Global Business Strategy Multinational Corporations Venturing into Emerging Markets

86 5 New Business Model as Response to Competition from Emerging Economies

modular, with components such as a CPU, input/output device, memory storage,
and other components created to be less interdependent. This enabled the develop-
ment of large-scale computers in a short period of time. This increase in system
development efficiency paid big dividends for IBM (Baldwin and Clark 2000).
However, the modularization of product architecture spurred the appearance of
companies that specialized in each type of module, including IBM spinoffs, causing
the downfall of IBM’s vertical integration model used in mainframe computers. On
the other hand, Intel developed a CPU for use in PCs—an act of destructive innova-
tion for mainframe computers. The progress in modular PC technology has been
dramatic, with mainframes currently being used only in applications that require
high-speed processing of large volumes of data. Many information systems have
been replaced by servers that have modular architecture.

On the other hand, as stated in the previous paragraph, automobiles continue to
be products with an integrated architecture. However, in electric vehicles, many of
the components required in traditional vehicles, such as fuel, gasoline engines, and
transmission systems, will become obsolete and the number of parts will drastically
decrease. In addition, interdependency between parts will also reduce, making elec-
tric vehicles modularized. As shown in Fig. 5.1, modularization triggers a horizon-
tal division of labor in industry structures, with finished goods being made by
assembling components. As a result, these products lack in performance shown by
products that have an integral architecture, but having lower costs as market compe-
tition increases. Further, assembling finished goods becomes labor intensive; there-
fore, the increase of developing countries often spurs further cost reduction. On the
other hand, with modular innovation, the pace of technological innovation in fin-
ished products becomes faster (Baldwin and Clark 1997). This results in reduced
time requirement for product performance to exceed the level demanded by custom-
ers, increasing the likelihood of destructive innovation and further price erosion.

Product modularization results in a more competitive marketplace for companies
from developed countries, including Japan. However, modularization in some types
of products, such as airplanes, is unheard of. An airplane may have between one and
two million different parts, making them more complicated than automobiles in
terms of the order of magnitude. The process of developing new airplanes is of high
duration. Airplane manufacturers procure parts from vendors only after completely
thoroughly analyzing their technological characteristics. Airplane product technol-
ogies have matured to a certain extent, with interfaces that divide the parts, more or
less fixed. However, the pace of performance improvements for each part differs,
requiring an overall balance in the assembly of an optimized product (Brusoni et al.
2001). Greater modularization allows a faster pace of technological innovation
because the modules encapsulate information inside and enable technological prog-
ress regardless of the status of other modules. However, internal encapsulation of
information is not performed in airplane manufacturing, which requires manufac-
turers to consider the overall product composition after first understanding the tech-
nology of products procured from external sources. Therefore, airplane
manufacturers and their parts vendors are loosely coupled. Airplane manufacturers

5.5 Infrastructure Exporting as a Systems Integration Business 87

are known as systems integrators because of their role in coordinating the overall
system in all its scale and complexity (Brusoni et al. 2001).

Even within industries where modularization has progressed, Japanese compa-
nies may be able to sustain by playing the role of a system integrator. With the
modularization of large computers with integral architectures, IBM’s share prices
fell drastically; however, IBM did not attempt to compete in the market with stand-
alone products. Instead, they paved the way for a new path as a system integrator.
Computer users have various IT systems needs. For example, a bank may wish to
implement a high security accounting system that can quickly process large amounts
of financial information. In this case, a system integrator will combine appropriate
hardware and software catering to the needs of the bank to provide a suitable IT
system to customers, thereby increasing the value of their products. IT systems are
industry-specific, and with its large customer base, analyzing the appropriate sys-
tem to meet an industry’s needs is one of IBM’s strengths. Know-how is a rare
management resource absent among young companies. Corporations from devel-
oped countries, including those from Japan, have better business experience than
companies from developing countries; similar management resources should exist
from such business experiences. By moving from a business model based on out-
right sale of products to one based on customer service as system integrators, will
enable these companies to build competitive advantage over companies from devel-
oping countries.

