Following the publication of her latest book, The Business Reinvention of Japan: How to Make Sense of the New Japan and Why it Matters (Stanford University Press), we invited Ulrike Schaede to discuss the behavior of Japan’s business economy in response to the coronavirus pandemic. Schaede’s book offers an in-depth exploration of current Japanese business strategies, which have made Japan the world’s third-largest economy and an economic leader in Asia. In this interview, Schaede discusses how the strategies utilized by Japan’s business economy have managed to keep it afloat during the pandemic. She also discusses “what works” about these strategies as well as how the shifting global economy may affect the behavior of Japanese companies, and consequently other Asian countries.
Ulrike Schaede is professor of Japanese business and director of The Japan Forum of Innovation and Technology at UC San Diego. She works on Japan’s changing corporate strategies, including business culture, change management, employment practices, financial markets, manufacturing, and the digital transformation. Her other books include Cooperative Capitalism: Self-Regulation, Trade Associations and the Antimonopoly Law in Japan (Oxford University Press, 2000), and Choose and Focus: Japanese Business Strategies for the 21st Century (Cornell University Press, 2008). She has spent over nine years of research in Tokyo and is an advisor to two startup incubators in Japan.
Japanese companies now dominate certain input markets and have become essential to global manufacturing. In your view, how have Japanese companies responded to the coronavirus pandemic and shifting global demands in the manufacturing sector?
Let me first explain the phenomenon I am describing: With a few exceptions, such as cars, advanced cameras, certain video games, or industrial robotics, the names of Japanese companies have disappeared from our daily life use. But that does not mean that Japan no longer matters. Rather, several leading Japanese firms have relinquished the consumer end markets (TVs, etc.) and moved up the supply chain into input markets. This makes strategic sense because profit margins are higher there, and these companies enjoy a technology leadership in these advanced materials and components.
This shift to making high-tech input materials means that Japan is much less visible, because there is no “Japan Inside” sticker on the end product. But this is powerful, nonetheless. This new role of Japanese companies has created a whole new web of resource dependencies within East Asian trade, where Japan makes the upstream input materials (e.g., a chemical film needed for a monitor), Korea and Taiwan turn those into components (e.g., a touch monitor), and China assembles the end product. It is also important to note that many of the Japanese companies are large, established players, and they have global production networks to supply these materials.
Covid-19 affects this in different ways. Of course, Japanese companies are dependent on shifts in world demand. But working from home has greatly increased the demand for electronic gadgets, as everybody needs to enhance their home computer settings. At the same time, the US-China trade war has created new opportunities for Japanese companies in various communication technologies, and the looming digital transformation is opening new business opportunities in digital manufacturing, robotics, edge computing, etc. Companies in those industries are doing fairly well now. The concern, as everywhere else, is a deep global recession that will greatly affect all companies in all industries. Japan’s shift into upstream materials and components does not insulate Japanese companies from those shocks.
Another concern may be the ongoing decoupling, a.k.a. the end, of globalization. What if the Asian break-out of supply chains into various stages of production gets interrupted? At one level, it is possible that the US-China trade war may just bring the Asian countries closer together. But at another, it may be necessary to move all production to the one-country export model. In such a scenario, South Korea stands to suffer most, because Samsung and LG Electronics are fully dependent on Japanese fine chemicals and production machinery. Japan might suffer the least because Japanese companies can more easily move downstream into assembly than other Asian players can move upstream into the deep-tech components.
Has the behavior of Japan’s large businesses changed at all in the last year?
It is important to note that my book is about Japan’s best and brightest companies, many of which are large. There are, of course, many Japanese companies that are slow to change strategies, as they are devoid of a clear vision of how to compete. Japan is currently in a particular version of the “80-20” principle, where 20 percent of companies explain 80 percent of the outcome (and are the reason why Japan continues to be the third-largest economy in the world). There are many analyses of what ails Japan; I am looking at what is working. Through that lens, Japan’s leading companies have not yet adjusted downward much.
This is for two reasons. The first is that for most Japanese companies the fiscal year begins on April 1, and so planning and budgeting were done before the Covid-19 outbreak. Many companies are continuing as planned so far. The second reason is that most large companies in Japan hold very high cash reserves. Western pundits have long berated them for these “inefficiencies,” but it sure is wonderful to have savings stashed away for a rainy day at this moment in time.
