Asian business modelhttp://plaza.snu.ac.kr/~sikorski/

click on manuscript on Asia-Pacific Business and go to Chapter 8: Japanese Business Systems

Chapter 11: Overseas Chinese Business Systems

SMEs in Taiwan

Township-Village Enterprise

CAUSES OF THE ASIAN “MIRACLE” & CRISIS:

BUSINESS/MANAGEMENT SYSTEMS• Distinctive national enterprise models:

– Japanese keiretsu– Korean chaebol– Taiwan SME (Chinese family business)– Singapore Government-linked Company– Others:

• Foreign-invested firm (China, Singapore, etc)• China “town-and-village enterprise”• Conglomerate (emerging markets generally)

CAUSES OF THE “MIRACLE”:BUSINESS/MANAGEMENT SYSTEMS

• Conglomerates can add value to national markets.– Firms in emerging markets often must perform

basic functions because of “institutional voids”.• Inefficient legal and regulatory infrastructure• Consumers, employers, investors lack information.• Conglomerates provide their own labor, capital and

product markets; they have more credible brands.

• Special “core competence” of Asian enterprises(?)

Asian business model

• “Industrial capitalism in general has developed more organizationally integrated means of coordinating economic processes, both within and between “the units of financial control conventionally called ‘firms’”. (Richard Whitley 2001)

• Distinctive business systems reflect differences in processes of industrialization and continuing variations in the nature of institutions (including ‘firms’) in those societies. – E.g. the nature of financial, labor, and political systems varies. – Systems vary considerably across East Asia, leading to contrasting kinds

of firms and market relations.

• Comparative business systems framework:– Nature of firms– Relationship between firms– Management of work

Comparative business systems framework (Richard Whitley 1998)

• Business systems vary…– Nature of firms

• Diversity of activity: conglomerate vs specialized• Commitment (to survival of core activities)• Owners’ involvement• Growth: internal vs external

– Relationship between firms• Market response vs relationship response

– Management of work• Centralization vs decentralization• Employer-employee relationship• Manager-worker distance• Task/role specialization

• Common characteristics of economic structures/institutions in East Asia:– State-led industrialization– Weak intermediaries for mobilizing loyalties

beyond kinship– Low trust in formal institutions and procedures– Authorities overwhelmingly personal/paternal

• Environmental changes– Globalization and foreign investment (including

portfolio)– Complexity– Institutional (especially politics)

JAPAN

BUSINESS MANAGEMENT

AND ORGANIZATION

Comparative business system framework

American JapaneseDiversity Diversified/divisionalized Diversified (limited)Commitment High birth/death rate Low rate of changeOwner involvement Arm’s length Low external shareholder

involvement

Growth External acquisition Internal growthFirm relationships Impersonal /market Networks/ collaborationCentralization Centralized strong middle managementEmployer-employee Labor market Low turnoverManager-worker Separate compensation

structureLow differentiation

Specialization High Low

Comparative business system framework(2)

American JapaneseGoal of the firm Profit maximization Empire-building: growth,

longevity, market share Top priority Shareholders Employees Business practice Consumer economics Producer economicsPeople treatment Less respect and loyalty Respectful, loyal Ownership Outside shareholders Interlocking (insiders)Shareholder attitude Impatient for profits Patient capitalEmployee training Minimal MaximalBonus system Performance-based Teamwork-basedProfit centers Narrow Broad –enhance cooperation

Japanese Foreign Direct Investment (FDI)

0

10

20

30

40

50

60

70

1989 1993 1997 1998 1999 2000 2001

Inward FDIOutward FDI

Billion $

Japanese personnel management

• Lifetime employment (though not all individuals/enterprises are included) enhances mutual commitment, but firms are strapped with excess labor in times of low growth.

• Seniority promotion (geared to the school-recruitment system) has led to an increasing payroll burden in the low-growth era.

• Ringi (Nemawashi) decision-making may increase participation at lower levels and foster process improvements, but democracy at work can cause inertia. (40% of managers’ time spent in meetings)

• The “inside” role of owners and directors (stakeholder capitalism) allows more stability and managerial autonomy from shareholders but detracts from the profit objective and the ability to change.

• Producer economics promoted the creation of industry but causes high prices and other disservice to consumers.

Japanese business organizations (keiretsu)

• The keiretsu is a huge combine generally including a bank, a number of manufacturing companies, and often other enterprises such as a trading company (sogo shosha). Japanese post-war industrial policy channeled development funds through selected commercial banks, causing a clustering of firms around banks and a responsiveness of the keiretsu to government direction.

• Markets were internalized for capital, supplies, personnel, etc. Cross-shareholding enhanced stability and cohesion of the group, and members were thus protected from hostile external takeover.

