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Japan’s hidden dynamism

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It’s hard not to be contaminated by “Japo-pessimism”.  Economic recession.  A bumbling government.  Lack of confidence in an ageing future.  Toyota on the ropes.  Korean companies like Samsung leading on world markets.  But the Japanese economy does have a dynamic under belly.

According to German academic, Stefan Lippert, Japan like many other countries, has numerous "Hidden Champions".  These are world market leaders who are known by only a handful of experts.  Their annual revenues range from a mere $50 million to some $3 billion.  Many of them have global market shares of over 50 percent; some hold as much as 70 or 90 percent. On average they are more than twice the size of their strongest competitors. They are the vanguard of globalization. 

Lippert’s recent research has identified about 200 Hidden Champions in Japan.  This means that in reality that there are lots, lots more which are “hidden”.  In fact, in Japan where bureaucrats have their fingers in almost every pie, many of these hidden champions are genuinely hiding.  Can you blame them?  Some small policy favours from Japanese bureaucrats could leave them indebted to repay the favour in the future by giving a bureaucrat a post-retirement job (“amakudari” or parachuting).

Notwithstanding all the hue and cry about Japanese cultural differences, Japan’s hidden champions do resemble their Western peers in terms of strategy, organization, and operations.  They often start with an engineer or scientist with a great idea, and who sees a niche in a market.  Once he has conquered the local market, he expands overseas.  Rather than broadening his product line in the local market, he specializes more deeply and exploits economies of scale through globalizing his operations.

Japan does however have its differences.  While Western Hidden Champions can be found in almost all industries, almost all of their Japanese peers are industrial manufacturers.  The Japanese Hidden Champions are on average approximately twice as large as their Western peers. They seem to need a higher “critical mass” to conquer global markets.  The Japanese Hidden Champions are generally less profitable.  Finally, even as they grow, they usually remain a closed shop such as by refusing to cooperate or merge with other companies, and hanging onto staff through lifetime employment.   

The Economist magazine has documented a number of fascinating examples.  One single firm, Japan Steel Works from Hokkaido, supplies the huge, solid-steel vessel to contain the radioactivity in all the world's nuclear power plants under construction.  In specialized engineering, Shimano earns around $1.5 billion a year by supplying 60-70% of the world's bicycle gears and brakes.  Around 75% of motors for hard-disk drives in computers come from a firm called Nidec, while 90% of the micro-motors used to adjust the rear-view mirror in every car are made by Mabuchi.

According to our textbooks, countries graduate from agriculture to manufacturing and then through to services, with the US and UK seeing their biggest trade growth in the area of services.  By contrast, Japan seems to be stuck in manufacturing.  Is it a problem?  Yes and no.

Japan's capacity to become a major player in global services is constrained by many factors.  Its own domestic service sector is not competitive as it is smothered in domestic regulations.  Such regulations mean for example that Japan is not an attractive and competitive international tourist destination.  Japan's capacity in speaking English, the language of international service delivery, is very poor, the worst in Asia according to some observers.  And Japan's financial sector is woven so closely into the close networks of government and business that it is not competitive either.

But Japan does seem to have a capacity to dominate global high technology niches.  According to the Japanese Ministry of Economy, Trade and Industry, Japanese companies serve more than 70% of the worldwide market in at least 30 technology sectors worth more than $1 billion a piece.

While Japan's hidden champions typically invest a lot in R&D, they also work very closely with their high quality customers who impose strict product standards and may ultimately involve in their future technical plans.  This puts a premium on building long term relationships, and maintaining staff long term.  Even when basic products are outsourced, the high-end stuff is kept at home in Japan.

But for how long can Japan maintain its competitive edge in high tech manufacturing?  Korean and Taiwanese firms, which have followed the same model of copying American technology and then bettering it, are now biting at their heels.  Non-stop innovation is of course part of the answer, always staying ahead of the pack.   

The Economist "INVISIBLE BUT INDISPENSABLE", 5 November, 2009