iStock photo/Yongyuan Dai

In the late 1990s and early 2000s, as China opened up its market and joined the WTO, many Japanese companies were suddenly able to manage businesses in China with independent capital from joint ventures. A drive for localization began, but very few companies could actually achieve it.

This was the first wave of Japanese business in China.

The second wave took place around 2010. Following the 2008 financial crisis, China started shifting from export-driven economic growth (a factory economy) to growth driven by domestic demand (a market economy). During this shift, Japanese companies also rapidly increased the amount of resources invested in training local managerial personnel. The focus of this training was on mastering the fundamentals of management and marketing.

2017 is bringing a third wave. Companies that failed to catch on to the second wave are focusing their resources on training local management personnel, while companies that caught the second wave are entering a new stage. Chinese executives are becoming core members of management, setting subsidiary strategies and mid-term plans.

Although this change is difficult to observe from the outside, it is causing fundamental changes to the management of Japanese companies in China. It signifies a fundamental shift in the target market and strategy. Roughly speaking, until now, Japanese companies in China targeted the Japanese expatriate market. However, from now on and in the years to come, we will enter a new management phase in which Chinese executives target the local Chinese market. The network of Japanese companies in China will expand and deepen considerably.

This is a very positive change for Japanese companies, as new markets will develop, costs will decrease, and profits will increase. Although many Japanese companies have established themselves in China, the “world’s factory,” to manufacture products at low cost, China’s importance as a market will increase significantly in the years to come. There will be a shift from “made in China and sold throughout the world” to “made in China and sold in China.” Within China, sales and production will continue to integrate, and value chains will link up.

Personnel who can understand purchasing, manufacturing, logistics, sales and marketing, services, and R&D, as well as lead local staff, will be indispensable. More talent like this is becoming available. The focus of training will shift to simulating management-level experiences.

Getting to this stage has certainly not been easy. Although many Chinese executives were promoted in many Japanese companies, there were also some failures. Among these failures were significant losses due to new business investments and bankruptcies caused by the Japanese side’s limited understanding of Chinese processes.

Thus, although the transformation is hardly complete, Japanese companies have learned a lot from their failures. More tangible results will emerge in or after 2018, but it can surely be said that we are witnessing a major step forward for Japanese companies in China.

This article is translated and edited from the original Japanese.

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