• However in the 1990s, “dwindling sales, excess capacity and collapsing profits test the conventions of loyalty that bind the networks together.” (Economist)

Background

• The Zaibatsu

•From the Meiji Restoration in 1868 until WWII, several large industrial groups dominated Japanese economic activity.

– Some developed from Tokugawa merchant houses whereas others were closely related to the government.

•The major pre-war Zaibatsu were:Mitsui Asano

Mitsubishi Okura Sumitomo Kawasaki Yasuda

• A center family business was the core company, with many smaller companies supporting these companies.

• Later, the WWII period brought about greater centralization of the Zaibatsu in its growth from family controlled companies to bureaucratic conglomerates.

• After the war, in 1947, United States compelled Japan to dissolve these groups as they contravened anti-monopoly regulations.

• However, in 1948 to prevent weakening of the Japanese economy, anti-trust laws were amended. Many companies were re-established. Since then, the conglomerates have developed into the Keiretsu. – The Korean War (1950-) fueled demand of heavy industries and

greater consumer demand.

– High growth (7.7% annually from 1950-90) was fueled by very high level of investment in imported technology –Japan paid more for foreign know-how than any other major industrial country between 1964-71.

Background

Subsidiaries and

affiliated companies

Owner family

Holding company

Zaibatsu pyramidal structure:

Subsidiaries or affiliates

Group member

companies

Keiretsu star structure:

The resulting Keiretsu enterprise was…

•A uniquely Japanese form of corporate organization which evolved after the Second World War.•A grouping or family of affiliated companies that form a tight alliance to work towards each other’s mutual success.

Horizontal Keiretsu- occupy horizontal relationships across the industries. Usually they only have one enterprise in each business sector to enjoy economies of scale and avoid competition within the group

Vertical Keiretsu- control the flow of products, services and prices from the factory to the consumers

Protectionist Nature of the Keiretsu proliferated in the following ways:

•Cross Holding of Shares

•Preferential Treatment from Banks

•Preferential Treatment towards Group members

Fate of the Keiretsu and some notable changes in its structure in recent years……

•Foreign acquisition of Japanese rivals

•Cost cutting efforts on suppliers

•Strategic carve-outs and partial mergers

•Outsourcing of production

•Increased efficiency and competitiveness among suppliers

•Reform of personnel management system

Foreign Acquisition of Japanese Rivals

• Western acquisition of Japanese rivals is now rampant.

• Evinced by Renault’s (French automobile maker) 1998 purchase of a controlling interest in Nissan Motor Co. Ltd.

•CEO Carlos Goshn arrived in July 1999.

•He discarded seniority system and plans to reduce workforce by 21000 but without layoffs. But he focused on product revival and profits rather than market share.

• He became more Japanese. Women voted him one of the top four men they would like to have father their children…

•Mazda Motor Corp. is now controlled by Ford Motor Co.

•Mitsubishi is under the umbrella of new parent company, DaimlerChrysler AG.

Cost Cutting Efforts on Suppliers

• The survival of the Keiretsu is further threatened by necessary cost cutting efforts undertaken which break the networks of equity-interlocked companies and sever ties with suppliers who cannot offer lower prices.

•Many keiretsu are shedding non–profitable divisions or product lines so they can focus on “core competencies”.

•Before Renault merger, Nissan owned stakes in 1394 companies; the automaker said it will sell off its shares in all but four by 2003.

Strategic Alliances

• Keiretsu are also putting their profitable non-core divisions to one side by means of strategic carve-outs and partial mergers.

•These allow them to pool for example R&D resources and to consolidate operations.

• Hitachi and Matsushita, which announced an alliance on 23/5/2001 will share their expertise in developing new digital appliances.

Outsourcing of Production

•The “big 5” consumer electronics firms led by Sony are selling their plants to independent electronics manufacturing companies and then buying the products made in their former factories.

•In October 2002 Mitsubishi Electric announced it would stop making DRAMs, and Fujitsu said it would expand a deal with Siemens (German electronics firm) to share its computer business.

•“Unlike Europe and America where most firms have split the design and manufacturing sides of their businesses and narrowed the focus, Japan still trudges on with five vertically integrated electronic giants.” (Economist 10/10/2002) But this may be changing.

Increased Efficiency and Competitiveness among suppliers

• Manufacturers are also trying to make their production processes more efficient by installing supply chain management systems.

• Sharp, a consumer electronics company set up a supply chain system in its Osaka factory in 1999 and since then has raised the rate of fulfilling orders from 77 to 88%.

Reform of personnel management

• Since March 1998, new recruits at Matsushita are offered three options.

1) Employees can live in company housing, go to free social events and buy subsidized services. Retirement bonus is two year’s salary.

