Global markets are experiencing a period of remarkable change. Rapid globalisation has given rise to social inequality, and the COVID-19 pandemic has had a massive impact on economic activity throughout the world. At the same time, we are seeing the emergence of a tripolar balance of power consisting of the Chinese economy, the growth of which has benefited from globalisation; the US’s anti-China economic and diplomatic policies; and the EU’s pursuit of strategic autonomy. Japanese companies have also seen their management affected by these developments, and are now facing the need to respond to the geopolitical changes brought about by the decoupling of US-China economic relations. At the same time, the ESG (environmental, social and governance) movement is gaining momentum not only with Japanese companies but around the world. In view of these changes, the PwC Japan Group conducted a survey in August 2021 on trends in global strategy at Japanese companies, including issues and response measures related to this changing environment. In this report, we will provide an analysis of the survey results and attempt to shed light on the potential strategic paths that Japanese companies should take.
The first question in the survey asked about the respondents’ revenue forecast for their overseas businesses. Over half of the respondents replied that they predict a growth in revenue, with 20% predicting an increase and 33% a slight increase (Figure 1). While the economic impact of COVID-19 and the state of vaccination vary from country to country, this overall positive outlook in comparison to 2020, when many countries were on lockdown, can be partially attributed to the general economic recovery brought about by vaccination progress.
Figure 1
Question: How does your overseas business forecast for the current fiscal year compare to the previous fiscal year?
How do Japanese companies view their medium-term growth prospects over approximately the next three years, during this current phase of recovery from the pandemic? Our next question asked respondents about their medium-term market prospects in domestic and overseas markets. The result shows that approximately two-thirds of all respondents view overseas markets as a source of growth (Figure 2).
We also asked the respondents about their plans for their overseas businesses—specifically, whether they are planning to reinforce or expand their overseas businesses or downsize or even withdraw from them. A majority of 54% responded that they planned to reinforce or expand their overseas businesses, whereas only 5% indicated that they planned to downsize or withdraw (Figure 3).
Figure 2
Q: Do you see domestic or overseas markets as growth markets for your company in the medium term (approximately the next three years)?
Figure 3
Q: How would you describe your medium-term (approximately three-year) business forecast for your overseas businesses?
Next, the survey asked respondents to list the countries or regions that they see as promising potential markets for their companies. The US was ranked the highest, followed by China and then India (Figure 4).
We then asked the respondents to select the reasons for their choices. The most common response was, ‘Future growth potential of the local market’, followed by ‘Current scale of the local market’ (Figure 5). The US and China have large-scale markets, as well as large GDPs, and these results can be interpreted to show that many respondents expect these two countries to continue to lead the growth of the global economy. Finally, it is also worth noting that seven of the top ten countries and regions selected as promising markets are located in Asia, suggesting that a large number of companies are focused on Asia as a region to invest in going forward.
Figure 4
Q: Which countries/regions do you see as promising markets for your business in the medium term (approximately the next three years)?
Figure 5
Q: Why did you select the countries/regions that you did for the previous question? (Choose one or more.)
Next, we asked the respondents to select the countries and regions where they are considering downsizing, relocation or withdrawal in the medium term (approximately the next three years). China received the largest number of responses, followed by Korea and then the US (Figure 6).
We then asked the reasons for their choices. The most common reason was local political and economic instability and/or social insecurity, followed by limited growth opportunities due to downward trends in the local market (Figure 7). China ranked highly both as a promising market for business expansion and as a target of potential business downsizing, relocation or withdrawal. This suggests that many Japanese companies are facing the need to revise and transform their strategic business portfolio, and may be a sign that their view of the Chinese market has changed significantly in recent years. In the past, due to its lower cost structure, China has typically served as a ‘factory’ for the rest of the world, including Japan. Recently, however, multinational corporations have come to see China as a consumer market, and have transformed their value chains to include procurement and sales as well as manufacturing.
In addition, domestic Chinese companies are increasing their technical capabilities and competitiveness. These changes may be encouraging Japanese companies in China to relocate their low-added-value assembly operations to Southeast Asia, review their business portfolios to downsize existing businesses, and/or shift toward models that include not only manufacturing but also product development and design operations that provide higher added value. In this sense, the survey indicated a strong trend toward strategic business transformation related to China.
