Nomura Investment Forum: Slow Does Not Mean Stagnant for Japanese Companies
Companies in Japan have been on a long march towards becoming technology leaders
- Japan’s leading companies have reinvented themselves as technology leaders
- A small portion explains the bulk of the country’s economic performance, as in the 80-20 principle
- Japan ranks No. 1 on diversity and complexity of its exports and ubiquity of products
Thinking beyond macroeconomic growth, Japan did not remain stagnant at the firm level over the past 30 years. Rather, its leading companies – the frontrunners – went through a period of transformation and reinvention to emerge as technology leaders, said Dr. Ulrike Schaede, Professor of Japanese Business, University of California San Diego’s School of Global Policy and Strategy, at Nomura Investment Forum in Tokyo on December 5.
Regardless of stagnant economic growth, deflation, an aging population and limited productivity increases over the past three decades, this reinvention explains why Japan still retains it spot among the top economies in the world.
“30 years is a long time, but Japan is still the fourth largest economy in the world,” said Dr. Schaede.
Japan may currently be an expression of the 80-20 principle, meaning that a small portion of Japanese companies accounts for the bulk of its economic performance. As more companies learn from the frontrunners, the hope is that we can move to a 60-40 proportion, she said.
More surprisingly, Japan has ranked No. 1 in the world in Harvard Growth Lab’s product complexity ranking since 1995. This measure ranks countries based on the complexity of their exports, and the ubiquity of a product in terms of how many other countries can make it, she said.
“We can’t explain this ranking with the macroeconomic story,” said Dr. Schaede.
After the bubble economy burst in the late 1980s, Japan was no longer a follower, but had arrived as a technology leader. The rise of South Korea, Taiwan and China then challenged Japan’s old business model as a mass-manufacturer of consumer end products. As lower-cost countries took over the assembly portion of global supply chains, starting around 2005, leading Japanese companies moved away from commodities and end-products for consumers, to design, advanced inputs like materials, components and machinery, or downstream in the value chain like retail and logistics.
It also complemented a strategy that many of them started to adopt in the 1990s, when they moved away from size, measured in sales and diversification into unrelated businesses, to a choose-and-focus model. Dr. Schaede calls this the Mainoumi pivot, naming it after the legendary sumo wrestler of the 1990s who outsmarted opponents twice his size by employing superior fighting techniques.
“Size is great, but size alone will no longer win. China will always be bigger,” said Dr. Schaede.
As Japan competes through technology, she said there are two types of companies that have emerged as leaders:
- One company occupies several adjacent technology markets, making it globally successful. Her examples include JSR in photoresists, polarizer film, brightness film; Nitto in adhesives and advanced materials for electronics, construction; and FANUC in numerical controls, robotics and factory automation
- Several companies occupy one technology niche making Japan successful. For instance, in fine chemicals for electronics, Japan has 80% of world market share, in various sensors for factory/system automation, as well as in semiconductor material and manufacturing equipment it commands 45-100%, and in carbon fiber for airplanes, automobiles, bicycles and golf clubs, it has a 65% share.
“These companies sit at the sweet spot of the global supply chain. They are technology leaders, excel in quality manufacturing processes, are strategically smart and know how to execute,” she said.
Sometimes they are perceived as slow, but slow is partially related to the complexity of a Japanese organization where a patient and measured approach works better. It is also a deliberate tradeoff and can be seen as the price Japan pays to maintain social stability during a period of transformation by limiting the cost on society, said Dr. Schaede.
“Slow is not stagnant, and Japan’s situation is one of a long march,” she said.
Japan as No. 1 will not be in terms of GDP growth or productivity, but in helping find the right balance between:
- Economic growth and social stability
- Economic production and environmental sustainability
- Corporate progress/innovation and human well-being
“This different No. 1 is much harder to measure, yet also much more relevant to all societies in the world going forward,” she said.
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