Restructuring in Japan: Unexpected opportunities for foreign companies

• Survey of 385 mainly German companies in Japan refutes the cliché about Japanese inflexibility
• Two thirds of respondents had restructured in the last ten years, 98% attaining all or most of their objectives
• 30% found restructuring had been easier than anticipated, 25% even easier than in Europe
• Two thirds of these managers think foreign firms have more freedom than Japanese
• Key to success is communicating effectively and keeping in mind that a company is considered a community

Despite the unstoppable force of globalization, the Japanese economy has kept up some of its unique features. One such peculiarity is the principle of life-long employment for a company's core workforce. Another is the close long-term bond with suppliers. When foreigners set up subsidiaries in Japan through acquisitions and mergers, they tend to adopt the prevailing structures and traditions. But the need to restructure is becoming increasingly urgent – also in Japan – as the global recession bites. Roland Berger Strategy Consultants and the German Chamber of Commerce and Industry in Japan (DIHKJ) have conducted a joint survey of senior managers from 385 European companies in Japan. They were asked about their experience with restructuring programs. The findings offer a few surprises: Most companies questioned have already restructured in Japan – nearly all successfully. What's more, the majority think they have far more freedom to make changes than their Japanese counterparts. Indeed, even the "peculiarities" of Japan's business environment need not be an obstacle to restructuring, but may even help. The point is to proceed sensitively, while not falling into the trap of excessive self-restraint.

"Many foreign businesses believe that restructuring programs still present major difficulties in Japan due to the idiosyncrasies of the country's economic system," says Dr. Dirk Vaubel, one of the study's authors and a Partner at Roland Berger Strategy Consultants in Tokyo. "Yet two thirds of the firms we questioned reported that they had restructured in the last ten years – with 98% of them saying they'd attained all or most of their objectives."

Job-for-life guarantee – a dwindling privilege

The participants in this up-to-date study by Roland Berger and the German Chamber of Commerce and Industry in Japan (DIHKJ) were asked to identify the external difficulties facing restructuring. The biggest problem was seen as legal obstacles to lay-offs under Japan's employment law. Japan's Statistics Bureau finds that not even 10% of Japanese workers are interested in changing to a new employer in the course of their life. So it might appear that no real paradigm shift has occurred with regard to flexibility. But this is misleading. What, then, has changed in Japan? The answer lies in the use of "non-core staff". Companies now employ a much bigger proportion of female, temporary and part-time staff. The irregulars can serve as a buffer that allows for flexibility in lean times. Their share of the workforce rose from 15% to 34% between 1984 and 2008. "Privileges like life-long employment are still regarded as normal in Japan. But in practice they only apply to smaller and smaller numbers of core staff," explains Martin Gottschlich, a Project Manager at Roland Berger and co-author of the study.

Japanese peculiarities and HR cost cutting

To continue offering their core staff a job-for-life guarantee and other benefits, Japanese companies find other ways to drive down their HR costs. They cut back on overtime, bonuses and new hires. They transfer their employees to other companies or within the group. And they replace core staff with flexible irregulars. "Transfers to other firms, usually to suppliers or subsidiaries, can be either a temporary or a permanent arrangement," notes Carsten Herbes, co-author and Roland Berger alumnus. "For many employees, moving from a secure job in the corporation to a badly paid job with a supplier does not so much prevent unemployment as delay it." Another typical instrument here is "voluntary early retirement". These schemes can affect employees even in their mid-30s. Early retirement is often a euphemism for dismissal. As Martin Gottschlich adds, "The settlements offered usually go nowhere near to replacing a proper pension."

Mitsubishi and Nissan – global players with global supply chains

The case of Mitsubishi Motors and Nissan shows how far companies in Japan under foreign ownership have adapted to global conditions, especially in their approach to sourcing. In the mid-1990s they began putting pressure on their suppliers to cut jobs, to offshore production capacity and to pay lower prices to their own suppliers in turn. The initiative gave the automakers big cost savings of up to 15%. "The same trend now applies to purely Japanese companies without foreign holdings. But the extent to which things have changed in Japan has still not been realized by many foreign firms," says Vaubel.

Unexpected opportunities for foreign businesses

There is clearly a growing willingness in Japan to give up specifically Japanese practices. Foreign firms can count on greater understanding for their restructuring needs. Almost two thirds of participants in the study thought they had more freedom than domestic companies. Only 17% saw themselves subject to tighter restrictions than their Japanese competitors. "On the other hand, foreign companies must be aware of the typical pitfalls," says Gottschlich. "All too often the foreign side takes an absence of open conflict as a sign of agreement by their Japanese staff. They expect a smooth rollout, but in practice the changes are held up or "sat out" by employees. The excuse given is usually "misunderstandings". This experience makes careful monitoring of implementation particularly important.

Managers must proceed sensitivity

"Restructuring in Japan isn't any more difficult than in Germany or the rest of Europe," argues Dirk Vaubel. "On the contrary, about 25% of our respondents said they'd even found it easier than in Europe. And for 30%, restructuring had certainly been easier than they'd previously imagined." The important point is to proceed sensitively. If a foreign company is aware of Japanese attitudes, it can even use typical behavior patterns creatively to help restructuring work. One of the most important points is to get the communication right: "For example, necessary lay-offs that are presented to staff in the form of "early retirement" offers will meet far less resistance. This arrangement allows both sides to save face." Another lesson is that a company can build trust by making a serious commitment to its business location. Building goodwill can even result in staff and trade unions supporting the rationalization goals with ideas of their own. This experience was reported by a foreign business engaged in joint-venture negotiations – after making a long-term pledge to the local workforce. "The Japanese company-as-community principle will then be applied to the new parent company," Vaubel explains.