5.5 Infrastructure Exporting as a Systems
Integration Business

According to METI, infrastructure investment between 2011 and 2020 in Asia is
estimated at approximately USD eight trillion, of which 51 % is estimated to be
energy related, such as power generation; 31 % to be transportation related, such as
roads and railways; 13 % to be telecommunications related; and 5 % to be water and
hygiene related (METI 2010). For example, India, a region of high economic
growth, is only capable of meeting 80 % of its electricity needs during peak demand
times, resulting in frequent power outages in the country. India also suffers from a
lagging road and railway infrastructure, which remains an obstacle to manufacturers
entering the market. On the other hand, the capital requirement to invest in such
future infrastructure demands exceeds the amount that the Indian government has
budgeted, so expectations are high for private capital. For Japanese companies, this
presents a significant business opportunity, and infrastructure exports have been
highlighted in government growth strategies as an area that both the government
and the private sector should undertake. We examine infrastructure exports as an
example of system integration and evaluate ways to expand in developing
countries.

Infrastructure services, such as roads, railways, water, and sewerage, are public
utilities traditionally controlled by governments. However, in countries such as the
UK and France, these services are outsourced to private undertakings through

88 5 New Business Model as Response to Competition from Emerging Economies

public–private partnerships (PPPs). While the responsibility to provide these services
as public utilities may rest with the government, this arrangement is based on views
that management by specialized businesses is more efficient; moreover, this aids in
effectively incorporating taxes. Governments in developing countries lack the
expertise and financial resources to efficiently manage such large-scale public ser-
vices and mitigate the gap between infrastructure supply and demand. Thus, gov-
ernments aim to employ the PPP system for infrastructure improvement. PPP
businesses for infrastructure services often operate within a build, operate, and
transfer (BOT) system. Thus, government organizations outsource the building and
operation of infrastructure to private businesses, and subsequently, the ownership of
infrastructure is transferred back to the country at the end of the outsourcing period.
These are typically long-term projects that last 20–30 years and are high-risk busi-
nesses from the cash flow perspective, involving high expenditures in the initial
construction period; these expenditures are then made up for through revenues gen-
eration from infrastructure operation over the long-term. A special purpose com-
pany (SPC) is typically established to run a BOT business. There are many dependent
parties that profit from these projects—investors as the creditors that finance the
business, public organizations requesting the business, plant operators, and others.
PPPs for infrastructure services are large, complex systems that involve many dif-
ferent parties over a long period of time.

We now examine the characteristics of infrastructure businesses using a railway
transportation service as an example. In addition to hardware infrastructure such as
railcars, tracks, and train stations, providing transportation services for passengers
or freight via railways requires operational and signaling expertise. The systems’
components are not deployed using modules, but are instead designed in an inte-
grated fashion, through mutual collaboration. For example, the UK revised its rail-
way laws in 1993 and broad deregulation was implemented. Specifically, a public
organization called “RailTrack” was created to consolidate infrastructure manage-
ment, such as tracks, bridges, stations, and operational planning. Further, railway
operations and ownership and maintenance of rolling stocks were outsourced to a
private company. However, this arrangement caused various problems (Gayer and
Davies 2000). For example, a company managing a particular line decided that it
was appropriate to increase the speed of trains on that line to improve passenger
service—a change that required a signaling system be installed in the rolling stocks.
However, a leasing company, which leased to other railway operating companies,
was separately involved with the railcars. Changing the signaling system of certain
cars was inefficient for the leasing company, since, depending on the line, they
would be forced to use other cars. Accordingly, the leasing company did not agree
to the installation of this signaling system, and therefore the decision to increase the
speed of the line was postponed, with parties unable to respond to differing circum-
stances and provide appropriate railway services. Issues such as the train schedule,
signaling system, and rolling stock specifications form an integral structure, and an
overall balance must be struck through mutual collaboration. Issues arose in this
case when the operations providers were fragmented, and RailTrack was unable to
function as a system integrator.

5.5 Infrastructure Exporting as a Systems Integration Business 89

The railway business provides a stable service through a purchase order that
spans decades, requiring a flexible operating structure to respond to technological
progress and economic situations. Consequently, the rolling stocks and signaling
systems (i.e., the technological aspects) that comprise the service must be provided
in unison with planning and management that are in sync with customer and freight
transportation demand (i.e., the organizational aspects). Developing countries’
capabilities to operate local railways is low; thus, there is a great need for an inte-
grated system, from construction to transportation management, to be provided by
developed countries. Japan provides high quality services in both long distance rail-
ways, as seen in the Shinkansen, or bullet train, as well as urban systems, as seen
around Tokyo. Thus, the heightened demand for infrastructure in developing coun-
tries presents Japanese companies with significant business opportunities.

