As Japan’s economy grew significantly from the 1960s through the 1980s, Japanese firms across all industries relied heavily on increasing domestic consumer spending and exports to the U.S. and Europe. Following the collapse of the economic bubble in the early 1990s and the lost decade (some would argue two decades) that ensued, it has become clear that these firms must increase sales in Asia’s developing markets if they are to survive, let alone thrive.

However, many Japanese firms today are not operating in ways that are conducive to success in developing markets and emerging economies. Since Japan became an economic power, top Japanese firms in industries such as consumer electronics and automobiles entered the American market, stressing an image of high-quality, safe products. Once the yen began to strengthen post-bubble, this image was accompanied by another of high prices when compared to competing products from other countries. For consumers such as those in the U.S. or Western Europe with a great deal of disposable income, this high cost has not been a deal-breaker. In the developing markets of Asia, however, this business model is often problematic because “consumers aren’t willing to pay extra for the features in Japanese products,” according to Masataka Oka, a professor at WasedaBusinessSchool.

Oka notes that Japanese firms face three major challenges in appealing to consumers in Asia’s developing markets. First, their knowledge of local markets is generally quite poor. Compared to foreign competitors, Japanese companies are often unaware of the features local consumers will pay for and those they do not need. As a result, these firms, particularly in the consumer electronics industry, bring to developing countries’ markets the same expensive products with unwanted features, leading to disappointing sales.

Second, Japanese firms tend to share knowledge and conduct R&D outside of their home country far less than their competitors do. Some of this is due to the language barrier, but knowledge sharing can be improved immensely if even a few non-Japanese voices are added to a company’s top management, as will be seen below in the discussion of Nissan’s strong performance. As Oka states, “This lack of global knowledge sharing hurts Japanese firms’ ability to learn from past successes and failures outside the country.”

Finally, despite Japan’s substantial investment in R&D spending, a culture of true innovation is often lacking in Japanese firms. According to Oka, burdensome and systematic rules at major Japanese firms significantly reduce the range of opportunities for developing innovative products. Encumbered by an employee-management system that generally does not reward merit or individual performance, firms often devote their R&D efforts to making minute changes and improvements to products that are fundamentally obsolete. This so-called “Galapagos effect” results in Japanese cell phone manufacturers, for example, continuing to produce flip phones for the domestic market. The R&D outlay used to develop these products would have been better spent on generating next-generation smartphones that could compete with those of Samsung and Apple.

Japanese firms, particularly in the consumer electronics industry, bring to developing countries’ markets the same expensive products with unwanted features, leading to disappointing sales.

These problems affect some Japanese industries much more than others, including the consumer electronics industry, which has faced significant headwinds, and the automotive industry, which embraced globalization earlier and to a much greater degree, resulting in tremendous success. An analysis of these industries identifies past mistakes Japanese firms should avoid as well as best practices that can be leveraged to ensure the firms’ future success in competing globally.

Struggles and Opportunities in Consumer Electronics

The Japanese consumer electronics industry’s fall from grace has been well-documented in recent years. In fiscal year 2012, Panasonic and Sharp experienced losses totaling more than ¥1 trillion (US$10 billion), while Sony eked out its first profit in five years, thanks in large part to a weakening yen. As the Japanese domestic market remains flat, firms across the industry see global expansion as the key to regaining profitability. As a consequence, expansion into Asia is now receiving much more attention.

In 2007, 25% of Sony’s global revenue came from the U.S. and 26% from Europe, while another 26% came from all other regions outside Japan. Since then, the distribution of the company’s revenues has changed dramatically. Revenue from the U.S. and Europe has fallen to 16% and 20% of the total, respectively, while revenue from the Asia-Pacific region in particular is growing very quickly. In fiscal year 2012, a full 19% of Sony’s revenues came from the Asia-Pacific region, and since 2007, the company has added China and India to its list of geographic regions of particular interest, in addition to the U.S. and Europe. These facts demonstrate that Sony has recognized the global economy’s shifting polarities, with Asian markets deserving major attention.