Figure 6
Q: In which countries/regions where you currently conduct business are you considering downsizing, relocation or withdrawal over the medium term (approximately the next three years)?
Figure 7
Q: Why did you select the countries/regions that you did for the previous question? (Choose one or more.)
The survey results thus far suggest that overseas markets are very important for many Japanese companies from the perspective of medium-term growth. In the second part of our survey, we focused on the issues Japanese companies are currently facing in their overseas business operations as the result of factors such as COVID-19 and US-China decoupling, as well as the factors behind these issues.
First, we asked respondents about the management issues they considered important for their overseas businesses (Figure 8).
The top answer was understanding of the market and competitive environment—in other words, market intelligence. This is likely because overseas markets differ from Japanese markets both in terms of the customers and of the competitive environment, making it necessary for Japanese companies to enhance their intelligence functions to enable them to detect market changes at an earlier stage. Although many companies have become more aware of geopolitical risks, compliance with existing laws and regulations is not enough. To adequately monitor and investigate such risks, companies need to be equipped with savvy intelligence functions that enable them to predict political and economic changes by understanding the underlying inter-governmental relationships.
To achieve this, many companies seem to be working to strengthen their intelligence functions, which contribute to improving the quality of information they collect and to the enhancement of strategic decision-making and risk analysis.
The second most common answer was the early detection and visualisation of fraud and embezzlement risks at overseas affiliates and subsidiaries. This response was particularly prevalent among companies that conduct business in emerging countries in Asia and other regions. This is likely due to the frequent occurrence of fraud and illegal activities, including embezzlement, at local businesses in emerging countries and the resulting need for Japanese companies to establish mechanisms to prevent and detect such activity.
The third most common answer was the hiring and training of local digital talent to propel overseas operations. This answer was especially prevalent among companies operating in the Americas and Europe. In Japan, as well, we have seen a steep increase in references to digital transformation (DX) in the media over the past few years, and more and more companies are working to advance their own DX initiatives within Japan. However, rolling out DX on a global scale seems to be a challenge on a completely different level. Companies’ infrastructure for training digital talent is hugely impacted by local political and economic policies, which makes it practically impossible to promote DX in a universal manner across countries or regions.
The fourth most common answer, establishment of production and supply frameworks to handle supply chain disruptions caused by changes in US-China relations, will be discussed in detail later in this report in reference to US-China decoupling and related issues.
Figure 8
Q: Which of the following management issues do you consider important for your overseas business? Choose the issues you consider most important (up to a maximum of five).
The survey results illustrate a distinct variation in the management issues that are considered important for each region. While the top three issues (market intelligence, hiring and training of local digital talent, and early detection and visualisation of fraud and embezzlement risks) were generally ranked as important in all regions, the survey also identified some issues that are characteristic of each region. For instance, the execution of strategic cross-border M&A ranked highly for the Americas, and post-merger integration (PMI) ranked highly for Europe, which indicates that companies operating in those regions are more focused on management issues related to M&A. In East Asia, including China, on the other hand, the management of cost increases and compliance requirements due to changes in local laws and regulations stands out as a region-specific issue.
Figure 9
Q: What management issues do you consider to be particularly important in the regions where you conduct overseas business? Choose the issue you consider most important for each region.
* The numbers of responses for each region varied due to differences in the countries/regions where survey respondents are currently operating. Therefore, multiple regions and countries have been grouped together to provide numbers of responses amenable to analysis.
How are the various issues between the US and China—particularly those related to trade, communications, and the protection, management and transfer of data—affecting Japanese companies? Our next survey question asked respondents about the impact of US-China decoupling on their business activities (Figure 10). The result shows that roughly half of all respondents either consider US-China decoupling to already have negatively impacted their business activities, or expect such a negative impact in the near future.
We also asked what kind of management issues the respondents’ companies are facing as the result of US-China decoupling (Figure 11).
Figure 10
Q: What level of impact does US-China decoupling have on your business?
Figure 11
Q: What management issues does your company face due to US-China decoupling? (Choose one or more response.)
The results show that 28% of respondents replied that they have not yet been able to identify measures or solutions for handling decoupling, and that 26% responded that they were unable to assess the degree of financial exposure on their own. This indicates that a considerable percentage of companies have not been able to take effective measures to address issues caused by US-China decoupling.
