The Challenge for Japanese Multinationals

Strategic Issues for Global Management

H. Takahashi

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137307606
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

The Challenge for Japanese Multinationals is about strategic issues of modern management from the view of global business practice. In the 2010 issue of Fortune Magazine's top 500 Multi-National Corporations, the USA ranked number one with 139 companies. This was followed with 71 companies in Japan and 149 in the EU. With the maturing of the domestic market, Japanese MNCs - not only in manufacturing industries but in non-manufacturing industries as well, will continue to globalize, with overseas expansion accelerating in emerging countries such as BRICs.

1

Regional Headquarters as Multinational Global Strategies

The concept of Regional Headquarters (RHQ) was devised as part of the way in which multinational corporations are organized. The idea of the RHQ also challenged the American multinationals, which so far have dealt mainly with domestic markets, to incorporate regional strategies into the framework of their management organization, leading to the creation of a new model (matrix organization) through the combination of product and regional organizations. I have been studying regional strategies and structures of multinationals, especially comparative studies of Japanese and American multinationals and RHQs, since 1987. I visited the RHQs of Japanese companies in North America and interviewed their executives and managers. Since the Japanese yen was strong at the time, foreign investment by Japanese companies in developed countries was increasing rapidly. In the latter part of the 1980s, when the so-called Bubble Economy was coming to an end, the total annual amount of foreign investments reached its peak, at US$67.5 billion, and large Japanese multinationals established a number of business units within the same region.

It is the task of an RHQ to set up an efficient management system in order to combine these business units with the same area into a greater regional entity. In the 2000s the study of such subjects started to attract attention from researchers in Japan and other countries.

This chapter will examine the functions of RHQ as a multinational organizational structure, based on two research papers on RHQs in Japan and in Europe.

Figure 1.1 Sony’s global HQ

1.1 The organizational background of the RHQ

The concept of the RHQ originated in the organizational process of American multinationals in an efficiently managed number of subsidiaries established in the early 1960s to promote investment in Europe; American multinationals actively invested in Britain, France, and Germany throughout the period of economic rehabilitation after World War II and, in particular, after the formation of the EEC (European Economic Community). The increase in the number of such subsidiaries in turn required the multinationals to set up an effective management system in Europe. What was expected of such a system was to solve the problem of how those European subsidiaries could be integrated into the framework of the corporate strategies of the multinationals, hence the RHQ. The American multinationals had so far dealt mainly with domestic markets, incorporating regional strategies into the framework of their global management organization. So the RHQ led to the creation of a new model through the combination of product and regional organization.

At that time, many of the American multinationals established RHQs in major European countries as a new organizational structure. For example, IBM and Ford Motors established RHQs in Paris and London respectively, through which they controlled and managed their subsidiaries in various countries around Europe. These corporations’ European RHQs are still working well at the time of writing, having undergone some changes and reforms in the process of their development. However, apart from a handful of successful companies, most of the American multinationals were obliged to reduce or withdraw their RHQs not long after their establishment in the early 1960s. Their failure is attributed mainly to the following: difficulties in the actual operation of a matrix organization: the organizational duality existing between the corporate headquarters and each subsidiary; increase of administrative costs incidental to the establishment of the RHQ; and the lack of leadership by the CEO in charge of the RHQ.

Next, let’s look at the current moves by the American multinationals. After establishing some subsidiaries in the Asia and China markets, some American multinationals are setting up RHQs again in cities such as Singapore and Beijing, in order to control the markets as if they were a single region. Japanese multinationals, also facing the problem of how to manage their operational business units efficiently in North America (formation of NAFTA, 1993) and in Europe (formation of EU, 1992) have set up their RHQs similarly. An increasing number of overseas subsidiaries of European multinationals are being established with the expansion of the Asia/China markets, and with that, the unifying function of the RHQ has been organized to deal with the Asia/China markets as a single integrated region. Thus in the early 2010s, business activities across borders are becoming a daily occurrence for Japanese, American and European multinationals. Our intention is therefore aimed at finding out how these subsidiaries that have been set up amid such transnational activities can be bound together by regional unit and how the centers of each area can be integrated into the global objectives of the relevant corporation.

1.2 Trends in the establishment of Japanese company RHQs

1.2.1 The BRI research survey

The increase in foreign investment by Japanese companies has been altering the nature of international management. Since the 1990s, among the so-called progressive Japanese international companies such as Honda, Sony, Panasonic, Asahi Glass, Canon, Bridgestone, and Nomura Securities, the trend of establishing a corporate body to promote their local subsidiaries has been conspicuously accelerating. This trend reflects the response of these companies to the transition of the international business scene in the form of restructuring the international business organization.

BRI (Business Research Institute in Tokyo; in Japanese, Kigyo Kenkyu Kai),¹ conducted a survey by means of a questionnaire by mail; this was addressed to 120 typical Japanese international companies operating in fields such as automobiles, electric appliances, machinery, precision machinery and chemicals. Of these, 70 companies responded.

Our survey found 27 companies with overseas operational headquarters (35.7 per cent of the total sample), 17 companies were considering the possibility (24.3 per cent) and two companies might consider it in the future (15. 7 per cent). Summarizing these results, we found that 53 of the responding companies (75 per cent) showed a positive attitude toward this subject.

Two factors may be identified in understanding the reasoning for this trend:

1)as the relative proportion of overseas business operation increases, it is necessary to have an effective management system;

2)increasing their ability to response to the management goals of the overseas subsidiaries has become an essential factor for organizing their setup from the long-term perspective. By clarifying their intention to localize management in Asia, Europe and America, some international firms also contribute to the identification of these trends.