Sony’s annual report for 2011 included a special feature on emerging markets, emphasizing the importance of Brazil,Russia,India, and China. Among these emerging markets, Sony has built software-development facilities only in China and India, showing the special importance the firm places on these countries. Yet, when compared to other consumer electronics firms operating in the region, Sony comes up short. It still faces major problems in competing with local Chinese companies to gain a customer base. Indeed, Sony is far behind the top five firms in smartphone sales in that country.

According to Keigo Sugimoto, a project leader in Sony’s product planning and marketing division, with the exception of Apple, brand does not matter to Chinese consumers. This situation makes it very difficult for firms such as Sony to compete. In Japan and in the West, consumers value the Sony name and, to some degree, will pay a higher price for the company’s products because they believe them to be of higher quality.

According to Sugimoto, there are two main types of customers in China: those who want and can afford high-end brands such as Apple, and those who want but cannot afford these brands. Sony is currently not attractive to either of these groups because it wants to charge brand-level prices but is not viewed as such by the market. It is still uncertain whether the company can gain a strong foothold in the Chinese market.

Captains within the cross functional team report directly to Ghosn, eliminating the bureaucratic chain of command that is all too common in Japanese firms.

Sony’s situation is somewhat better in India, where it enjoys a high brand value. In 2012 it had the number one market share for flat-panel TVs, digital cameras, and laptops. In the mobile phone market, however, it is still struggling. A 2013 survey by Voice & Data, an online magazine that compiles data on the Indian telecom industry, found that Sony has not cracked the top five in mobile phone sales. Even domestic Indian companies such as Micromax Informatics and Karbonn Mobiles have gained market share at Sony’s expense. The firm’s struggles to sell some of its high-tech products in China and India raise questions about its approach to developing its products.

Understanding What the Customer Wants

Sony CEO Kazuo Hirai once said that his company sometimes becomes the victim of its own success. In the past, the company developed products such as the Walkman and camcorder without thoroughly vetting consumers, yet the products were very successful. This has led Sony’s current employees to believe they can repeat these successes, which has not been the case. While few doubt the ability of the company’s engineers to develop products in their research labs, far from the actual consumers, companies such as Samsung have spent a great deal of time and effort to learn first about consumer’s needs before developing products.

In 2004, Samsung launched its regional specialist program, in which young employees are sent to countries the company has not yet commercialized specifically to learn about and understand potential consumers’ needs. This program has guided Samsung’s engineers significantly in developing successful products.

Sony has completely neglected this approach. Employees are sent on short business trips for exactly the same purpose. The end result, however, is very different. As Sugimoto notes, “The findings of these short trips are not exactly customer insights. They are just a collection of customer requests.” Sony’s approach involves interviewing the locals, while Samsung believes in observing the locals, which produces a much better end result.

At Sony, most of the ideas related to products are developed in Tokyo. The sentiment among some of its engineers is that the company is not properly leveraging the strength of its R&D centers in China and India. According to Rajkumar Waghmare, an Indian engineer who has worked at Sony’s headquarters in Tokyo, “Only after an idea matures enough to become ready for implementation is it off-shored to R&D centers in India and China.” Products that are developed entirely at off-shore locations are few and far between. As a result, the company is unable to properly incorporate local needs and wants that can be identified by engineers in these regions. Unlike Apple, which makes each product for the entire world, Sony makes hundreds of different products for various markets and cannot afford to ignore the wants of customers in its fastest-growing ones. Samsung’s approach of leveraging its employees’ ideas outside its home country has produced very strong results so far; it remains to be seen whether Sony will apply these techniques for its own product development.

Observers suggest that Sony realizes the importance of generating higher revenue from the Asian market. Japanese firms continue to spend a great deal of money on generating new technologies and earn a tremendous number of patents each year. If Japanese consumer electronics firms can combine their technological prowess with a stronger knowledge of customer desires and produce new products that their foreign customers want, there is tremendous potential for global growth.

Strong Performance from the Automotive Industry

In contrast to the consumer electronics sector, Japanese firms in the automotive sector have performed quite well in the Asian market. Toyota and Nissan stand out as having embraced globalization and Asia’s potential most aggressively. The Asian market accounts for about 40% of global sales for Toyota and about 35% for Nissan.

Japanese firms continue to spend a great deal of money on generating new technologies and earn a tremendous number of patents each year.