But if you broaden the lens, the overall business situation in Japan is certainly as precarious as anywhere else. This is because other parts of Japan’s economy—the medium and small companies, as well as large laggards—are not in good shape. The business sentiment is clearly pessimistic, as companies of all sizes and track records are bracing for the world recession that is bound to hit us next year. Even Japan will probably not be saved from rising unemployment and bankruptcies in many sectors.
Hopefully, as already mentioned, the new aggregate niche strategy can offer some cushion and possibilities for sustained sales revenue. The digital transformation also promises new business opportunities, such as 5G and other infrastructure installations. Japan is an important contributor to that technology push, so with a bit of luck, some companies will find a way to weather the coming storm. But they probably won’t be able to carry the entire economy with them.
You argue that Japan has successfully moderated inequality and social stability while pursuing economic success. In your view, has Japan’s behavior in this regard shifted during the coronavirus pandemic?
Recent political developments around the world show that inequality and social instability apparently lead to polarization and political instability—as they have done in history, if you think of the French Revolution, etc. In comparison to the United States and Europe, Japan suddenly looks like a safe harbor in a storm. Partially, this is because corporate managers understand their social responsibilities, they eschew layoffs as much as possible, and they are not paid outrageous salaries. Even though there are many rich people in Japan, flaunting wealth remains socially unacceptable behavior, and a lot of effort is exerted in upholding the myth of the middle class. It may be a façade, but psychologically it is very important for people to think that Japan’s system of capitalism tries to be good for all, and that it is more balanced than elsewhere.
In general, within this current health crisis, the behavioral traits of Japan’s tight culture—not making a big fuss, going with the flow, doing as told, etc.—are very helpful. I explore this further on my blog.
The resignation of Prime Minister Shinzo Abe has presented an opportunity for reassessment of the results of Abenomics. The new prime minister has set among his urgent tasks the setting up of a new “digital ministry” in charge of updating Japanese government and business practices. What needs to be done, and what do you think are the prospects for success in this effort?
I will leave questions on what the government needs to get done to the political scientists. From the business perspective, any and all processes that reduce the costs of doing business, or transaction costs in general, are always welcome. The root cause of this issue is not necessarily business, but it’s the laws, regulations, administrative processes and incentives that prescribe paper and stamp. The government oversees this, and Prime Minister Yoshihide Suga is right that, therefore, the government has to lead change.
Of course, businesses are contributing to the traditional way of doing things, by insisting on their own complicated processes on top of the legal system. The hanko (personal signature stamp) is a great example. In legal terms, the Ministry of Justice has to allow a substitute, such as an e-signature, before businesses can change. But in reality, removing the need for the hanko is complicated because it is so much more than just a signature. Rather, it has long been a main tool of internal nemawashi (consensus finding): If a manager or section chief put their stamp on a certain business decision, they could not later complain about that decision. Changing the “endless meeting culture” and introducing true patterns of delegation into large organizations is beyond government regulation. It requires new leadership at the top of Japanese companies to create new processes. In this sense, the government initiative will surely help.
Another item on the list of urgent tasks is the end of tatewari administration. Ex-defense chief Kono Taro, who has been put in charge of this project, set up an online submission system for complaints and received thousands of submissions in the first day. Is this a problem in business, as well as in government, and what are possible solutions?1Tatewari or the tatewari gyousei refers to the sectional nature of the Japanese government’s compartmentalized public administration system, which works as a vertically segmented bureaucracy where interministerial rivalries and interests prevent ministries from cooperating effectively. Kono Taro, Japan’s new administrative reform minister, has been criticized of being “anti-bureaucratic” because of the adoption of recent policies that streamline processes.
Again, this may be a question for political scientists. Business has lots of other challenges—which may be related but require different responses. I write about some of these in my book. They range from the above-mentioned focus on process over outcomes, the steep hierarchies in companies and the associated opportunities for power play, all the way to the tight culture with its need to be always polite, appropriate, and considerate, which makes it difficult to push reforms through a system. It is very difficult to change these entrenched norms of behavior, and a new type of visionary manager and corporate leader is required. The good news is that, compared to changing the government, corporate change should be easier. The competitive pressures within Asia and from the global market are also helpful in pushing change through companies. This is why the companies that I am looking at—the best large players in Japan right now—have already reinvented themselves into powerful global competitors. They have begun to change their internal processes. Maybe Kono-san can learn a few things from them.
Ulrike Schaede’s recent book, The Business Reinvention of Japan: How to Make Sense of the New Japan and Why it Matters, is now available from Stanford University Press.