Japanese Companies Leverage China/Asia Capital for Survival

Osaka – Sunday, December 12, 2010




A recent article by Nikkei, Japanese newspaper specialized in business and economy, introduced an interesting way in which some Japanese companies leverage China and Asia capital to survive in the turbulent global economy.



The author feels that this can be a clue to many other Japanese companies in creating their own strategy to survive in the today’s global economy, although there is a risk of outflow of technologies. It is because this is an option of out-of-the-box thinking that is not chosen by many major Japanese companies yet this can be an extremely effective one, leveraging the strength of Japan.



1. What is the recent phenomenon in which Japanese companies leverage Asian capital? Why such phenomenon started to emerge?



1) Phenomenon



It is, so to speak, “Made in Chapan (‘China’ and ‘Japan’ coined together)”, convergence of China’s capital and Japan’s technology and brand. Asia (China) capital acquires underperforming Japanese companies, hotels, consumer electronics and apparel in particular, and creates new value and business to provide to worldwide market.



2) Background



(1) China and Asia are promising, growing markets.



(2) China in particular has abundant capital.



(3) “Made in Japan” is an excellent weapon (brand) in global business yet Japanese companies have not been able to leverage it sufficiently.



(4) Not many Japanese companies are financially capable of entering Asia/China market from scratch on their own.



2. What are concrete, successful cases of “made in Chapan”?



1) Hotel






(1) Phenomenon



Among 10 hotels/real estate etc. that needs restructuring, as many as 8 are recently acquired by China and Asia funds. Such funds calculate acquisition cost on condition that they will market go China and other Asian countries i.e. market of 1.3 billion population or more, which would be far competitive price calculated by Japanese funds that calculate their acquisition cost based on only Japan domestic market. Moreover, even if they are failing companies, they are uncut diamonds in the eyes of Chinese and other Asian funds.



(2) In the case of Chikusenso Mt. Zao Resort & Spa



Chikusenso　Mt. Zao Resort & Spa, located in Zao National Park in Miyagi prefecture, that had failed due to decrease in skiers in this area in the recession, was acquired by Osbert International, based in Hong Kong. The fund invested total of more than 3 billion yen to acquire and revitalized the hotel and re-opened in April this year. The fund also made effort and succeeded to start flight (first limited time) between Hong Kong and Sendai by Hong Kong Dragon Airlines.



The main target of the luxurious resort hotel with spa is the rich people of China and other countries in Asia, whose evaluation of the Japanese culture is quite high. The concept of the hotel is “Japanese modern”, and the price is over 66,000 yen per person (twin room).



2) Consumer Electronics






(1) Phenomenon



Japanese mid-sized consumer electronics makers visit everyday a long-established consumer electronics mass merchandiser that have been in the red for years, requesting to start trading with them. This is because the long-established consumer electronics mass merchandiser has the access to the distribution channel in China.



(2) In the case of Laox Co., Ltd



Laox Co., Ltd, a long-established mass merchandiser, was acquired by a China consumer electronics mass merchandiser leader last year. This opened an access to approximately 1300 stores in China, a promising and growing market, owned by the China mass merchandiser. Since then, business partners of Laox doubled or more because the partners have requested to trade with Laox, expecting to benefit from the access to China that Laox possesses in entering the promising market of China.



For this reason, Matsuzakaya, a department store in Ginza (area in Tokyo where many department stores are located) opened a Laox franchise in their department store on November 20 this year. Matsuzakaya is said to have negotiated with other companies in opening a new franchise but chose Laox with the objectives of attracting tourists from China, in addition to competitive financial requirements presented by Laox.



3) Apparel






(1) Phenomenon



Japanese long-established apparel maker acquired by a Chinese company, and expand distribution channel in China.



(2) In the case of Renown, Inc.



Renown, Inc., a Japanese long-established apparel maker, plans to open 2000 stores in China in the next 10 years, which became feasible after being acquired by the Chinese company. The strategy of the Chinese company is to penetrate the China market with high quality product made in Japan.



For this reason, the top executive of the company says that made in Japan products are of longing of Chinese customers and therefore is determined to make all Renown products made in Japan. This is not easy because of the limited equipment/production capacities in Japan. The top executive of Renown comments that this incident is a good opportunity for them to re-acknowledge their value.