2) No retirement bonus, but more money now.3) No perks also, but even more money now.

Only 3% chose Option 3. But 41% chose Option 2.• Matsushita and most Japanese firms are tying promotions

and bonuses to performance (as well as seniority). A government survey found more than 80% intended to introduce some measure of performance to pay/promotion schemes.

• But Matsushita is bound by its promises for lifetime employment of its existing staff.

Japanese manufacturing still has a competitive advantage

• Integrated production systems are far more sophisticated than competitors can manage.

• High technology at home has long been an advantage. Leading firms invest in new generations of products.

• Other long-standing advantages:– Well-trained workers– Excellent quality control– “Lean” production processes– Industrial mould-making is the basis of all manufacturing.

• Japanese bureaucrats are still involved.• The Japanese way: careful attention to detail and cooperative

adjustment for optimal performance.• China and other low-wage countries buy Japanese inputs for

their digital products.

Case Study on Mitsubishi

•One of the “Big Six” Keiretsu; most tightly interwoven of Japan’s corporate families and at its peak

•Owned 30 premium companies and many subsidiaries with $400 billion revenues (about 8% of the country’s total output)

•Empire of 216,000 employees and prominent in businesses ranging from banking to beer, shipping and shipbuilding, property, oil, aerospace and textiles

•Stunned the world by buying 51% of Rockefeller Center in New York’s Times Square, whilst racking up 27% annual sales gains in the US automobile market in the early 1990s

However, in a mere decade, this economic godzilla was brought to its knees…The reasons which contributed to this decline are found in the very strengths of the keiretsu system.

Access to cheap capital led to excessive expansion:

Plentiful capital from the group’s own banks (Bank of Tokyo-Mitsubishi Ltd) led to over-diversification and expansion and financed investment in global market share in boom times, without regard for profit but with the aim of increasing sales.

Lack of effective communication among top management:

Friday Club meetings proving increasingly ineffective as board of directors become more absorbed with their own problems and Japanese culture promotes face saving and lack of direct confrontations of those non-performing members.

Subsidies and bailouts for partners in distress costly:

Old ties prove costly when partners keep hitting on each other for subsidies and bailouts.

Overdependence on business from subsidiaries leads to loss of competitiveness in global markets.

Conclusion

• Movement within the Keiretsu and painful costs are opening doors for Western practices in Japan.

• Japanese ways however are slow to change in spite of the current climate. Japan may remain “the last socialist country among advanced nations”.

• Japanese companies are trying to be less dependant on the keiretsu system, as automakers find alternatives to become cost competitive and suppliers find new opportunities outside. (e.g. the case of Nissan)

• Well-established relationships which they have in the keiretsu system will take a long time to be displaced even with market competitive products and services.

The Japanese Economic Model

• Designed to catch up with the West industrially and technologically

• Emphasized the needs of producers over consumers

• Compulsory savings deductions • Capital raised through banks• Emphasis on exports• Insider relations between businesses and

between businesses and the government 

Japanese political economy

• Stable political system: one party dominance• General growth consensus legitimized quiet

political scene• Stable relationships between bureaucrats,

businesses and politicians• Fast decisions made outside normal legislative

process• Politics are used when responsibilities are not

clear or international interest are concerned

Japanese banking & financeBig Bang• Background: the bubble and how it burst

– Bank-based credit system misallocation of capital.– Financial liberalization changed pattern of capital flows.– Banks still expanded their lending, fuelling investment. – Inevitably, investment psychology turned negative.

• lingering problems– low asset values– bad debts and low margins at banks– Japan’s status as international financial centre– savers lack flexibility over where to invest

• Too much capital devoted to bank lending.– May lead to unwise investment, overcapacity.– Risk and return was never a concern.– Bank shareholders do not impose limits.

• Captive savers have a lousy deal.• Pension funds cannot meet commitments.• Corporate shareholders had little influence.• The “cosy world of safety nets” disappears.

– Economic growth no longer lifts all boats.– Banks can no longer help companies.– Government can no longer back the banks.

What will happen?

• Savers invest their money better.• Investment flows abroad.• Banks consolidating / contracting; • corporate cost of capital rises.• Corporate restructuring (ristora)

– to trim the “3 excesses”:• excess debt

• excess capacity

• excess labour

Key concepts of Chinese management culture

• guanxi (connections/networks)– Also defined as friendships bound by reciprocal favors.– Chinese depend on guanxi, particulary with those in

power, to get things done.– Such relationships are utilitarian more than emotional.– Chinese don´t see favoritism as unfair.

• face (our individual perception of how others view us)(Both face and networking are also important elsewhere in East Asia. Of course, it exists even in Western business, pursued as corporate-to-corporate relations.)