Based on the survey results, we would like to discuss the current situation for future overseas operational headquarters of Japanese corporations.

First, let us consider the holding company, a prototype of the operational headquarters, which seeks the benefits of ultimate rationality through economic efficiency. By controlling overseas subsidiaries, holding companies generally gain tax advantages.

For example, if some of the subsidiaries in America are in the black while others are in the red, by being integrated into the form of one holding company the red and black cancel each other and the erstwhile taxable profits disappear. Our survey demonstrates that nine companies identify the role of the operational headquarters with that of the holding company. This view is likely to continue in near future.

1.2.2 The staff function of an RHQ

In addition, a holding company may have the role of a promoter of efficient management by establishing various systems. To achieve this, the holding company serves as a local office in close contact with its headquarters in Japan, and with a total management system which includes such areas as planning, research, legal affairs, auditing, public relations, personnel affairs, information processing, advertising and training. By adopting these staff functions, it can offer advice and guidance to each subsidiary.

The reasoning behind the adoption of this method is that it is much more efficient than each subsidiary establishing its own business support operations. Also, by establishing a holding company, the overall operations of the many associated companies will be better coordinated and integrated.

From the results of the survey, 16 companies currently regard the role of the overseas headquarters as a staff function. The number of companies that share such a view is likely to increase in the future; for example, in the American market, the functions of staff that had previously been dispersed across the country are now being integrated.

In the European market, the need to present a unified response to the EC market while maintaining the ability to respond to the variety of demands in the market of each individual country is becoming more apparent. It is particularly important to determine which organizational section should play a central role in the total management with regard to the upcoming EC market integration.

Such integrated corporate strategy will include contact with the industrial and managerial groups at the level of EC, public relations activities with EU Committee, information gathering, lobbying, and negotiating with the European Congress, the European Courts and other EU organizations.

Another important matter is the localization of management, which refers to a process that organizes local manpower, materials, money and information as efficiently as possible for specific corporate goals. A current international business operation of Japanese expansion from sales to production accompanied by research and development activities, and the notion of coexistence and mutual prosperity with local communities has received greater attention. The urgent problems to be resolved by international companies at this juncture lie in the following three fields:

1)in terms of human resources, recruitment of management, including presidents, and education and training for better qualified personnel;

2)as for production materials, observing national standards for the ratio of locally procured and domestically produced parts (local content such as car industries country rule);

3)money must be raised and managed efficiently.

Recently, technology and management know-how, which are at the core of companies, have been largely dependent on headquarters in Japan; however, these should ultimately be localized.

In completing this, the globalization of management will be established, a self-completing process which includes localized R&D, production, sales & marketing, service and in the final stages, accumulation of local and global business. These overseas headquarters will assume this role for the promotion and adjustment of such operations. After completing the localization of sales and production, progressive Japanese international companies are moving to localize their research and development. Some companies are establishing operational headquarters companies to drive strategic localization. According to our survey, 24 companies (42.8 per cent) have drawn attention to this activity, and a large proportion (35.7 per cent) have emphasized this role for the future (Figure 1.2).

Figure 1.2 Present and future functions of the RHQ

Note: The subjects of the survey for the “present role” include the 53 companies responding to the poll. The percentages relate to the total number of companies which responded to our survey.

Source: Based on answers to the survey questionaire conducted by Business Research Institute out of a sample of 120 companies responding to our survey (Business Research Institute, “Trends of Japanese Multinationals,” 1989).

In addition it appears that these operational headquarters are being developed for a dual role: to organize and coordinate management functions as a whole, including sales, production and R&D; and to establish a foundation for the development of new business activity. So far, only seven companies (12.5 per cent) have identified these activities as a current role for their overseas operational headquarters, but 22 companies answered that in the near future their operational headquarters companies will assume this role. This shows that after completing the establishment of R&D functions, overseas operational headquarters intend to proceed with the development of new products and new business, and in the future seek to make the company an “insider” in that region.

When Mr. Tetsuo Suzuki, Chairman and CEO of Hoya Corporation, established its overseas operational headquarters in the Netherlands, he expressed his view as follows: “We have ten subsidiaries in Europe, but all of them are under the individual control of each business division. Each subsidiary does not present corporate and coordinate activities, but in response to the integration of the EU, we will unify these subsidiaries in our headquarters in the Netherlands so that they may possess the necessary functions required to produce the products the European market will desire. After several years hence, European Hoya will have a different management style, moving away from the Japanese prototype.” It will take a considerable time for such a notion to materialize, but it will only be possible through this global vision of coexistence and mutual prosperity.

1.2.3 Dual organization structure

However, the foundation and management of an overseas operation headquarters presents certain problems. The first involves the positioning of such a company between the headquarters in Japan and the overseas operations. More specifically, it raises a question as to how such a company can cut into the conventional well structured command system established between headquarters in Japan and overseas subsidiaries, and the duality of the new system created by these additional routes. Even now, it has been pointed out that the distribution of responsibility and authority is quite vague in the international business theater.

This may sound redundant, but the very reason for the existence of an RHQ is its ability to fulfill the shortcomings of both the headquarters and overseas subsidiaries, acting as a liaison between the two.

A gradual approach in responding to the globalization of management is necessary as the role of the overseas operational headquarters, its current tasks and the range of its authority, are clarified. This is especially important in Japanes...

Table of contents

• Cover
• Title
• 1 Regional Headquarters as Multinational Global Strategies
• 2 The Issues for Corporate Governance and Its Reform
• 3 Business Ethics for Global Business
• 4 A Global R&D Network
• 5 The International Competitiveness of the Japanese Service Industry
• 6 Training and Qualifications for Global Leaders
• References
• Index