To the author, the fact that Chinese companies evaluate highly of “producing in Japan” is extremely meaningful when Japanese companies shift their production to overseas (China in particular) as mentioned in many of her previous articles including "High Yen Slashes Profitability of Japanese Companies – The Reality".

Asia Business Drives Recovery of Japanese Companies

Osaka – Sunday, June 27, 2010

Nikkei, Japanese newspaper specialized in business/economy, reported today that Asia business is driving revenue recovery of Japanese Companies. It came clear that Asia is the engine of generating revenue (profit) for one out of four companies when they analyzed operating revenue of financial data by region for fiscal year ending March 2010.

Operating profit from Asia business has recovered to the level of 82% of those of before the worldwide financial crisis in 2008. This is far greater than Americas (43%) and Japan (30%). It is true that there are risks such as increase in personnel cost of China. However, the Japanese government has developed the new growth strategy as explained in the previous article Japan's New Growth Strategy Approved - What Is It? making the most of growth in Asia economy and therefore it is likely that further shift in Asia business will take place among Japanese companies.

1. How did Nikkei come to the conclusion?

Nikkei collected and analyzed financial data of 419 listed companies (excluding financial and new companies) that are:- a)fiscal year ends in March; b)discloses revenues by region; and c)sequent data is available since 2000.

2. How much was the operating profit generated by Asia business?

Operating profit generated by Asia (including Oceania) business was 1.8814 trillion yen in total, which covers 26% of total operating profit generated worldwide. Although this percentage is behind Japan, which was 52%, it is far greater than Americas (11%) and Europe (3%).

3. How is Asia business driving recovery of major companies?

Companies covering 25% of 419 companies analyzed have been recovering driven by Asia business. Most of them are of major manufactures of automobile and electronics. Operating profit generated by Toyota’s Asia business was the greatest, totaling 203.5 billion yen. This attributed to Toyota’s consolidated operating profit returning to black even though their America and Europe business still remains in red.

Major Companies Generating Revenue/Profit Primarily from Asia Business
(Source: Nikkei, translated by the author)
Company Name / Amount of Operating Profit from Asia Business (billion yen) / % of Operating Profit from Asia Business*
Toyota / 203.5 / 139
Denso / 75.3 / 54
TDK / 65.9 / 251
Suzuki / 56.1 / 67
Toshiba / 46.1 / 41
Daikin / 37.9 / 88
HOYA / 34.1 / 58
Seiko Epson / 27.2 / 158
Hitachi Construction Machinery / 26.5 / 219
Rohm / 26.5 / 108
* above 100 = the total operating profit from business in other regions are negative (i.e. loss)

Suzuki’s business is strong in India, where they have market share of approximately 50% in passenger cars. Card produced locally topped 1 million for the first time. The top management commented “operating profit generated by business in India covers almost 70% of consolidated operating profit”.

Toshiba’s operating profit from Asia business doubled from previous year totaling 46.1 billion yen. This was because of business growth in their infrastructure and digital consumer electronics businesses.

4. How is Asia business recovery compared?

Revenue and profitability recovery from Asia business is outstanding. Sales have recovered to 70% and operating profit has recovered to 82% of the level of fiscal year ending March 2008, i.e. before the worldw ide financial crisis. Profitability of Asia business is also high compared with other region. Operating profit of Asia for the analyzed companies turned out to be 9% in average, which is far greater than Japan (45), Americas (3%) and Europe (1%).

This is because profit tends to expand in the process of market recovery for Asia where cost is comparatively low and inflation is comparatively high, compared with, for example Japan, whose profitability is more difficult to improve with high yen and deflation.

5. What is the outlook for fiscal year ending March 2011?

Asia is assumed to remain the engine of further business/financial performance recovery of Japanese companies for fiscal year ending March 2011.

For example, UniCharm Corporation estimates to increase its operating profit by 19%. For sales increase, third plant in China has been constructed in the end of 2009. TOTO plans to generate approximately 70% of assumed worldwide operating profit from China business. To achieve this, they will strengthen sales of housing equipment in inland area.

The government’s new growth strategy leading to strengthening economic relationship with Asia countries could mean positive effect on Asia business of Japanese companies. However, there are risks such as devaluing of the Chinese yuan (RMB) and increase in personnel cost of factory workers in high growing market of China, which has big impact on management. In addition, competition with strong companies of the west and Korea is severe. It is high likely that the quality of Asia business strategy determines how their Asia business further grows.