However, Japanese companies have had a late start in expanding the railway
business in developing countries that would oversee projects from construction to
management. The track record of Japanese companies to date consists primarily of
projects under a “standalone product model,” such as rolling stock’s delivery, and
few Japanese companies have been involved in railway operations. On the other
hand, Alstom, Siemens, Bombardier, and other Western railcar manufacturers are
aggressively chasing the package-style railcar business. In the 1990s, the EU used
an open access policy for railroads to create a “top and bottom” organization, sepa-
rating ownership and management of structures, such as tracks and stations, from
operation of the railcars. As a result, a public organization was responsible for the
infrastructure (the “bottom”) as with the case of the UK, while railcar operations
(the “top”) were outsourced to private businesses. Thus, train manufacturers man-
aged the railway service operations, becoming more competitive as railway service
companies. On the other hand, beginning in the 1980s, Japan split railway compa-
nies by region as a means of reforming the national railways; the railway systems
have been managed as one ever since, without “top” and “bottom” separation.
Therefore, railcar manufacturers have not been able to build a knowledge base for
operating railway businesses (Akizuki and Konagai 2010).

Accordingly, Japan Railways and private railway companies hold the key to
future overseas expansions for the Japanese railway business. Taking advantage of
Japan’s strengths in railway services, namely its safety and accuracy in train man-
agement, requires the partnership of Japanese manufacturers to provide an inte-
grated Japanese-style system as a package. However, the requirement of a high level
of customer service is possibly higher in developed countries such as the US or
Europe, rather than developing countries. A European team originally had the right
of first refusal for the Taiwan High Speed Rail (the so-called Taiwanese shinkan-
sen), which was designed as per European standards, but Taiwanese authorities
were nervous about the design’s earthquake resistance and ultimately chose Japan’s
shinkansen. This led to not only the purchase of railcars and management systems,
but also to the dispatching of train conductors from Japan Railways to provide guid-
ance. This is an example of Japanese companies providing railway services down to
the operational level. In this case, a Japanese system was selected because of its
geographical similarities with Japan’s mountainous terrain and earthquake

90 5 New Business Model as Response to Competition from Emerging Economies

frequency. Infrastructure businesses such as railway systems need design and operation
that respond to the geographical characteristics of each region. Therefore, it is
imperative for companies to refine their targeted regions and formulate a proposal
for such targets.

Moreover, Japanese companies must sort their technological (equipment and ser-
vices) and organizational (management know-how) strengths, and clarify how each
feature can enhance customer services. Package exports of an infrastructure busi-
ness cannot merely be expanding Japanese business overseas as-is, considering the
level of local customer demands and costs. Rather, companies need to filter the
expertise required for core operations in current services, and then match that to the
level demanded by the target region in terms of service levels and cost. In doing so,
they must also consider how to differentiate themselves from their Western com-
petitors and offer recommendations from the proposal stage that highlight the
strengths of a coalition of Japanese companies.

5.6 Conclusion

In this chapter, we discussed how Japanese companies can best create business
strategies while keeping in mind competition with local companies that emerge with
the rise of developing countries, from the perspectives of a “customer value” model
and product architecture theory.

The customer-centric model repudiates the corporation-leaning logic of “make
good products and they will sell.” It focuses on services provided by products and
displays the concept of rebuilding business models from the perspective of improv-
ing customer value. A product-centric business strategy that chases product func-
tionality and performance will lose effectiveness at a stage where product
performance exceeds the level of customer demand. In developing countries such as
China and India, “good-enough” product markets feature in a volume zone, and
have a lower-than-average level of customer demand compared with markets in
developed countries. Accordingly, competing with companies by using a strategy
that emphasizes performance and functionality is difficult, and companies should
instead design products and services from the perspective of maximizing customer
value. The value customers seek from products is derived as they use those prod-
ucts. Thus, companies must focus on services derived from products and create
business models that increase customer satisfaction across the product’s lifecycle.

Next, companies must formulate strategies that correspond to the characteristics
of product architecture. In particular, products with a modular architecture are easy
for companies in developing countries to catch up with and will dramatically
increase the competition faced by Japanese companies. In those situations, compa-
nies must consider strategies to improve the technology or differentiate products at
the modular level. In addition, companies may take the opposite approach and
become system integrators, providing valuable systems for customers by combining
multiple products. As can be seen in system integration services for information
equipment, customers have various needs, and providing turnkey services that

References 91

optimally combine IT systems is characteristic of integral architecture. This is
because of the expertise required to optimally combine these products to meet cus-
tomer needs, rather than the performance of the components themselves.

