HBR.

ORG May 2012

reprinT R1205J

The Globe

How to Win in
Emerging Markets:
Lessons from Japan
by Shigeki Ichii, Susumu Hattori, and David Michael

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 The Globe

How to Win in
Emerging Markets:
Lessons from Japan
by Shigeki Ichii, Susumu
Hattori, and David Michael
I f you’re a consumer in one of the world’s
developed economies and you think
that Japan is full of powerhouse export-
ers, you’re right. Hitachi, Panasonic, Sony,
Toyota—many Japanese multinationals be-
to move into the middle and low-end seg-
ments, where economies of scale and
scope—and profits—can be found. As a re-
sult, these companies are at risk of becom-
ing also-rans in the world’s fastest-growing
came household names in the second half markets.
of the 20th century. If you’re a consumer in That poses a threat to their very exis-
an emerging market, though, you probably tence. After all, growth in the developed
don’t view Japanese companies the same economies is slowing to a crawl. Goldman
way. In fact, it’s possible that you have Sachs forecasts that these markets will
never used a product made by one of those grow at an average annual rate of 2% from
Photography: Getty Images

giants. 2011 to 2020, while the developing econo-

Most Japanese companies moved up mies, such as Brazil, Russia, India, and
from the bottom in developed countries, China, are expected to grow at an average
Above but they have chosen to enter develop- annual rate of nearly 7% during the same
Toyotas bound for
export from Sendai, ing countries at the top of the consumer period. Not surprisingly, in January 2012
September 2011 pyramid. Afterward they have struggled Japan reported its first annual trade deficit

2 Harvard Business Review May 2012 Copyright © 2012 Harvard Business School Publishing Corporation. All rights reserved.
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Where Japan Inc. Leads—and Where It Doesn’t

Our study of seven product categories in Brazil, Russia,
India, China, and Indonesia reveals that few Japanese
in 31 years. Honda, Sony, and Toyota—com- companies are leaders in these markets, where
panies that generate two-thirds or more of multinational corporations dominate.
their annual revenues overseas—saw their
sales abroad fall or stagnate from 2005 to Brazil Russia India China Indonesia
2010. This suggests that their emerging Automotive
market performance wasn’t great enough Fiat Avtovaz Suzuki Volkswagen Toyota
to offset the effects of those sluggish de-
veloped economies. The global recession TVS

wasn’t to blame: During the same period, LG Samsung LG / Hisense LG

Samsung
Volkswagen and Hyundai had double-
Home Appliances
digit overseas sales growth that was driven
largely by progress in emerging markets. Whirlpool Indesit LG Haier Sharp
Clearly, if Japanese companies wish to ex-
Retail Hygiene
pand, they must make deeper inroads into
those markets. P&G P&G P&G P&G Unicharm
Our recent analysis of seven product Beauty & personal care
categories in Brazil, Russia, India, China,
and Indonesia found that with the excep- Natura P&G Unilever P&G Unilever
tion of Indonesia (where Toyota, Sharp, Beverages
and Unicharm have leading positions in China
Abi Carlsberg UB Group Resources Sinar
the automotive, home appliances, and Sosro
enterprise
retail hygiene markets, respectively) and
Packaged Food
India (where Suzuki has led in the automo-
tive industry since the mid-1980s), Japan’s Gujarat Inner Indofood
Nestlé Wimm- Coop Milk Mongolia Sukses
manufacturers are trailing in each market. Bill-Dann Marketing Mengniu Makmur
Tellingly, rival multinationals, rather than
Dairy
local corporations, dominate there. For MNC Local Japanese
company company Source BCG
instance, South Korea’s LG is the leader
in TVs in Brazil, India, and Indonesia. In rations are hamstrung by distaste for the more-expensive flat-screen TVs. By hom-
personal-care products Procter & Gamble middle and low-end segments of the mar- ing in on the middle and low-end segments,
and Unilever dominate except in Brazil, ket; aversion to mergers and acquisitions; LG, Samsung, and India’s Videocon have
where the local player Natura is number reluctance to commit—financially and or- captured the market: The two South Ko-
one. And so on. (See the exhibit “Where ganizationally—in emerging markets; and rean companies each have a 25% share, and
Japan Inc. Leads—and Where It Doesn’t.”) a failure to properly allocate talent. Videocon has a 19% share. The three largest
After Japan rebuilds a domestic market 1. Distaste for the middle and low- Japanese manufacturers—Sony, Panasonic,
ravaged by the 2011 earthquake and tsu- end segments. Most companies that are and Toshiba—collectively have a paltry 13%.
nami, its companies will need to grow—and breaking into emerging economies find Japanese companies do not seem to un-
quickly—in emerging markets. They won’t their sweet spots in these segments of the derstand the strategic importance of gain-
succeed unless they rethink their strategies market. But in recent years Japan’s compa- ing share while a category grows. With 80%
and overcome four structural challenges. nies have focused on the high end, a strat- of its sales coming from the low end in India,
It may be tough but it won’t be impossible egy that brings them success in established LG has created a platform for future growth.
to catch up with their rivals—as two Japa- markets. Although that segment is expand- Its extensive presence has given it bargain-
nese companies, Unicharm and Daikin, are ing in developing countries, competition is ing power with retailers and distributors
showing. fierce, and Japanese companies tend not to and has lowered its sales and marketing
utilize premium-brand strategies to differ- costs. These advantages will persist when
The Four Challenges entiate their products. the market shifts to more-sophisticated,
Japan’s multinationals have underesti- For example, inexpensive but clunky higher-margin devices.
mated the speed at which emerging econo- cathode-ray-tube televisions are still domi- 2. Aversion to M&A. Japanese com-
mies change. Smart local companies and nant in India and accounted for 70% of the panies shy away from, or are slow to un-
foreign multinationals respond quickly sets sold there in 2009, yet Japan’s elec- dertake, expansion through mergers, ac-
to these shifts, but most Japanese corpo- tronics companies concentrate on selling quisitions, and partnerships in emerging

