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Offshoring by Japanese Companies during the Heisei Period Tomikazu Hiraga, Ph.D. Professor, Faculty of Management, Osaka Seikei University Adjunct Research Fellow, NLI Research Institute [Date of Issue: 4/March/2019 No.0288-1099]

Date of Issue: 7/March/2019

Offshoring by Japanese Companies during the Heisei Period

Tomikazu Hiraga, Ph.D.
Professor, Faculty of Management, Osaka Seikei University
Adjunct Research Fellow, NLI Research Institute

This article looks back on trends and changes in offshoring by Japanese companies over the Heisei period in the context of the economic development of the Asian emerging countries and other major changes in the international situation.

Only two months remain until the end of the Heisei period (Japanese calendar: January 8, 1989-April 30, 2019). With a new emperor about to be enthroned and a new period to begin, I would like to take this opportunity to explore trends and changes in offshoring by Japanese companies over that time, referring also to major changes that have occurred in Asia and internationally.

If I may start with my personal experience, on January 8, 1989—the first day of the Heisei period—I was over in Bangkok for the purpose of studying offshoring by Japanese firms into the Association of East Asian Nations (ASEAN) countries.

I subsequently moved on to become a corporate businessman, a ratings agency analyst, and a think tank researcher, but in all these capacities, I have continued to be involved with Japanese companies' offshoring to Asia and elsewhere. As the Heisei period draws to a close, I am currently lecturing on international management—offshoring by Japanese companies included—at a university, so here I would like to express some personal views based on that experience.

As shown in Table 1, the Heisei period began with the euphoria of the bubble economy. Foreign investment boomed, including some purchases of sufficient scale to draw international attention. When the bubble subsequently collapsed, however, companies pulled out of many of these investments.

Table 1: Key events in Japan and abroad during the Heisei period (selected by author) Yen appreciation as of 1991 weakened Japan's import competitiveness, accelerating moves by Japanese manufacturers to set up local production operations in Southeast Asia, etc. Due to the key events and factors noted in the table above, despite fluctuations in Japan's foreign direct investment (FDI) and the pace of offshoring by Japanese firms, the direct investment balance and the number of companies with operations offshore grew significantly throughout the Heisei period, as is clear in Table 1 and Figure 1.

Figure1: Japan's FDI balance (Unit: USD million) Next I would like to turn to trends in Japanese offshoring, changes in offshoring objectives, and personnel localization, as well as issues that impacted on these.

Looking first at Japanese offshoring, in 1989, where in 1990 Japanese companies had 7,544 local operations offshore, the latest data (2016) shows this figure growing 3.3 times to 24,959 (Table 2). Of these, the number of manufacturing operations grew 3.4 times from 3,243 to 10,919 and services 3.5 times from 3,850 to 13,367, with the rate of increase for the latter growing more strongly in recent years.

Table 2: No. and ratio of local operations by region and key country Until around the mid-Heisei period, the United States topped the list for local Japanese operations, but numbers have been gradually picking up in the Newly Industrializing Economies (NIEs), ASEAN member nations, and emerging countries such as India and Mexico.

One major factor behind this change was strong yen appreciation, whereby manufacturers sought to redress their falling competitiveness by accelerating the establishment of operations in emerging countries in Asia and elsewhere as production sites offering the advantage of lower costs for personnel, etc. Other factors encouraging local production were preferential investment policies for foreign firms and foreign investment deregulation pursued by emerging countries, as well as avoidance of US-Japan trade friction.

As economic development boosted the importance and attractiveness of emerging countries in Asia and elsewhere, both the manufacturing and service industries stepped up their offshoring. Particularly in recent years, a whole spectrum of service companies have been expanding their operations overseas.

As a result of the above, Japan's offshore production ratio grew from 5.7 percent in 1989 to 23.8 percent in 2016 (all domestic manufacturing corporations), and rather than low costs, taking advantage of growing local markets has become the main motivation.

Global supply chains have emerged, typified by the auto industry's Thailand-based supply chain, and Japanese manufacturing methods, foremost of which is of course the Toyota Production System (TPS) , have also been transferred overseas. Conversely, the modularization of manufacturing processes in the electrical and electronics industry has led to international horizontal specialization, including the emergence of manufacturing contracting majors such as Taiwan's Hon Hai Precision Industry and TSMC (Taiwan Semiconductor Manufacturing Company), as well as product development geared to local market needs, and these factors too are impacting on Japanese companies' offshoring.

