BECOMING CHINESE
How Japanese companies in China are struggling to bridge the cultural differences.
By Wu Chen

He has a Japanese name, but he is actually an ethnic Chinese. Born and raised in Shanghai, Motosuke Higashiyama became one of the first citizens from communist China to study in Japan in the 1980s. After graduation from Kyodo University (and changing his name), Higashiyama went straight to work for Suntory, Japan’s fourth-largest brewer. He is now executive vice-president in charge of marketing
and sales at Suntory (China) Holdings, effectively the second-in-command there.
If only there were more of him. For many Japanese companies, Higashiyama is the perfect solution to a new dilemma in China: how to let go of the Japanese way of management, particularly in human resources. When China was simply a manufacturing base for Japanese goods, sending Japanese expatriates to fill even junior posts posed few problems. Now that China has itself become a significant market, Japanese firms are finding that selling to the Chinese requires Chinese, not Japanese, executives who can marry a localized marketing strategy with Japan’s famous quality control and R&D capabilities.

Unfortunately, Chinese-turned-Japanese executives like Higashiyama are rare, so Japanese companies have no choice but to turn to homegrown talent. This is more difficult than it sounds. In the hierarchy of desirable employers in China, the Japanese are well down the list, after Western and other foreign companies. “It’s very hard to deal with Japanese colleagues,” complains Koeman Wang, a manager at the household products department at Kao Commercial (Shanghai), who left in July. “Internal communication is very difficult.” Kao declined to be interviewed for this article.

The problems were highlighted in a survey of Japanese companies in China conducted last year by the Japan External Trade Organization (JETRO) Shanghai Office. Seven of ten respondents cited “development of HR and reinforcement of staff” as management problems that needed to be addressed in order to enhance competitiveness. Another 32.9% focused on the need to localize management.

No to the Japanese Way

Retaining talent, concedes JETRO vice president Shigeki Tanaka, has become more and more difficult for Japanese firms. He attributes the problem to rigid Japanese management practices. “Western firms are often results-oriented,” he says. “Their managers are empowered to do whatever needs to be done to deliver results. On the other hand, Japanese firms usually emphasize processes in their pursuit of goals.” This may work in a mature market like Japan, but not in a rapidly changing one like China.

Li Degang, deputy general manager of Beijing-based RAC China-Japan Business Consulting, recalls that it once took more than two months to receive a document he had requested from a Fortune 500 Japanese firm. “Things change in a matter of weeks in China,” says Li. “No one will wait two months for a document.” Companies that insist on tight controls over subsidiaries and a hierarchical reporting process, he warns, will miss many opportunities.

For Yao Chonghua, a partner at Co-Effort Law Firm, which has offices in Shanghai and Osaka, the issue is also one of trust. In his view, Japanese firms in China are slow to localize because it takes time to build trust in local staff. “Expatriates dispatched from Western firms are often required to do several jobs in China, whereas Japanese firms tend to dispatch a team,” he notes. The Japanese practice assures headquarters of senior management’s trustworthiness. The downside is that the Japanese expats know little of the local market and most cannot adapt to the Chinese environment.

Lessons Learned

At Suntory, Higashiyama saw the difficulties first hand when the company invested US$50m in 1984 in a beer plant in Lianyungang, north Jiangsu province. Suntory brought the traditional Japanese human resources system emphasizing loyalty to the company and promotion on seniority. “When I talked to local staff, I heard all kinds of complaints against the system,” Higashiyama recalls.

In 1996, Suntory took the bold step of conquering Shanghai, whose beer market, combined with that of nearby Jiangsu and Zhejiang provinces, rivals Japan’s in size. Higashiyama, by then a seasoned manager at Suntory’s headquarters in Tokyo, was charged with the job. Drawing lessons from Lianyungang, Suntory did not automatically transfer Japanese HR management to the joint venture. After initial studies, Higashiyama concluded that a more Western HR system would be more suitable. Lan Rong, the HR director at Suntory Shanghai, describes the system as a hybrid of Western job promotion, Japanese management methods, and local operation models. Five of Suntory’s eight subsidiaries in China are headed by Chinese executives. The rest have Chinese as deputies. Higashiyama continues to emphasize the importance of localization to his bosses in Tokyo. He believes in trusting local staff and giving them room to perform. “The better the stage, the better the performance,” he says.

Ironically, Suntory’s initial approach in Shanghai floundered due to the wrong product. The managers in Japan assumed that the original Suntory beer would be welcomed by Shanghainese, who tend to cheer all things made in Japan. “Not beer,” says Higashiyama. “Chinese customers didn’t regard Japanese brewing technology as superior to local ones.” He and his team shifted gears quickly and introduced a lighter version of the same beer, positioned in the medium price range. It was a huge hit.

The Suntory brand, unknown just ten years ago, now commands more than half of the beer market in Shanghai. Early this year, Suntory acquired a 74% stake in Shanghai Donghai Brewery, the city’s number-two beer maker, boosting its share of Shanghai’s beer market to 51% from 33%. “We haven’t sent one Japanese manager to Donghai,” says Higashiyama, a first for any Japanese firm. “The consolidation of the marketing and sales team has been completed one year ahead of schedule.”