In this chapter, we discussed the export of infrastructure business packages, such
as railway services, as examples of system integration services. Providing railway
services requires knowledge of signaling systems and railcar management, in addi-
tion to that of hardware infrastructure such as railcars, tracks, and stations. The fact
that each system component is not modularized, but rather requires mutual collabo-
ration for an integrated design, is characteristic of integral architecture. Japan’s rail-
way services have a high level of safety and accuracy. However, competition among
railway operators is absent in Japan unlike Europe, and the passiveness shown by
Japan Railways and other private railway companies in pursuing overseas expan-
sion has caused Japan to fall behind in overseas expansion. Moving forward with an
overseas business will first require Japan’s railway operators to clarify the extent of
their expertise on system integration and management. With that done, they must
formulate proposals to countries and regions that make use of Japan’s strengths.

Open Access This chapter is distributed under the terms of the Creative Commons Attribution
Noncommercial License, which permits any noncommercial use, distribution, and reproduction in
any medium, provided the original author(s) and source are credited.

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India’s Neemrana Industrial Park 6
for Japanese Firms

6.1 Introduction

India is second only to China in terms of population. India’s economic growth since
the mid-2000s has risen to around 8 %, and is now considered as having a promising
future market. However, the driving force behind this economic growth is the coun-
try’s service industry, particularly its IT service industry. As compared to China,
India trails in its growth in the manufacturing industry. One reason for this gap is the
lack of infrastructure in India. For a manufacturing industry to grow, basic infra-
structure, such as power and water, and logistics facilities, such as roads, railways,
and ports for imports and exports, are required. However, infrastructure develop-
ment in India has not progressed as planned. Half of India’s population is under the
age of 25, resulting in a relatively low average age. Therefore, creation of employ-
ment opportunities for this younger generation is important. For this reason, it is
necessary to promote the manufacturing industry having a high employment absorp-
tion capacity. Infrastructure creation is thus an important policy issue for the Indian
government.

The Neemrana Industrial Park for Japanese firms was created with the coopera-
tion of the Japanese government and the state government of Rajasthan, situated to
the southwest of Delhi. This project has become a highly anticipated one even
within the Indian government. Industries in Rajasthan have focused on agriculture
and mining such as for marble and cement. The relative lag in industrialization has
motivated the Rajasthan state government to provide incentives to factories to set up
operations such as automotive industries having high employment absorption
capacity. On the other hand, India carries a relatively higher investment risk for
Japanese companies for a variety of reasons than do other nearby Asian countries,
such as China. These companies find themselves forced to make investment deci-
sions based on insufficient decision-making information, for example, the accessi-
bility of infrastructure such as power and water necessary to operate factories,
availability of efficient and appropriate workers, or the ability to adequately respond

© The Author(s) 2015 93
K. Motohashi, Global Business Strategy, Springer Texts in Business
and Economics, DOI 10.1007/978-4-431-55468-4_6

94 6 India’s Neemrana Industrial Park for Japanese Firms

to various central or local government regulations and directives. Maruti Suzuki and
Honda, which together comprise more than 40 % of India’s passenger cars, operate
factories near Delhi and have strong incentives to attract parts and materials manu-
facturers to India to strengthen cost competitiveness. Against this backdrop, Japan’s
External Trade Organization (JETRO) has taken the lead in outfitting the industrial
parks to lure, primarily, Japanese auto-related companies to India, thereby reducing
risks that individual companies otherwise could not handle.

6.2 Background of Neemrana Industrial Park

The Neemrana Industrial Park is located in the state of Rajasthan, and is approxi-
mately 105 km southwest of Delhi’s Indira Gandhi International Airport (a 90 min
drive). The Park faces National Highway 8, connecting Delhi and Mumbai. With the
establishment of Phase III (1,166 acres), it will be the first in India to be developed
specifically for Japanese companies (Fig. 6.1).

India has pursued industrial decentralization policies aiming to balance develop-
ment since the 1970s by providing industrial location guidance to underdeveloped
and unindustrialized regions. In addition to the Delhi Special Area, the center of
development since the latter half of the 1980s, development plans have expanded in
the neighboring states of Uttar Pradesh (UP), Haryana, and Rajasthan (in part), all
of which comprise the National Capital Region (NCR). These plans aim to relieve
overpopulated conditions in the capital and decentralize economic activities.

