Japanese Seek New Role in East Asia Electronics

Date: 09-28-2006

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HONOLULU (Sept. 28) — Japanese companies have played a critical role in East Asia’s electronics industry, an industry that dominates the region’s international trade and investments and one that displays very high levels of integration into global production networks. Japan has been a major source of capital, components, and machinery, as well as supplying the template for the industry’s business models and management techniques. But, according to a study by East-West Center senior fellow Dieter Ernst, that dominant position has been eroded.

Findings from Ernst’s study, “Searching for a New Role in East Asia Regionalization: Japanese Production Networks in the Electronics Industry,” appeared in the 2006 book “Remaking East Asia: The Dynamics of East Asian Regionalism” edited by Peter J. Katzenstein and Takashi Shiraishi. The book was published by Cornell University Press Paperbacks in Ithaca and London.

During the 1990s, what Ernst refers to as Japan’s “lost decade,” Japanese electronics firms found themselves facing new challenges as Japan experienced a long-term decline in its share of global markets. They also found themselves losing out in the “global technology race,” Ernst points out, as “U.S. corporations consolidated their leadership in semiconductors and computers, creating new product, software, and service markets.”

This, however, does not imply that the Japanese are ready to withdraw from East Asia. Drawing on extensive interviews with Japan’s largest electronics firms and their small- and medium-sized component suppliers, Ernst describes how, over the past few years, Japanese electronics firms have been searching for ways “to expand and upgrade their regional distribution, production, and R&D networks,” if not to regain supremacy to at least stay in the game. This has come about mainly because corporate capital in the Japanese electronics industry “now critically depends on the region, not only as a global production base but also as a major and increasingly sophisticated market for its products, services, and technology.” The fact that the region can also supply Japan with lower-cost knowledge workers, too, is an important concern.

To benefit from the growing importance of East Asia, Ernst says, Japanese electronics firms realize that old strategies won’t work any longer. “The emphasis is on attempts to fine-tune the division of labor between domestic and overseas production, and to reduce reliance on traditional “keiretsu-type” linkages with other Japanese firms.”

According to Ernst, this is a belated attempt by corporate headquarters to transfer to Asia basic changes in the Japanese business model. “Of particular importance are attempts to move away from market share expansion to profitability as the main measure of success, and attempts to strengthen vertical specialization, by outsourcing non-core activities.” Ernst adds, “These changes in the Japanese business model have been debated at headquarters since the mid-1990s. Yet the green light for implementing such changes in Asia was only given five years later, when the slowdown in the electronics industry gave rise to intensified competition and reduced profits.”

Ernst also explains why Japanese electronics firms find it difficult to implement the necessary changes in organization.

He argues that the once much-lauded Japanese network management system, with its focus on closed, Japan-centered production networks, has now become a liability. “As long as Japan continues to trail behind the U.S. in its overseas production ratios and especially in its net direct investment income, Japanese firms will remain under pressure to minimize risks by centralizing management control in the parent company,” and “to rely heavily on the parent and other long-standing partners for the supply of capital goods and components.”

Ernst also points out, “attempts to shift the center of gravity of Japanese East Asia production networks from ASEAN to China are constrained by a deeply entrenched history of Japanese management trying to shelter the company from risks and uncertainties.”

According to Ernst, an equally important constraint can be found in the contrasting sales destinations of Japanese and American production networks in Asia. “While American companies have moved from a primary focus on reverse imports into the U.S. to an increasing emphasis on sales in Asia’s high-growth markets, Japanese electronics companies have moved in the opposite direction: from sales to local markets to third country exports, and now to reverse importing into Japan.” Ernst says “this has resulted in a lack of aggressive Japanese strategic marketing to address the specific requirements of East Asian markets.”

But the most perplexing finding of Ernst’s study is that human resources management, which used to be considered a major strength of the Japanese business model, has now become a serious constraint to upgrading Japanese production networks in East Asia. “No other factor arguably constrains Japanese electronics firms in East Asia more than their very limited capacity to tap the creativity of non-Japanese skilled workers, engineers, and managers, and a reluctance to outsource R&D.”

Ernst shows that “in China, for instance, European and American firms put enormous energy and money into training Chinese staff and promoting them up the corporate ladder. Japanese companies have instead bred ‘China experts’, Japanese fluent in Chinese who have studied Chinese business practices and behavior. These Japanese managers maintain a firm grip on business and keep their Chinese colleagues at a distance.”

According to Ernst, this gives rise to a vicious circle. “Because of an unwillingness to promote local managers to top positions and because of the operation of a seniority system that inhibits rapid promotion, Japanese companies have found it difficult to recruit and retain quality managers and engineers in their Asian subsidiaries.”

But do not count the Japanese out.

Ernst says the “Japanese electronics firms recognize that they must drastically change their human resources management (HRM) practices in East Asia.” And, he points out, “they are searching for ways to catch up with the more open, flexible and decentralized HRM approaches of global industry leaders, including their Korean and Taiwanese competitors.” Ernst adds, “Japanese firms know that without such changes in HRM, any competition strategy they have will prove ineffective. After years of hesitation, Japanese firms are now eager to tap into East Asia’s huge pool of lower-cost managers and engineers to facilitate and accelerate decision making, and to cope with the frantic pace of change in Asian business practices, values and ways of thinking.”

Ernst points out, “Belatedly, some Japanese firms are now attempting to develop more equal partnerships with emerging new industry leaders in Asia, primarily from Greater China.”

And, according to Ernst, that “hybridization of business organization, moving beyond national models,” is the key for Japan’s electronics firms. “The dichotomy ‘Americanization versus Japanization’ that may have been the norm before,” according to Ernst, “is insufficient to capture what is really happening,” in East Asia. “In a sense,” he adds, “Asianization of production networks may be in the process of superseding in the longer run the battle between Japanization and Americanization.”


Dieter Ernst is a senior fellow in the Economics Study Area of the East-West Center Research Program. He is a former senior advisor to the OECD, Paris, and former research director of the Berkeley Roundtable on the International Economy (BRIE) at the University of California at Berkeley. Dr. Ernst has co-chaired an advisory committee of the U.S. Social Science Research Council to develop a new program on Innovation, Business Institutions, and Governance in Asia. He has also served as scientific advisor to several institutions, among them the Organization of Economic Cooperation and Development, the World Bank, the Asian Development Bank, the U.N. Conference on Trade and Development, and the U.N. Industrial Development Organization. His recent publications include International Production Networks in Asia: Rivalry or Riches (2000), Technological Capabilities and Export Success: lesson from East Asia (1998), and Innovation Offshoring — Asia’s Emerging Role in Global Innovation Networks (2006).

Dr. Ernst can be reached at the East-West Center at (808) 944-7321 or via email at ErnstD@EastWestCenter.org

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