• Chinese management cultivates deal-making skills.

 

Overseas Chinese in Southeast Asia  Share of

populationShare of marketcapitalization

Indonesia 3-4% 73%

Malaysia 30% 69%

Philippines 2% 50-60%

Singapore 78% 81%

Thailand 14% 81%

Source: The Economist, Survey of Asian Business April 7th 2001, Table 2

Listed Corporate Assets controlled by top 15 families

% of total value, year-end 1996

0 20 40 60 80

JapanTaiwanMalaysiaSingaporeHong Kong

South KoreaThailandPhilippinesIndonesia

Source: The Economist Survey of Asian Business 7th April 2001 Table 3, adapted from Claessens, Djankov and Lang,

“The Separation of Ownership and Control in East Asian Corporations”, Journal of Financial Economics, 2000, Table 9

%

Township and Village Enterprise

Industry emerges in the Chinese countryside

What is a “Township and Village Enterprise”?

• TVEs were first established in late 1970s as a result of China’s economic reform in the countryside.

• Rural enterprise originally designed to manufacture low value-added goods such as agricultural products and inputs, i.e. fertilizer, and farm machinery.

• Ownership rights are historically vague; they are theoretically owned collectively by local governments and employees.

• Independent of central government and receive no investment except in infrastructure, i.e. roads and communications.

• They rely on themselves for development and are therefore market driven.

Development

• Low production costs are due to cheap labor, use of pre-dated pollution control machinery, and failure to abide by environmental and health regulations.– Difficult to monitor because located in remote areas.

• Collective property rights remained in hands of town and village authorities.– This assured TVE’s legal status with the authorities when it

was still risky to be associated with Capitalism (1980s).

– Allowed managers to purchase raw materials, cheap land, etc. that was still allocated by central government.

Rise and Fall of TVEs

• Growth in TVEs became huge in mid-1980s and continued until mid 90s.– Result of little competition, strong market orientation, favorable

tax policy, low production costs, etc.

• Outputs increased by 25% a year, share of national GDP increased from 13% in 1985 to over 30% in 1995.

• TVEs created over 100 million rural jobs over this time period and solved problem of the flight of surplus rural workers to the city.

• Brought competitive pressure to SOEs and contributed to China’s export performance (1/3 of total exports in ’94).

Rise and Fall of TVEs (cont.)

• Growth of TVEs subsides beginning mid to late 90s.

• Thousands of TVEs have been forced to shut down and lay off 100,000s of workers in the face of steeper competition.– FDIs prove to be more efficient and have superior

technology.

Challenges Faced by TVEs

• Limited Funds and Supplies: growth relies mainly on re-investment of any surplus- doesn’t have benefits of government investment that SOEs have

• Obsolete Technology: they have little to invest in R&D and also rely on mechanical technology and manual work

• Low Level of Employees’ Education: in the mid 90s less than 1% of employees had a college degree or held a minimum level technical qualification

• Profitability Not Clear: much of profitability is often based on preferential tax policies

• Why public enterprise? (answer: market failure)– Ideological reasons (e.g. UK, communist countries)

– To exploit natural resources

– To redistribute wealth

– To promote employment

– To preserve declining industry (rescue takeover)

– To control strategic industry

– As a pragmatic means for development (e.g. Singapore)

– ….etc etc etc (predominately not economically rational)

PUBLIC ENTERPRISE / STATE-OWNED ENTERPRISE *

* Institutional importance in China, Singapore

• Why liberalize/privatize?– Answer: nonmarket failure –bureaucracy/politicians

• Reform efforts– Tinker with government management system to improve

enterprise autonomy/incentives– Liberalize/deregulate relevant policy areas

• e.g.- Allow competitors into state monopolies– Market pricing– Eliminate subsidy– Market staffing and compensation

– Privatize –transfer ownership from public to private investors.

• Why was privatization not appropriate for China?– Entrepreneurs set new firms.– State-owned firms’ performance could be improved.– The state-owned sector acts as a safety net.

n.a.

n.a.

n.a. n.a.

n.a.

Australia

Brazil

Britain

India

Japan

Singapore

S. Korea

U.S.A.

W Germany

SCOPE OF STATE OWNERSHIP (pre-privatization)

Legend:Publicly owned

Privately owned

Not applicable n.a. or negligible

posts

telecom

electricity

gas

oil prod’n

coal

railways

airlines

cars

steel

ship bldg

Purpose of privatization

CLASSICAL PURPOSES

• Improve efficiency

• Strengthen market environment

• Unburden the government

RATIONALE IN SINGAPORE

• Withdraw from commercial activities

• Broaden/deepen stock market

• Reduce competition with private sector