May 2012 Harvard Business Review 3

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 The Globe
An analysis of Japanese companies’ sales and growth rates from 2005 to
2010 suggests that most operate only at home or in developed markets
A Typology of Corporate Japan overseas. Few are committed to emerging markets.

Low CAGR/Low Overseas Sales  High CAGR/High Overseas Sales

Domestic Developed Overseas Emerging Market

Market Focus Market Focus Beginners Champions
These companies aren’t Some leading Japanese These companies are growing These players already have
venturing out of Japan much. companies have a strong fast in emerging markets, but a strong emerging-market
presence in developed they’re playing catch-up. presence and are enjoying
Nissin Foods
Sapporo markets but aren’t growing fast growth.
House Foods
DAIHATSU in emerging markets. Fancl
Toyo Suisan Daikin
Kirin unicharm
NEC
Toyota Kobayashi Pharmaceutical
KosÉ
Nissan Asahi Breweries
Lion
Suzuki
Yakult
Mazda
Mitsubishi Electric
Honda
Ajinomoto
Sony
Source BCG

markets, even though that is frequently brewer (Asahi), has only a 0.4% market cause they underestimate the importance
the fastest way to gain economies of scale, share. of those markets, they’re reluctant to post
market share, distribution channels, and 3. Lack of commitment. Many Japa- high-ranking executives there. They also
capabilities. From 2006 to 2010 Japanese nese companies have simply not made the rarely offer competitive compensation
companies announced just 387 acquisi- financial or organizational commitments and promotion opportunities to local ex-
tions in emerging markets, compared with necessary to win in emerging markets. ecutives, and therefore have not built a
2,349 by U.S. companies, 998 by British, Their big investments are still in Japan, the strong cadre of talent with intimate market
555 by French, and 505 by German. This United States, and Europe. At the end of knowledge. Without local managers in key
go-it-alone approach has cost the Japanese 2010 the United States and Western Europe positions, any multinational has difficulty
growth in markets that are frequently dif- still accounted for 54% of Japan’s foreign customizing products to local conditions,
ficult to penetrate through organic expan- direct investment. responding quickly to changes in the mar-
sion. Decision making at Japanese compa- LG was relatively slow to build a con- ket, and breaking into new segments.
nies tends to be slow, and if they do decide sumer electronics business in India, enter- LG deftly balances locally recruited
to acquire, often the most attractive targets ing the country only in 1997. But it invested managers with talent from the home of-
have already been snatched up by other $300 million in two plants there during its fice. The head of its consumer electron-
multinationals. first 10 years and has announced plans for ics business in India and a few important
For example, Anheuser-Busch InBev a third. LG’s bets are paying off: In 2009 it functional executives are South Korean
(ABI), the world’s largest brewer, solidified succeeded in generating $3 billion in rev- expats; the rest are local, and they have
its presence in China through acquisitions enues in India—more than all the Japanese full decision-making authority except on
of or partnerships with a number of local consumer electronics companies com- key investments. LG’s managers in India
beer companies. These included Harbin bined generated in the country. Japanese have the authority to add local languages
and Sedrin—China’s fourth- and seventh- companies entered the Indian market in on setup menus, to use subcontractors for
largest brands, respectively, with 5.3% and the early 1990s, but their focus on the high basic assembly to lower costs, and to mod-
2.6% of market share—and allowed the end made them hesitant to make large ify television sets to address performance
company to expand its product portfolio investments. issues related to power fluctuations.
and its penetration of the middle and low 4. Lack of talent. A shortage of mana- In contrast, Japanese electronics com-
market segments. ABI is now the third- gerial competency, too, holds back Japa- panies are heavily weighted with expats,
largest brewer in China, with nearly 12% of nese companies in emerging markets. Be- who hold a majority of key management
market share in 2011, after China Resources
Enterprise and Tsingtao Brewery (in which
ABI has an equity stake).