Toyota, the world’s largest automaker, was forced to reorganize its corporate structure and management after its traditional style proved to be outdated. This reorganization was based on the increasing importance of emerging markets for the company’s sales. Business units now include one for developed markets and one for emerging markets such as China,Indonesia, and Latin America. In addition,Toyota has appointed three outside board members for the first time and chosen non-Japanese CEOs for its divisions in the U.S., Africa, Latin America, and Europe in order to benefit from the more global knowledge base that many of its competitors lack.

In 1999 Carlos Ghosn, COO of Renault, was appointed CEO of Nissan, following the French company’s takeover of the Japanese firm. Ghosn played a key role in steering the company back to growth through his “Nissan Revival Plan” (NRP), which is recognized by many as one of the most spectacular corporate turnarounds in history. The feeling across Japan is that only a foreign CEO could facilitate such a sharp corporate transformation.

Nissan has made significant changes to its corporate culture and management. Ghosn disliked the company’s inefficient corporate communication style and launched a cross functional team (CFT) to facilitate more direct and reciprocal interactions between departments and senior management. Each department selects its own CFT representatives, who work together within this new, smaller, and more efficient group to network more effectively without any departmental barriers. Captains within the CFT also report directly to Ghosn, eliminating the bureaucratic chain of command that is all too common in Japanese firms. This unique management approach has opened up Nissan’s traditional Japanese corporate culture, removed unnecessary politics, and led the firm’s communications to become brighter and more transparent. It should be noted that these recent changes by Toyota and Nissan have not yet been applied by their Japanese competitors in countries such as South Korea or China.

The Importance of Global Operations in the Automotive Sector

For many years, Japanese automobile manufacturers have earned significant revenues across the globe and embraced the potential of Asia’s developing markets long before Japanese consumer electronics firms did. Toyota, in particular, has worked diligently since the 1960s to grow its operations in Southeast Asia, developing not only a new market for sales but also its own local production sites. “Toyoda Precepts,” established in 1935, states that Toyota is “to be contributive to the development and welfare of the country” in these developing markets. In line with this philosophy, Toyota has supported local industries and contributed to the development of local transportation infrastructure. The company has also become involved with local communities through foundation activities and environmental conservation. These efforts have earned it a positive image in the ASEAN region and helped to build a successful and sizeable market for its automobiles.

Nissan, however, sees its flexible global production capability and supply chain as its strengths for entering new markets as well as a means of reacting quickly to crises. By customizing its systems and logistics, the company believes it can optimize its total manufacturing costs by building different components in different locations across the globe. This system helped Nissan recover quickly from recent crises, such as the 2011 Tohoku earthquake in Japan and the 2013 floods in Thailand. Such flexibility also enables the company to focus its production globally or domestically, depending on the strength of the yen at the time, an option most of its competitors do not have. Over time, Nissan’s overseas manufacturing has increased from just 9% in 1984 to 75% in 2011. The company currently operates 26 manufacturing plants and 25 powertrain plants overseas, compared to just five and two plants, respectively, in Japan.

The tremendous success of the Japanese automotive industry’s globalization, compared to the struggles of the Japanese consumer electronics industry’s efforts toward the same goal, shows that the future success of Japanese firms is achievable but not guaranteed. As Sony and its Japanese compatriots have seen firsthand, consumers in Asia’s developing markets evaluate products differently than Japanese or American consumers do. If Japanese firms do not identify their customers’ wants better, they will continue to fall behind. Furthermore, as Nissan has learned with Carlos Ghosn as CEO, the introduction of foreign voices into senior management can have a very positive effect in ensuring a global sharing of knowledge within the firm, benefiting both Japanese and non-Japanese employees and customers. As Oka notes, “if Japanese businesses can couple their hard-working employees with global best practices for management, they can succeed anywhere.”

As the Japanese population decreases and the developing economies of Asia grow more rapidly, the importance of Japan’s Asian neighbors to its economy will continue to grow. The success of Japanese firms competing in Asia is uncertain. But if these firms heed Oka’s advice to expand their global knowledge sharing, develop products more closely aligned with the desires of local consumers, and build a more merit-based employee-management system, their chances of global success will continue to grow.

This article was written by Andrew Dugan, Randy Kyung-rok Han, and Sagar Pagare, members of the Lauder Class of 2015.