Deepening economic integration in Asia has also contributed to intraregional trade and investment liberalization, exemplified by the progressive reduction of ASEAN's intraregional tariff rates from 11 percent in 1990 to zero as a rule in 2018.

Similarly, with major advances in bilateral and multilateral free trade agreements and economic partnership agreements (12 agreements involving Japan are now in force, from the Japan-Singapore Economic Partnership Agreement concluded in November 2002 to the EU-Japan Economic Partnership Agreement concluded in February 2019), as well as the North American Free Trade Agreement (NAFTA) and the European Union (EU), Japanese companies have been increasingly establishing a presence in Mexico, Europe and elsewhere.

Emphasizing local markets, supplying products and services tailored to local needs and tastes, and ensuring smooth local management and marketing requires hiring local employees with a deep understanding of the local situation, culture, and customs.

Even as the number of local employees booms, the ratio of dispatched Japanese staff to total staff in overseas operations dropped from 2.7 percent in 1996 to 1.2 percent in 2018 (according to the latest results published in January 2019 from the Japan Overseas Enterprises Association (JOEA)'s Questionnaire Survey on the Globalization of Management in Japanese Companies. There are also more and more cases of locals and non-Japanese familiar with the local situation being appointed to lead local operations. According to the above JOEA survey results, the number of non-Japanese presidents soared from 29.5 percent in 1996 to 62 percent in 2018.

As a result of all this offshoring, the structure of Japan's balance of payments too has changed significantly, with the trade surplus that was so dominant in the early Heisei years now on the decline and dividends and other income received from offshore operations now representing a major portion (in 2017, the trade surplus stood at USD44.4 billion and dividends and other income received from offshore operations at USD177 billion).

Turning from changes in offshoring by Japanese companies during the Heisei period, I would like to identify in closing key issues for the new era which will begin in May 2019.

In relation to the international political economy, developments in US-China relations, Brexit and the insularity emerging in major powers are likely to play a major role in the decision-making of Japanese companies on future offshoring.

To make progress with the personnel localization which fundamentally shapes offshoring success or failure, companies need to have in place the right cultures and mechanisms to attract top-flight human resources. This will lend increasing importance to management philosophies and rules of conduct that speak to employees worldwide, systems for hiring and training talented personnel regardless of nationality, and attractive compensation and welfare systems. Company headquarters will also need to become more international so as to provide the foundations for hiring and training talented staff and enabling them to bring their ideas and talents into full play.

Recently, we've seen some great performances from our national sports teams including outstanding players with overseas roots, and this could offer some valuable lessons for the international management of Japanese companies in a new era. In terms of strategic and systematic approaches and systems, putting together a team of Japanese who have built up international experience from a young age along with talented personnel with overseas roots who can understand and put into practice their mission and goals as team members is an excellent way to exploit a company's strengths to the full.

In other words, it will be important to move away from the focus on Japanese personnel and introduce diversity into the organizational capacity which has always been a strength of Japanese companies to take advantage of the power and motivation of talented personnel from a range of national and cultural backgrounds.

To that end, we need to provide the young generation of Japanese with as many opportunities as possible to gain invaluable experience overseas from early on. If we can move past the conceptualization of parent company-regional headquarters-local operations simply as a chain of command to create organizations that share their information and knowhow horizontally to create added value, this could represent a major competitive advantage. I look forward to Japanese companies making a strength of diversity in the post-Heisei era to ride the advance of markets in Asia and beyond to make major progress of their own.

About the Author
Tomikazu Hiraga
Professor, Department of Global Tourism and Business, Faculty of Management, Osaka Seikei University
Adjunct Research Fellow, NLI Research Institute

Graduated from the Faculty of Economics at The University of Tokyo and joined Tokio Marine and Fire Insurance (now Tokio Marine & Nichido Fire Insurance). Also worked at the Ministry of Foreign Affairs (ODA to the Asian countries), the Japan Center for International Finance (Director of Europe Dept. and Director of Asia and Oceania Dept.) and the Japan Credit Rating Agency, Ltd. (General Manager and Chief Analyst of International Dept.) before joining the NLI Research Institute in 2009. Became Executive Research Fellow & General Manager for Asia in 2014, and took up his current position in April 2018. Also lectures at Sophia University. His academic qualifications include a Ph.D.in Business Administration, an LL.M. and a Harvard Business School General Manager Program Certificate.

(For the Japanese version of this article)

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