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1.3.3 Strengthening Cost Competitiveness

When providing products for “good-enough” markets, it is important to strengthen the cost competitiveness of the overall company. In light of the rise of companies from developing countries such as China, strengthening cost competitiveness is necessary not only for competing in local markets but also for global competition in Japan and elsewhere.

On this point, Japanese companies have been continually working on local production in low-cost regions such as Southeast Asia and China. Overseas production began in earnest among Japanese companies in the mid-1980s, originally as a countermeasure to rising domestic production costs resulting from a stronger yen. Figure 1.4 shows the relationship between various globalization measures such as exchange rate fluctuations, Japanese export volumes, and overseas revenues. The rise in the yen following the 1985 Plaza Accord resulted in an expansion in overseas

Fig. 1.4 Trends in exchange rates and overseas revenues (Sources: Compiled from “Kaigai Jigyou Katsudou Kihon Chousa” (METI), “Boueki Toukei” (Ministry of Finance))

production. The yen continued to strengthen slowly thereafter, and overseas production resumed rapidly after 2000. In 2000, overseas revenues among manufacturers were greater than export revenues, and while revenues dropped somewhat after the 2008 global financial crisis, they have recently trended upward again.

Figure 1.5 shows the number of subsidiaries, both domestic and foreign, of Japanese companies by year of establishment and country as of 2011. The graph indicates that the movement overseas to developing countries began with investment in New Industrial Economies (NIES) and ASEAN countries. Backed by the strong yen, Japanese electronics manufacturers and automakers began to aggressively enter these regions during the latter half of the 1980s. Investment in China began to grow rapidly thereafter during the 1990s, after China implemented liberalization policies to the outside world and began to aggressively seek foreign investment. During the latter half of the 1990s, the number of overseas subsidiaries drastically reduced, with many companies suspending new overseas investment due to domestic issues resulting from the 1997 economic recession brought about by failures of large economic institutions. In the 2000s, investment in NIES and ASEAN countries remained flat while investment in China again picked up dramatically. This was perhaps brought about by China's entry into the WTO in December 2001 and improvements in China's business environment.

The entry into the overseas market, primarily of production facilities, focused on China as a means to strengthen cost competitiveness. However, wages along China's coastal regions, which have agglomerations of foreign firms, continue to rise, and

Fig. 1.5 Subsidiaries by country and year of establishment (Source: Compiled from “Kaigai Shinshutsu Kigyou Database 2011” (Toyo Keizai Shinhousha 2011))

more companies are increasingly considering moving to the interior regions of China or to lower-cost countries such as Vietnam. However, when moving production facilities, companies cannot ignore logistical issues such as procurement of raw material and transportation costs, as well as costs associated with investments in production infrastructure and employee training. In addition, companies must consider a host of other factors when selecting new production bases, such as procuring land and dealing with different environmental regulations, tax laws, and investment incentives that are specific to each country.

Japanese companies are in the process of expanding production overseas for many years, although strengthening cost competitiveness of a company as a whole requires the consideration of overseas resources in areas of research and development (R&D). The results of an international comparison of R&D within foreign firms in China show that Japanese companies lag behind their European and US counterparts (Motohashi 2011). In terms of management of overseas R&D centers, Japanese headquarters exert strong control and do not facilitate open innovation between local subsidiaries, local corporations, and universities (Motohashi 2012). Till now, Japanese companies have been cost competitive by transferring production overseas; however, they must also consider the optimal global placement of overall operations, including R&D. Furthermore, creating partnerships with local firms can be used as a means to strengthen cost competitiveness to drive global business.

However, joint ventures and strategic alliances increase the possibility of nurturing potential competitors; therefore, costs and benefits should be closely considered when selecting partners and forming alliances.

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