In contrast, Japanese beer companies Many Japanese companies have
have little presence in the Chinese market,
where the local brands they have acquired
simply not made the organizational
have a much lower market share than those
of the brands ABI purchased. Yantai, the
or financial commitments necessary
largest local brand acquired by a Japanese to win in emerging markets.
4 Harvard Business Review May 2012
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positions and have a narrower scope of products, but they recognized the need low-price product and has reduced its 50%
authority than their counterparts at LG. At to reach the mass market. In Indone- price gap with LG and Samsung to 10% to
one famous Japanese electronics company, sia, Unicharm redesigned diapers and 15%. LG and Samsung together have a 50%
expats occupy 20 of the 350 positions in the sourced material locally to cut prices by share of the Indian market, but Daikin ex-
Indian market. At LG they hold only 15 of 40%; developed close relationships with ecutives are confident. They aim to capture
5,500 positions. traditional mom-and-pop retailers; and 10% of market share in 2013 (having had 5%
hosts events with wholesalers, giving in 2010) and to become the third big player
Getting It Right attendees volume discounts. Since Uni- by 2015.
As noted above, two Japanese multina- charm launched MamyPoko Pants Stan- They made deals. Mergers and ac-
tionals have started winning in developing dar in Indonesia, in 2007, its share of the quisitions are difficult to implement and
economies: Unicharm, a manufacturer of Indonesian diaper market has risen from integrate, especially in unfamiliar markets,
personal-care products, and Daikin, one 23% to 30%, with the gain largely wrested so they should be approached cautiously.
of the world’s largest air-conditioning from Procter & Gamble and major local But they are frequently the best way to ad-
manufacturers. According to the Boston players. vance in developing nations.
Consulting Group’s estimates, more than Daikin uses differing approaches in Daikin has been aggressive in making
80% of Unicharm’s overseas sales and more China and India. China’s high-end market acquisitions. In 2006 it spent $2.1 billion to
than 50% of Daikin’s come from emerging is large enough to provide decent growth acquire Malaysia’s OYL in order to acceler-
markets. potential, so the company entered at the ate growth in India, Russia, Brazil, and the
Unicharm tailors its products to devel- top to establish its brand and then lever- United States. In China’s middle market the
oping countries, targeting the middle class aged its presence to move down into the company faced a formidable competitor in
in second- and third-tier cities that other middle market. It now focuses on China’s Gree, a local giant with a 40% market share.
multinationals overlook. The company be- largely underpenetrated interior. In India Rather than try to compete head-on, Daikin
gan a serious push into other Asian markets the company originally tried to enter the established two joint ventures with Gree.
in the early 1990s. In 1995 it started mak- much smaller high end but discovered that Analysts have questioned whether Daikin
ing disposable diapers in China. When Uni- the competition from LG and Samsung was will lose control over key technology, but
charm enters a new market, it sends some too stiff, so it lowered its sights. Daikin has the strategy seems to be working: The com-
Japanese executives to transfer knowledge entered two first-tier cities and nearly two pany has leveraged Gree’s supplier base to
and its unique management practices to dozen second- and third-tier cities with a reduce its cost of goods sold by 20% while
the subsidiary, but it focuses on building
local expertise.
Today Unicharm holds the top share in
diapers in Indonesia and Thailand and the
second-largest share in China, competing
against Procter & Gamble, Kimberly-Clark,
and local players. Powered by an average
sales growth rate of 48% from 2006 to 2010,
its China business has become a major
source of its profit growth.
Daikin entered China in 1995 and began
local production the following year, focus-
ing on the B2B market to leverage its tech-
nological advantage. The share of Daikin’s
sales that come from overseas grew from
46% in 2005 to 62% in 2010, when China
alone accounted for 16% of sales overall.
Daikin is now looking hard at other emerg-
Cartoon: Martin Bucella

