make their headquarters a more welcoming environment where non-Japanese can feel part of the team and make a genuine contribution. More Japanese firms need to understand the potential of European operations to make wider contributions, and to build expectations among European managers accordingly.
“European managers must also be ready to speak out on wider global strategic issues. As we have seen in the cases of NSG, JT and Hitachi, Japanese firms are starting to understand that their European operations can and should make a much wider contribution to their global strategic ambitions. We can expect European firms and European managers to play an increasingly important role in the globalisation of Japanese firms.”