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Japan Expands into SE Asia: Three Chronological Stages of Development and Insight for Future Strategy

This article explains how Japanese companies have expanded overseas especially into Southeast Asia (ASEAN) in each era since World War II and how they have changed.

(Stage 1) - Post-World War II (1945-1985)

Historically, the manufacturing industry has been the main driver of Japanese companies' overseas expansion.

After World War II, it was the textile, steel, and other industries that spearheaded the overseas exports of Japanese companies, boosted by special demand in Korea. Later, during the period of high economic growth, Japanese national brand companies gained international competitiveness and accelerated their overseas expansion with Japanese suppliers, mainly Tier 1 companies.

During the 1980s, durable goods such as automobiles, color TVs and the electronic components such as semiconductors and capacitors dominated the overseas market. In terms of management functions, these were times when there was a strong need to strengthen export-based marketing and sales functions.

(Stage 2) - After the Plaza Accord (1985-2010)

However, after the rapid appreciation of the yen following the Plaza Accord (1985) (the dollar has since fallen from the 240 yen level just before the Accord to the 120 level in 1988), Japanese manufacturers were forced to expand their operations overseas in no small numbers, locating production bases based on direct investment and transferring production and material procurement functions in order to shift production from Japan.

As the second wave of overseas expansion of the manufacturing industry, it was during this period that the overseas expansion of manufacturing companies, especially in the food, daily necessities, cosmetics, and pharmaceutical industries, became more active.

Since all of these industries have a strong domestic demand orientation due to the nature of their products, the main objective of overseas expansion was to secure low labor costs in the short term while aiming to develop local markets in the long term.

(Stage 3) The Rise of China (2010-present)

In 2010, there was a particularly impactful news story for the world and for Japan. China surpassed Japan to become the world's second largest economy in terms of GDP.

Since then, China's economic growth has continued unabated, with government-led large-scale investment and urban development, and a group of fast-growing mega IT companies collectively known as "BATH" (Baidu, Alibaba, Tencent, Huawei), which have a presence that overwhelmingly overtakes the top Japanese companies in terms of market capitalization.

As if in response, the Association of Southeast Asian Nations (ASEAN) has been working to strengthen cooperation within the region. In the 2010s, it began to eliminate tariffs almost entirely and to unify standards for logistics networks, customs clearance, and other aspects of its business infrastructure.

In fact, the managers of ASEAN countries often refer to their understanding of ASEAN as a "region" with a single economic organism, and they have actually started direct investment among countries in the region.

Japan, on the other hand, has been suffering from chronic deflation and recession since the collapse of the bubble economy, and has generally been unable to take any aggressive steps. This is also true in the context of overseas strategy.

Future Overseas Strategy: What Japanese Companies Should Do

Under these circumstances, the direction that Japanese companies should take in their overseas strategies can be summarized in the following three points.

1) Shift to a market-in approach

2) Market development by utilizing core competence and know-how x localization

3) Strengthen linkages within Asia

1) Shift to a market-in approach

Japanese manufacturers, in general, need to break away from the winning patterns of the export-oriented and transplant-oriented model era. There are still examples of companies stopping to think about the words "Japan quality," but this is just a discussion of specifications, and they should conduct their business based on what users and consumers want.

There is no shortage of examples where Japanese manufacturers have fallen behind emerging economies in terms of external indicators such as budgeted capital investment and R&D activities, acquisition of international certifications, and financial figures such as sales growth and profit margins. In particular, in the area of "technological prowess," which Japanese companies have prided themselves on as their forte, there are examples of Chinese and ASEAN companies providing technology to Japanese companies in highly innovative areas such as IT, where social implementation is speedy.

If the "coordinates" are only shifted from Japan to overseas and the work can only be done within the circle of Japanese companies, the scale of the business will naturally reach its limit. However, this is the current state of overseas business of Japanese companies, and if we want to expand into overseas "markets" in the true sense of the word, we need to change this mindset as soon as possible.

In other words, by delegating and consolidating management functions, including sales and R&D, to local companies (or regional bases), we will be able to develop products that meet local needs quickly, reform the high-cost structure of Japan, and develop local human resources.

In doing so, we should not be bound by the old time machine pattern of winning, i.e., deploying advanced solutions from Japan as an advanced country to emerging markets, but rather, we should have a perspective that sees emerging markets as a place for innovation.

In this regard, we should be aware that Japan is in a situation where innovation is greatly restricted due to its low birthrate and (super) aging society, or because it is an advanced country. It is clear which is the more suitable market for innovation: emerging countries with young, digitally native populations, or Japan, the world's most "super" aged society, especially in industrial domains where the end users are consumers.

Even in Japan, the term "mobile first" has finally come to be used. On the other hand, we should not forget the differences in market environments, such as the fact that mobile devices, which have spread rapidly in recent years (rather than PCs), are the royal road to Internet infrastructure in emerging markets.

In Southeast Asia, the rapid growth of national income and markets, the existence of a young population that is flexible to change, the underdevelopment of social infrastructure, as well as the open-sourcing of technology and the propagation of advanced practices by Chinese mega-IT companies, have all contributed to the progress of social implementation in areas that have been slow to spread in Japan.

2) Market development by utilizing core competence and know-how x localization

This applies not only to companies that have already expanded overseas and are seeking to develop local markets, but also to non-manufacturing industries (retail, wholesale, logistics such as warehousing and land transportation, non-life insurance, food service, education, tourism) and domestic demand industries (railroads, urban development, ports and airports, real estate, etc.). These companies tend to be late entrants into the market compared to the manufacturing industry, but they have the insight and refined operational excellence that comes from being a domestic demand-oriented industry that matured earlier and survived in the overly competitive Japanese market. We believe that it is possible to use this know-how as a weapon to attack emerging markets.

3) Strengthen linkages within Asia

As China's country risks become more apparent in various areas, such as the trade war between the U.S. and China, there is an urgent need for a fundamental restructuring and integration of production bases to achieve total optimization, with an awareness of linkages within and outside the Asian region, and the establishment of integrated global functions, including the division of labor and collaboration among bases. As a side effect, the non-manufacturing and domestic demand-oriented industries mentioned above will also find new business opportunities in providing complementary and outsourced functions to the value chain of Japanese companies in the region in response to this trend. Logistics, warehousing, industrial real estate, and temporary staffing are some of the interesting investment themes to watch.

Importance of business development in collaboration with local partners

The three measures mentioned above that will be necessary for Japanese companies' overseas strategies in the future (1. shifting to a market-in approach, 2. market development through the utilization of core competencies and localization, and 3. strengthening intra-Asian linkages) can only be realized through "collaboration with local partners. However, the only realistic solution is to collaborate with local partners.

Accumulating knowledge of each country's market, human networks, and geographical connections on our own would not only consume an enormous amount of time and human resources, but would also be an unrealistic approach.

We believe that the way to strongly promote "collaboration with local partners" is through M&A and joint ventures, which we support, in other words, partnerships through capital.

Thank you for reading to the end. If you have any questions or concerns about the contents, please contact us using the inquiry form.


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