Japan rising

We step into Kiyoshi Oike’s office, going over our questions in our minds—how big is your company, what are your expansion and marketing plans, how different is the India experience...Greetings exchanged, we settle back to start the interview. Before we can speak, though, Oike has a query of his own. “Have you tried Yakult?” Even as we frame our reply, an assistant hurries in with a tray of small plastic bottles. Oike looks on as we swallow the pale, fermented milk and then eagerly asks how it was. Good, we respond somewhat helplessly. “And it’s good for your health, too,” he says.

Oike’s enthusiasm for Yakult is understandable—he heads the company in India, after all. But his fervour to showcase his company’s product is also a telling sign of how Japanese companies are eager to make up for lost time in India—by understanding the Indian market and its consumers and also by increasing awareness of Japanese products.

Since India liberalised in 1991, the Koreans, Chinese and Taiwanese have dominated the market for goods that Japan is traditionally famous for. Although companies like Suzuki, Honda, Yamaha Motors and Sony have been here since the 1980s, it was non-Japanese companies like Hyundai, LG and Samsung that gave the Indian market its current shape. 

In 2006-07, Japan accounted for just 1% of total FDI coming into India. Since then, as the annual quantum of total FDI coming to India nearly doubled, FDI from Japan has also kept pace. (See: Growing, growing) The numbers are still tiny, no doubt, but consider this: about 74% of the total FDI from Japan since 2000 can be traced to the last three years. In 2008, there were 438 small and large Japanese companies in India. In 2010-11, there were 725. “Don’t compare with China, the story is of renewed interest in India. We will cross 1,000  very soon,” says Masaki Ida, Chief Director General, Jetro Indi The Free Trade Agreement between Japan and India signed in February 2011 has also given a huge push to Japan’s interests here: about 200 companies have set up shop in India since then, or are in the process of doing so. And Japan isn’t only about cars and electronics. Ida points out that about 40% of Japanese investment in India is in sectors unrelated to auto. 

Growing, growing

The share of Japanese firms in FDI has been increasing since 2008-09

Complacent, conservative, meticulous

“Ten years ago, who would have believed there would be so many high rise buildings here?” muses Tetsuo Yamaguchi, Senior Manager (Markets), Ernst and Young, standing in his office overlooking the lush green DLF golf course in Gurgaon. Yamaguchi, who came to India from Japan over a decade ago, says he often used to stop by with his friends for a few rounds of golf on his way back home after work. The golf course itself was surrounded by wilderness in those days. “A friend had an offer to buy a property for ₹15 lakh here,” he remembers with a wide smile. “At that time, I advised him against it. Now, I guess I’m wrong.” He simply didn’t think India would grow so fast. Incidentally, Yamaguchi’s friend disregarded his advice and is considerably richer for it. But Yamaguchi’s attitude wasn’t unique. 

For the Japanese, the big growth opportunity lay in China and other Asian countries, not India. And they have a slow-and-steady approach to new ideas—and that includes new investment options. “Japanese companies are conservative by nature,” agrees Yamaguchi. “They don’t get aggressive if they’re not confident about doing business in a country.” The lack of confidence in India stemmed from two factors, say analysts. Not only was the Indian economy opening up slowly and with obvious reluctance, in 1998 the country made its nuclear capabilities public. As the only nation to have experienced the horror of an atomic bomb, Japan was swift in condemning India’s nuclear tests and promptly imposed sanctions that were lifted only three years later. In short, Japanese companies generally viewed the region to be volatile. 

Japanese firms in India

74% of total foreign direct 
investment from Japan has 
come in the past three years 

Former Commerce Secretary GK Pillai, who was instrumental in initiating the comprehensive FTA with both Korea and Japan says that Japanese firms are traditionally very meticulous in studying a market. “They go right down to ascertaining food availability and to ensuring their kids have access to studying Japanese language in schools,” says Pillai, who gives the example of a company that spent three months scouting for a good Japanese restaurant in Chennai and then asking it to start a franchise in its SEZ. “Everything is discussed in detail in Japan,” confirms Takashi Yamaguchi, Joint CEO, Daiwa Asset Management (India). “That often makes the process of decision making quite slow.” 