Winners and Losers

Other Japanese companies are taking note. Shanghai Jinjiang Kirin Beverage & Food, a joint venture subsidiary of Japanese beer and beverage giant Kirin, has hired a local executive, Cheung Wai, as deputy general manager in charge of sales. “The development of a brand in the China market relies on two things: basic technological capability and the foresightedness of Chinese managers,” he says. Kirin introduced its basic beverage line in Shanghai in 1996, but consumers did not take to the drinks.

Things began to turn around only in 2001 when Tokyo finally approved Cheung’s request for the introduction of the specialty drink Afternoon Red Tea, first launched in Japan in 1986. Following that success, the Chinese marketing team persuaded Tokyo to change its approach in China. “We won’t be successful if we only have R&D in Japan but didn’t send our latest products to China,” says Cheung. “New products must be brought to China in a timely fashion to maximize brand effect.” This year, Kirin simultaneously introduced the bottled tea drink Huajan Qing Yuan in both Japan and China. The company now claims 20% of Shanghai’s bottled tea market.

Toshiya Tsugami, president of investment fund Toa Capital and a former official at Japan’s powerful Ministry of International Trade and Industry, points to Dentsu, Japan’s leading ad agency, as another firm that gets it. “The key to its success is that it pays handsomely to attract local talent and is willing to take bold initiatives,” he notes. “At the end of the day, communications by Chinese firms are better done by Chinese.” Tsugami credits the localization approach for Dentsu’s leap to the top of the advertising agencies’ league tables in terms of revenue. “It gets ads not only from Japanese clients, but also from some local firms,” he says.

These success stories are in marked contrast to the travails of Kao Commercial, a subsidiary of Kao, Japan’s dominant cosmetics and household products company. Kao used to be a star in Shanghai in the 1990s, when competition was a lot less keener than today. But its marketing team, led by Japanese expatriates, cannot seem to respond effectively to the fresh campaigns of Unilever and P&G, as well as those of up-and-coming local cosmetics makers. Sales at Kao have plummeted and its market share has been shrinking. A recent effort to partner with homegrown cosmetics producer Hang Zhou is failing to deliver.

Wang, the executive who recently resigned from Kao, blames the company’s woes in large part on its rigid corporate structure and management. Since coming to Shanghai in 1993, Kao has not managed to trust local employees, he says. Many of its Chinese employees do not understand why Kao insists on assigning Japanese expats even to middle-ranking positions, effectively closing off the career prospects of homegrown managers. Wang had been promised a deputy director’s post, a long overdue promotion in his view, but decided to bolt anyway. He is now director for marketing at a Western cosmetics firm.

Slow Changes

Suntory’s localization program and Western-style HR policies have not gone unnoticed in China’s Japanese business circles. “The company quickly designed a new operation model catering to the Chinese market and achieved huge success,” says JETRO’s Tanaka. He adds Japanese multinationals like Sony and Matsushita to the list of reforming companies. “In recent years, they have hired very talented managers with a global perspective and assigned them to be presidents of their China subsidiaries,” says Tanaka.

Even the parent companies back in Japan are rethinking traditional approaches such as lifetime employment and tight control over subsidiaries. According to JETRO, some have relocated their Asia Pacific headquarters to China in recent years to give local operations more autonomy. But the changes are being made too slowly. In the JETRO survey, almost half of respondents say their primary concern in the area of corporate restructuring is “difficulty in coordination with Japan HQ.”

Yao thinks the new attitudes still need to be internalized. Japanese firms in China may pay lip service to the idea, but they do not really believe that local managers can do a better job than managers dispatched from headquarters. Self-preservation is a key issue here. If the Chinese executives make mistakes, their Japanese superiors will bear part of the responsibility. It all boils down to the question of confidence and the willingness of Japanese managers to place their trust in the capabilities and initiatives of their Chinese colleagues.

The Chinese lawyer draws on his own experience to illustrate the tendency of Japanese expatriates to play safe. “The reason many Japanese firms like to hire top Japanese law firms to solve legal problems in China is not that they have the best practice,” he says. “It’s because if things turns sour, they can go back to their boss in Tokyo and say, ‘We’ve hired the best.’” In reality, the same top Japanese lawyers subcontract the job to Chinese law firms. They simply do not have the local expertise and knowledge to do the work themselves.

Tsugami, whose recently published, China Rising: What Should Japan Do?, a bestselling book in Japan, would like to see a sea-change in mindsets, not just in corporate systems. “So far, when we talk about economic ties between China and Japan, it always starts with Japanese or Japanese firms as the subject,” he observes. “It shouldn’t necessarily be that way in the future. We need to see more Chinese or Chinese firms in the subject line.” And more managers like Higashiyama, who is on track for election to Kirin Shanghai’s board of directors and full command of China operations.