Adapting to Changing Business Environment in Asia: China, Japan, South Korea,…

“The dramatic modernization of the Asian economies ranks alongside the Renaissance and the Industrial Revolution as one of the most important developments in economic history.”  ~Larry Summers

There is a common misconception that all Asian countries share the same Asian values, attitudes, and mindset. This idea is occasionally promoted by some Asian politicians who emphasize pan-Asian values when arguing against the incursion of Western influence into their countries.

When viewed in detail, Asian cultures share a variety of characteristics, but each distinguishes itself from the next through specific cultural elements and accepted business norms. Therefore, it is important to understand the cultural or business norms that are unique to a specific country or ethnic group, and then adapt one’s business approach to address such customs or norms.

Michael Witt, Professor of Asian Business-INSEAD Business School and Associate in Research-Harvard’s Reischauer Institute, is at the forefront of an emerging field called “Comparative Business Systems.” Witt doesn’t focus solely on macroeconomic trends, but how to capitalize on opportunities by understanding the differences between workforces in different Asian markets. And the differences, he says, are stark. “Everyone is playing ball,” Witt says, “but they’re playing very different games.”

It all comes down to understanding how people think. “Culture is not how you pick up the chopsticks,” says Witt. “Its how you make sense of the world.” In other words, the ways in which people interpret facts have a huge impact on how decisions are made and how businesses are run. One way to evaluate culture is to consider how business leaders view the role of the firm in their economy. In Witt’s latest research, he asked senior executives in both the U.S.and Asian countries why their firms exist.

Most Americans answered quickly that firms exist to “create shareholder value” — a mantra in the world at least since the early 1980s. But across Asian countries, Witt found, the answer to this simple question varies widely. How top management in China understand their world, for instance, differs starkly from the views of their counterparts in Japan. “When firms partner with each other, they are thinking about what the other side wants,” says Witt. “We’re adding a key piece of information: it depends on the country.”

Private firms in China exist to provide shareholder value–like their U.S. counterparts–but only for people at the very top. The function of the firm in the private sector in China is mainly about generating family wealth. Most of China’s new class of millionaires comes from profitable family-owned businesses. Thus, the idea of most of these businesses is to squeeze as much as possible out of the workers for the benefit of the owner, which is why many large Chinese companies are governed more hierarchically than their Western counterparts.

What foreign firms need to think about carefully when buying or partnering with a private Chinese firm is whether highly valued products are being created.If you’re thinking about taking over a Chinese company,” says Witt, “you need to think about what you’re really acquiring once the family is out of there. Executives in state-owned enterprises, which are ubiquitous in China, have their own set of rules and incentives.

These firms are considered the strategic tools of the state, and managers often view their positions as steps in their career within the communist party. The overriding objective for many of these managers, Witt says, is to supply resources and compete in global markets in order to propel the country’s economic reemergence. One risk of partnering with Chinese firms, Witt says, is that they might attempt “to find out how you do it and take your business from you in the long-term.”

Like in China, the purpose of the Japanese firm is not solely to maximize shareholder value–but Japanese firms commonly assume a more family-like focus and strive first and foremost to take care of their employees. This is often a major constraint for foreign firms considering operations in Japan–given the labor practices often don’t mesh well with those of Western counterparts.

Many Japanese firms entering a merger insist on retaining their entire workforce as a condition of sale. This focus often translates to weak shareholder rights. Japanese firms provide benefits to employees like stable employment and a good livelihood, but this practice can be a major deterrent for foreign firms. “If you acquire a Japanese firm,” says Witt, “you’ll find it to be extremely resilient to any changes you would introduce.”

South Korea, according to a number of corporate executives, resembles Europe more closely than it resembles either Japan or China. The South Korean executive’s primary rationale for the existence of corporations is the generation of profit, says Witt. Yet very much like China, the East Asian country boasts its own graveyard of Western companies who have tried to enter the market and failed.

Any Western executive considering work in South Korea should know first and foremost that South Korean labor unions are some of the fiercest in Asia. “When the unions are on strike, it’s basically war,” says Witt. In 2009, the World Economic Forum cited the difficulty of hiring and firing employees as the reason that Korea dropped so dramatically in its business competitiveness rankings.

The main thing to understand about a South Korean firm, Witt says, is that it has an eye towards its three major stakeholders — employees, shareholders, and society. If a foreign firm isn’t able to strike a balance and please all three stakeholders, then doing business in South Korea can be extremely difficult.

In an article by Paul Temporal & Rod Davies write:  In South East Asia, the world of corporate success and management development are poised in a potentially dangerous relationship. The fast growth rates of countries such as Malaysia, Singapore and Thailand are now on track to see the double figures of pre-1996.

We can still expect to see businesses bursting at the seams with opportunities for growth and development. However, recent economic history leads us to ask two questions. Firstly, “how far is the success due to managerial skill”, and secondly, “how can the human resource function cope with the need to develop top managers in greater numbers and more quickly than ever before”?

Top leaders are often made on the basis of “political” (in a corporate sense) and on a “who do you know” basis. These factors combine to create top management teams that are often unbalanced in terms of the skills and abilities of members.

Consequently these organizations reveal excellence in ideas and concepts but fail when it comes to delivering on time and realizing the practical implications of their work. Similarly, the top teams of many institutions are unbalanced having myriad’s of detailed, quantitative, and ‘practical’ people, but lacking the creative and ‘exploring’ skills that are necessary for business development.