That’s changing now. For the past few years, Japanese companies have been rushing abroad as industry back home hollows out. An ageing population has altered consumption patterns, while a soaring yen and the earthquake and tsunami last year only worsened already stagnant growth even as Japanese companies sit on cash reserves of ¥60 trillion. The result: aggressive overseas investments and M&A activity, especially in emerging markets like India. (See: A yen for acquisitions) 

A yen for acquisitions

Top M&A deals in India by Japanese companies-2011

Relearning the ropes

When Dentsu, Japan’s biggest ad agency, organised an ‘India-Day’ at Tokyo a few months back, the organisers were surprised at the turnout of 400 senior executives from 130-odd Japanese companies. In the interactions that followed, the most frequently asked questions were: which of their businesses should be brought to India; whether they should be niche players or take a top-down approach; how they could tackle challenges of doing business in tier 2 and 3 cities. “Clearly, Japanese companies do not want to be a small player in a big market,” says Rohit Ohri, Executive Chairman, Dentsu India Group. “What Japanese businesses have learnt over the years is that India is a scale-story.”

Obviously, getting to understand the Indian market is high priority. That’s a change from some years earlier, says BVR Subbu, ex-president of Korean carmaker Hyundai India. He points out Hyundai ended Maruti Suzuki’s domination of the small car market by offering the comfort of an air-conditioner even in the base model of its small car offering, Santro. “Japanese companies lost out on the volume game early on due to their arrogance while dealing with the Indian market. Their attitude cost them dear,” Subbu declares.

Auto giant Honda corrected its India strategy the hard way. Where Hyundai was targeting the mass market with its hatchback, Honda targeted the premium end of the market with its range of sedans—City, Accord, CRV and Civic. “The brand promise was woven around technology, durability, quality and styling,” says Jnaneswar Sen, Senior Vice-President (Sales and Marketing), HSCI. However, given the price competitiveness of the hatchback market, offering a product at a mass price—while keeping its brand promise intact—became a challenge. “It took us some time to recognise that India was a hatchback market,” reasons Sen. But even when Honda finally launched a hatchback—the Jazz, in 2009—it was priced at the top end of small car segment. Expectedly, volumes remained elusive. 

The stakes for Honda were high. So the auto maker again went back to the drawing board for developing an India-specific product. “Though Japanese management style is hands-on, the headquarters’ India focus increased dramatically during the development of Brio,” says a senior Honda Siel India executive. So much so that in 2009, the Indian arm got an interesting request from head office—to fly two Indian women employees across to the R&D Centre in Japan with loads of saris in their luggage. At the lab, Brio, the small hatchback car from the Honda stable, was in the works. Honda’s R&D engineers wanted to make a car that suited sari-clad Indian drivers and passengers. Back in India, scores of Honda engineers spent time with Indian families at their homes to understand Indian lifestyles and driving habits better. The result was Brio, Honda’s first made-for-India car, after 12 years of presence in the Indian market. It has a high level of local content (around 80%) and competitive pricing (₹3.9 lakh onwards) and is backed by a wider dealer and service network spread across 80 cities.

While Honda depends on Brio, Toyota Kirloskar Motor (TKM), the Indian arm of Toyota Motor, is banking on its two made-for-India products, the 3-box Etios and the hatchback Liva, to reach out to the mass market. The experience of developing a global small car from India has been a game-changer for TKM when it comes to product development, operations and marketing, says Sandeep Singh, Deputy Managing Director, TKM. The ‘Etios Effect’, as it’s called within the company, has seen a revamp of TKM’s sales and service network. India will now share its learning from the Etios project with other emerging markets in the Toyota ecosystem. “The experience has been transformational,” says Singh.

This comes 11 years after its India debut with its successful multi-utility vehicle, Qualis, in 2000, followed by the equally successful Innova. Like Honda, Toyota thereafter targeted the top-end of the market with products such as Fortuner, Land Cruiser, Camry and Corolla. It was only around 2006 that Toyota started looking to enter the compact car segment in India. The world’s largest automobile manufacturer first toyed with bringing its mini car subsidiary Daihatsu to India. When that did not work out, in 2007, it took a final call to come out with an India-specific low-cost car. 

Says Singh, “We may have taken time to understand, study and plan our presence in the Indian market, but once we took the call, we were faster than others when it came to implementing our decisions.”  

Plans are afoot to ramp up production capacity by three times from 110,000 units in 2011 to over 300,000 by 2013. The aggressive India play seems to be working. TKM’s market share in India is expected to double to 5% by end of 2011. Sales are likely to move from 74,000 units in 2010 to 140,000 units in 2011, riding on demand for Etios and Liva.  