ing markets, primarily India and Brazil.

Unicharm and Daikin have addressed the
four structural challenges in similar ways:
They went after the middle mar- “Your drug test results show you aren’t taking any performance-enhancing drugs.
ket. Both companies have high-end Your performance review results show that maybe you should.”

May 2012 Harvard Business Review 5

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 The Globe

These companies must reexamine

their stance on the consumer pyramid:
What brought them success in the
past isn’t working now.
accessing Gree’s distribution, R&D, and ployees working on product development
quality-control systems. in China alone.
Unicharm, too, has actively pursued
acquisitions and partnerships in emerg- Some Japanese companies are already
ing markets: It has a joint venture in Saudi becoming more aggressive in their invest-
Arabia and recently acquired Diana, the ments in emerging markets. Although a

Business
second-largest player in Vietnam. serious financial commitment is necessary
They fully committed to emerging to succeed in developing countries, that
markets. Even though Japan is still the addresses only one of the four challenges.

Not As
largest market for Unicharm, the company These companies must also reexamine their
decided that it had to shift the focus of its stance on the consumer pyramid, recogniz-

Usual
organization, resources, and strategy if it ing that what brought them success in the
wanted to gain local insight and succeed. past isn’t working now. They must consider
It transferred some of its strongest market- acquiring or partnering with companies

Harvard
ing, R&D, and manufacturing executives to that have cultures dramatically different
developing countries and appointed one from their own. Some are already catching
of its top five executives to head its China on to this: In 2011 the number of overseas

Business
operations. Unicharm’s overseas sales have M&A deals executed by Japanese compa-
grown from ¥68 billion in 2005 to ¥159 bil- nies was close to its historical high of 455

Review
lion in 2010, and the share of those sales and included those conducted by Japa-
generated in emerging markets rose from nese brewers who are actively acquiring or
70% to nearly 90%, according to BCG’s partnering with local players, especially in
estimates. Southeast Asia and Brazil. These multina-
Daikin has set up an R&D center in India tionals must also find the proper blend of
to develop products tailored to the local local talent and homegrown expertise, re-
market. In 2011 it doubled the number of its gardless of how they usually do business.
sales and marketing outlets in China, and it Being a Japanese company in an emerging
is pushing further into the fast-growing in- market is different from being a Japanese
land markets. company in Japan.
They went local. Both Unicharm and Decades ago, when they entered the
Daikin have created strong local manage- U.S. auto industry, Japanese companies
ment platforms. Unicharm transferred figured out how to balance global capa-
more than 20 key executives to China and bilities with local needs. If they can adapt
has started to localize important decision- their capabilities in customer insight, talent
making processes there. It also moved sev- management, and general management
eral critical functions to China, including to overcome the hurdles they now face
product conception and planning, produc- in emerging markets, they will win new
tion equipment design, and sales planning. consumers on the world’s most important
Daikin has appointed a local execu- growth frontier.  HBR Reprint R1205J
tive to run its operations in India, has em-
powered local executives with product- Shigeki Ichii and Susumu Hattori are
development authority, and is targeting a partners and managing directors of the
hbr.org Boston Consulting Group in Tokyo. David Michael
high degree of product localization. The is a senior partner and managing director of BCG
The Revival of Smart
company currently has more than 300 em- in Beijing.

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