“All people are the same … it’s only their habits that are so different!” ~Confucius

In the article “Looking East: The Changing Face of Business” by Alan Keir (HSBC) writes:  A fundamental and unprecedented shift is taking place in the global economy. As we see a very clear move from West to East; Asia and the Middle East continue to assert themselves as the brightest prospects on the global landscape; certainly, the rise—or, some might say, the re-emergence–of the East…

This changing economic landscape and the impact of Asia on the rest of the world are profound: China will be the biggest economy in the world by the end of the decade. Many might think this unsurprising; after all, the East has long been force in manufacturing, particularly goods which then make their way over to the West. However, some might not be aware that today, many Asian goods don’t go to the West, but to other Asian countries. InIndia, two thirds of exports now go to markets outside the US and Europe.

And last year, China became the largest importer of goods from Latin American powerhouse Brazil. We are seeing the emergence of South-South trade: globalization isn’t just a process of goods circulating from developing to developed countries; it crosses and connects emerging markets.

The developing markets of Asia offer a virtuous circle of economic growth, investment and economic growth, and it is crucial that Western business people open their minds to the possibilities offered by the rise of Asia. In the report called: ‘Looking East: The Changing Face of World Business’ draws on Eastern economies, political, social, and financial and consumer climate.

The report says “that while every business and every national economy across the world is being affected by this shift from West to East, we will, in the future, see the decline of the western-centric mindset, and a new way for the world to do business; quite simply, the West is at risk of losing leadership”. Bearing this is mind, in my view, two key questions remain:

  • Do businesses across the West truly appreciate not only the vast scale of this change, but more critically, the considerable opportunities it presents?
  • In a time when the West is most in need of an economic and financial boost, are business leaders ‘looking East’ quickly enough?

Western businesses need to ask themselves how they can tap into the fast-paced thinking in Asia and how they can work with the development of Asian economies. Forming partnerships that see India and China take state-of-the-art design to the mass market by recognizing global strengths and expertise is a big opportunity.

For many Western companies, the rebalancing of economic power towards Asia presents a more challenging, more competitive, more threatening business environment. But they also suggest a huge range of opportunities; the new economic confidence of Asia means new markets, new global wealth and new business….

According to a study by the ‘Boston Consulting Group’ (BCG) and ‘Wharton School’; as China’s economy evolves — growing larger, more complex and more competitive — so must the way that multinational corporations (MNC) manage their operations there. CEOs and other senior executives at MNC in the U.S., Europe and Asia are focusing more of their time and their companies’ resources on China.

Research by BCG suggests that the MNC that have had the most success in China are those whose top managers have gone out of their way to stress the importance of their China business in relation to their global operations. At the same time, the managers on the ground in China are also changing: Expatriates still hold the most senior positions in China, but Chinese locals are assuming a greater role in both middle- and senior-management ranks.

One of the key takeaways from BCG’s research is that MNC grow their China operations from the top down, not the bottom up. “It needs to be top down because you need to reallocate global-level resources and activities if you are to really make a commitment to China.  To accelerate investment successfully in China over time, you need to bend the rules that otherwise might prevail inside your company.

You need to be able to allocate more management talent, more senior time and attention, and more investment than the near-term financial returns might otherwise warrant. If the regular rules say you need a two-year payback from the day you set up operations, you have to understand that a China investment probably won’t achieve that goal.

Another important finding: Bringing the industry value chain to China and building for the long term are also important. “You can’t just have a little sales arm there. You’ve got to be ultimately customizing and modifying your products for the local market. And you need enough value-added activity, like R&D, so that you can establish closer relationships with local suppliers and demonstrate commitment to local customers”.

“The central drama of our age is how the Western nations and the Asian peoples are to find a tolerable basis of co-existence” ~Walter Lippmann

Business methodologies across Asia are not uniform; each country has a different management approach, for example: Japanese management considers ‘market share’ growth strategies, value maximization, and creates value by optimization.

Supplier relationship, close cooperation and coordination with the supplier which allows fast and flexible product development. Participation of workers is highly valued. The customers are as important as the competitors when scanning the business environment. Product design is linked to production, which generates value to the company.

South Korean management, despite their inspiration by the Japanese, they are somewhat different. For the Koreans the main characteristic is the close relation of the companies with the government which was copied from the Japanese. The ‘Chaebol’ structure is an adaptation of the Japanese ‘Zaibatsu’ model. The Koreans tend to be more individualistic, despite stressing the concept of group harmony, they do not practice the loyalty and consensus found in Japan. The family business in Korea is a very strong figure based in blood lines.

Chinese management tends towards the directive, with the senior manager giving instructions to their direct reports who in turn pass on the instructions down the line. The manager is seen as a type of father figure who expects and receives loyalty and obedience from colleagues. In return, the manager is expected to take a holistic interest in the well-being of those colleagues. It is a mutually beneficial two-way relationship.

Senior managers will often have close relations to the communist party and many business decisions are likely to be scrutinized by the party which is often the unseen force behind many situations.

Asia is critical for all multinational companies (MNC), but doing business in Asia is different then doing it elsewhere in the world. In order to be effective, you need to be aware of these differences. Building credibility, building relationships, and building trust are the imperatives for doing business in Asia.

Regardless of country or strategy, the key to success in Asia is identifying, recruiting, developing and retaining very strong leaders in each nation. The reality is that these leaders should be locals: Japanese for Japan, Koreans for Korea, Indians for India, and so on…  Even China should be Chinese for China, or more specifically, Mandarin speakers for China… And, above all else, the leaders must have a commitment to consistency, a strategic understanding of regional intricacies, and strong culturally-sensitivity…

“Asian countries produce eight times as many engineering bachelors as the United States, and the number of U.S. students graduating at the masters and PhD levels in these areas is declining” ~Mark Kennedy