The Indian way

The trick, as Japanese companies are learning, is to go local, while retaining the international tag. “India is a tough market,” says Oike. “It is important to Indianise a product and, at the same time, not let down on quality,” he says. Yakult’s global tagline ‘kiss of good health’ becomes ‘daily piyo healthy jiyo’ in India. Celebrity brand ambassadors—Bollywood stars and cricketers, mostly—are the favoured marketing tool for companies across sectors. 

Consider the list: Nissan (Ranbir Kapoor), Sony (Hrithik Roshan, Kareena Kapoor, Mahendra Dhoni, Deepika Padukone), Panasonic (Katrina Kaif, Dia Mirza) and FMCG company Unicharm (Prachi Desai), among others. Even Yakult has signed actor Kajol to endorse the brand. Though Yakult is marketed across 30 countries, India is the only one where it has a brand ambassador. “It was a key learning for us that brand alone does not work for mass appeal,” says Sunil Nayyar, Senior General Manager (Sales), Sony India.

Companies are also customising products to local needs and tastes. Honda and Toyota are prime examples, but there’s also Casio, which has introduced calculators that display numbers in lakhs and crores, Daikin, which makes air-conditioners that withstand voltage fluctuations and climatic variations, and Panasonic’s range of LCD TVs with enhanced speaker quality.

Sometimes, the effort has to go beyond product design. Yamaha, for instance, has recently launched a keyboard that can play 61 Indian musical instruments. But that’s not where its true effort in building the Indian business shows. When Yamaha set up shop here in 2008, the musical devices maker decided to deal and nurture the Indian market on its own, rather than sell through dealers who imported products from Singapore. It created a network of 500 dealers who are trained in playing Yamaha instruments and 100 service centres in India. Managing Director Akihiko Ikeya, who loves watching Hindi movies (Rockstar is his latest favourite), says 75% of his business comes from musical instruments, 50% of which comprises keyboards. 

Similarly, electronics major Sharp makes it a point to sell ‘made in Japan’ products rather than ‘made in China’. “Customers expect Japanese technology in Japanese products and they will be upset if it isn’t so,” says Sunil K Sinha, the first non-Japanese national to head operations in a region in Sharp’s 100-year-old history.

The attention to customers didn’t end there. A few months ago, Sharp took out full-page ads in national newspapers detailing its entire product range with an assurance from Sinha that he would personally follow unattended complaints. To show that Sharp meant business, the ad included Sinha’s mobile number.  

Culture rocks

In Japanese corporate culture, the success of large companies is critical, explains former Commerce Secretary Pillai. Toyota, Honda and Mitsubishi have played a crucial role in getting more Japanese companies to come to India. Mitsubishi is among the first post-reform companies to start a power manufacturing base in India (in collaboration with L&T).

Hitachi is also planning one here. Daiwa’s Yamaguchi says India is a challenging market for his company because it’s a new one and, “Everyone in Japan has heard of Daiwa. That’s not the case here!” 

The hierarchy in India is more structured. It’s not as if this does not exist in Japan; it’s just that the whole thing is a lot more pronounced in India. In Japan, a boss can speak to a junior directly even if the junior is not a direct reportee. Also, in Japan, there is too much thinking and planning. There is emphasis on reaching a consensus. “Yes, we are conservative and to us, that is not a bad word,” agrees Yamaguchi. “We take risks and we are great believers in calculated risks, but a large part of that conservatism has reduced in the last 15 years.” An MBA from the Virginia University, USA, Yamaguchi moved to India last July. For the first couple of months, he carried a lunch box to work.Now, “Lunch is only at the office cafe. I love chappati and curry.”

Ohri feels a key learning has been that India is a ‘striver’ country, where most people want to do well in life. In such a scenario, a top-down approach—which many early Japanese companies followed—may not be the appropriate strategy. Another big change has been the understanding that they have to be price-sensitive even while sticking to their quality focus. The experience of one prompts others to explore the options of setting shop in India, Pillai says. Oike seconds that. Japanese companies across industries—including food, eye drops and lip balm manufacturers—have visited Yakult’s Sonepat facility to understand its India experience. Jetro, too, has started an incubation centre for start-up Japanese firms that want to set up shop in India. Japanese firms are aware their arch rivals from Korea are ahead on the India story. Now, they’re hurrying to catch up.