At the same time, a little less than 20% of respondents selected ‘Transformation of business models to prioritise US markets’, and approximately the same percentage selected ‘Transformation of business models to prioritise Chinese markets’. These respondents have likely been able to establish policies to address decoupling to a certain extent. We can also infer from these results that Japanese companies are polarised in their response to decoupling.
We also asked how companies are responding to supply chain issues with their overseas businesses related to US-China decoupling (Figure 12).
Figure 12
Q: How has your company responded to supply chain issues with your overseas business operations related to US-China decoupling?
The results show that a fair number of companies have already separated their US and China supply chains in response to US-China decoupling. However, 37% of companies are not yet working on or considering separation, which again indicates that Japanese companies are divided in their response to decoupling.
Thus far we have analysed Japanese companies’ awareness of their overseas businesses from the perspective of medium-term growth, as well as related management agendas and the status of response to those issues. In this section, we will explore the survey results related to the global strategies of Japanese companies.
We asked respondents about their companies’ positioning, particularly regarding their outlook on whether they can maintain their competitiveness in overseas business operations over the medium to long term (Figure 13).
Fewer than 20% of respondents answered ‘Yes’, and more than 60% selected either ‘Probably’ or ‘Probably not’, indicating a low level of confidence and a high degree of uncertainty. These results not only reflect the declining international competitiveness of Japanese companies on the technological front, but also the uncertainty of an era of VUCA (volatility, uncertainty, complexity and ambiguity) rife with rapid and unprecedented change.
Next, we asked which factors the respondents’ companies were focusing on in order to advance their overseas business strategy in this era of uncertainty (Figure 14).
Over 50% of respondents indicated the importance of overseas business expansion based on alliances with partners, including M&A. This seems to indicate that in these uncertain times, companies are investing greater management resources in their own areas of strength and are shifting to mutually cooperative strategies in which alliance partners can be used to bolster their capabilities in other areas.
The next most common response was the streamlining of overseas business operations by utilising external outsourcing. This likely reflects the increasingly sophisticated and specialised aspects of areas such as compliance and IT in recent years. It also seems to indicate that, based on the concept of ‘concentration in core competence’, companies have started to perceive the limitations of maintaining all of their business functions (particularly functions for handling routine administrative tasks) in house. Outsourcing routine functions such as bookkeeping and the filing of tax returns, as well as processes that require compliance with local laws and regulations, can enable a company to focus on strategic planning, while also increasing the resilience of business operations.
The third most common responses were ESG-related initiatives, which are discussed in detail below, and building value chains based on local production and local consumption. As we touched upon in the second on US-China decoupling, this latter response might indicate the view that localised supply chains could serve, for example, as an effective way to avoid or minimise the impact of tariffs and sanctions among the US, China and the EU. Efforts to localise supply chains in the automotive industry, where companies are shifting toward local production models, are particularly well known. However, we anticipate that an unprecedented and much higher level of local procurement and supply chain strategy, incorporating more localisation factors during the supplier selection process, will be necessary especially for businesses related to US federal budget projects or those subject to the Buy American Act, for example.
Figure 13
Q: Do you believe you will be able to maintain your international competitiveness over the medium to long term?
Figure 14
Q: Which factors do you believe will be important for future advancement of your overseas businesses? (Choose one or more response.)
ESG-related initiatives, which were the third most common response to the above question, have grown in importance as a management issue in recent years. In our next survey question, we asked the respondents whether their companies were incorporating any ESG factors into their global business strategies (Figure 15).
Whilst 25% of the respondents replied that they had not yet incorporated or considered incorporating ESG factors into their overseas business strategy, a majority of around 70% indicated that they had either already incorporated ESG factors or were considering doing so.
Next, we asked why these companies considered it necessary to incorporate ESG factors into their overseas business strategies (Figure 16).
ESG investments, for example, have been attracting investor attention in recent years, and ‘Maintaining relationships with overseas investors’ was the most common response. The results also indicate an increase in ESG awareness amongst customers and industry groups, as well as the advancement of ESG initiatives amongst competitors and within entire industries.
Figure 15
Q: Have you incorporated any ESG factors into your overseas business strategy?
Figure 16
Q: For what reasons have you incorporated or are you considering incorporating ESG factors into your overseas business strategy?
So, how are these companies incorporating ESG factors into their global strategies (Figure 17)?
Around 70% of respondents cited environmental considerations, including the reduction of CO2 emissions. As evidenced by the attention attracted by the UN Climate Change Conference (COP26) which was held this year in the UK, emphasis on environment protection has been growing year by year, and could be having a major impact on companies’ management strategies. Following this top response were contributions to local communities and improvements to the labour environment, which were the second and third most common responses, respectively.
Figure 17
Q: Which specific ESG areas do you focus on in your initiatives? (Choose one or more response.)
In this report thus far, we have analysed the survey results, specifically focusing on the management agendas that Japanese companies recognise in their global business operations and how they are responding to them. In our analysis, we were first able to confirm that many Japanese companies are focused on overseas markets and value their growth potential in the medium term. We also learned that companies are highly aware of the need to bolster their market intelligence functions, hire and train digital talent, drive digital transformation, and prevent fraud and embezzlement, particularly in emerging countries, and reconfirmed the unique characteristics of each region. The survey results also indicated that a considerable number of Japanese companies still have not been able to take effective measures to address the issues caused by trade conflict between the US and China.
Now, let us take a step back and examine the outlook for the world economy from a macro perspective. The table below shows the real GDP forecast for five major countries, and suggests that we will see a change in the real GDP rankings between now and 2023. Namely, China is expected to surpass the US in terms of real GDP and to become the world’s largest economy. We should not exclude the possibility that this changeover might be accelerated by the ongoing COVID-19 pandemic. India is also projected to surpass Japan and to become the world’s third largest real GDP. This forecast indicates that the ten years leading up to 2032 are likely to be a period of great change from the global economic perspective (Figure 18).
Figure 18
Real GDP
Source: Created by PwC based on data from IHS Markit
This forecast, alongside the survey results, indicates that Japanese companies will need to transform their business models to achieve medium-term growth through their overseas businesses during this period of great change. So, what do Japanese companies need to do in order to transform their overseas businesses and achieve sustainable growth? Our survey results indicate the necessity of the following three initiatives, in particular.
The overseas business operations of Japanese companies can take a variety of forms. To improve their decision-making speed and build localised business models suited to the local business environment, we believe it will be essential for these companies to engage in effective alliances, including M&A. With alliances come unique issues, such as those related to financing and management rights. However, building alliances with the right partners allows Japanese companies not only to leverage the experience and knowledge that they have accumulated, but also to bolster their market intelligence capabilities. Alliances can also be effective tools for executing cross-border M&A and PMI. For these reasons, we believe that the right alliances can be a powerful tool for solving problems related to market intelligence and M&A, which are common management issues related to overseas business expansion in all regions of the world.
To help their business operations succeed, companies should consider not only outsourcing to improve the efficiency of administrative tasks, but also outsourcing specialised and high-performance functions such as those requiring digital talent. Companies do not necessarily need to address the challenges that they face alone. The effective use of outsourcing, for example, can help solve problems related to the hiring and training of digital talent.
Many Japanese parent companies already list ESG initiatives as one of their top management agendas. When it comes to overseas business operations, however, there may still be regional discrepancies in the enthusiasm for and timing of ESG-related measures. Also this report derives no such data-based conclusion, we believe that ESG initiatives will continue to be an essential element of overseas business strategy going forward.
| Title | Survey of trends in global strategy at Japanese companies |
|---|---|
| Date | August 2021 |
| Method | Online survey |
| Scope |
|
Sample size |
305 people |
| Demographics | See below |
Notes:
1. Totals may not add up to 100% (due, for example, to only the top-ranking responses being used for aggregation or to the rounding up of percentages).
2. Please note that because each individual respondent was able to complete the survey anonymously, a single company may be represented by multiple respondents.
PwC Japan Group Global JBN Leader and Financial Service Industry Leader; PwC Global Board member; PwC Foundation Board of Trustees, PwC Japan
Partner, PwC India, PwC Japan
Wei Ku
Partner, PricewaterhouseCoopers Japan LLC
Yoshiteru Ito
Partner, PricewaterhouseCoopers Japan LLC
Partner, PwC Advisory LLC
Partner, PwC United Kingdom, PwC Japan