Fig. 6.1 Map of Neemrana Industrial Park and surrounding area

6.2 Background of Neemrana Industrial Park 95

The NCR is a planned area adjacent to Delhi and is based in seven centers
(Gurgaon, Faridabad, Noida, Ghaziabad, Sonipat, Greater Noida, and Meerut)
located along the National Highways radiating outward from Delhi. It is near con-
sumer markets centered in Delhi, and is a valuable base for the expansion of the
Northern Indian market. Being based near the capital has many other advantages,
such as better communication with government and other enterprises as well as
procuring excellent labor. The nexus of industrial development is the industrial
parks, and developmental corporations under the control of each state’s department
of industries are responsible for the purchase, establishment, and sale of properties
in the parks.

The Noida Business Park, situated in UP, is the largest industrial park in the
NCR, and has been under development since 1976. Phase I saw the participation of
smaller companies, while Phases II and III saw the participation of medium-sized
companies. Plans to proceed with medium- and large-sized factories in this region,
made up primarily of foreign auto makers, necessitated vast open spaces, and thus
the Greater Noida industrial park was developed at a distance of about 10–15 km
southeast of Noida. The foray of automakers into Greater Noida spurred the expan-
sion of the auto parts market, thus currently making this region the greatest agglom-
eration of auto industry companies. Suzuki (passenger cars in 1983) and Honda
(motorcycles in 1984) built factories in Gurgaon, Haryana, during the 1980s.
Gurgaon is located to the southwest of Delhi, making it possible to procure parts
from nearby areas of Noida and Greater Noida, resulting in this region also having
an agglomeration of auto industry companies.

In India today, Suzuki and Honda procure 80–90 % of parts locally, although this
figure applies only to finished vehicles. Japanese parts manufacturers in India that
supply to automakers, procure approximately 60 % of their raw materials interna-
tionally. It is becoming more difficult, even within India, to compete in price, as
low-cost cars such as the “Nano” made by Tata Motors are causing a stir with its
INR 100,000 (about JPY 200,000) price tag. There is an increasing necessity for
Japanese manufacturers to procure not only first-tier parts, but also second- and
even third-tier parts from local sources in the future to enable price competitiveness
through cost reduction. Automakers await the entry of second- and third-tier
Japanese parts suppliers into India, and when they do, these suppliers will need land
for factories. These parts manufacturers are oftentimes small- and medium-sized
firms, with low manpower or capital, making it difficult to independently enter the
Indian market. Thus, JETRO’s initiative is essential by kicking off projects to build
industrial parks for Japanese companies.

The issue is primarily location based. With sudden farmland expropriations to
develop industrial parks, land prices have risen in Noida and Greater Noida in the
state of UP. JETRO approached Faridabad and Gurgaon in the state of Haryana, but
industrial parks have already been developed in these regions, causing land prices to
skyrocket. Therefore, the state of Rajasthan, which had missed the development
wave, came under JETRO’s radar. Rajasthan was originally a kingdom (name
derived from “raja” or king and “stan” or country) with territories ruled over by a
maharaja (a powerful king), today it is said to have a citizenry with an earnest

96 6 India’s Neemrana Industrial Park for Japanese Firms

nature. Vasundhara Raje, of the Bharatiya Janata Party (BPJ), became the first
female chief minister of the state in 2003 proves the change. Chief Minister Raje
was very popular among those in the industry and had a reputation for being a wise
and decisive leader. Further momentum for industrialization was gained by the
aggressive efforts of the Chief of Industries in the Raje cabinet. The managing
director of the Rajasthan State Industrial Development & Investment Corporation
Ltd. (RIICO), a believer in the promotion of industrial development and having a
deep understanding of economic development in China, enabled agreements with
Japan to proceed smoothly.

RIICO created a Japan Desk, and appointed Anil Sharma as general manager.
Mr. Sharma notes the characteristics of the state of Rajasthan as an ideal location for
industry operations: “The laws and systems are well put together for India as a
whole, compared with developing nations. India is a democracy, and laws and sys-
tems don’t change according to the whims of government. Also, contracts are seen
as things to be honored. Next, we have an abundant workforce. There have been 76
engineering firms established in the state of Rajasthan in the last 15 years, and the
state has produced a tremendous number of IT and software-related companies. An
Industrial Training Institute (ITI) has also been established to develop factory work-
ers. Third, the electric power infrastructure is well developed compared with
Haryana and Punjab near Delhi. Finally, there is policy support. Much support is
given to lure industry here through RIICO.”

In regards to land, the plan has always been to sell property with RIICO as the
landowner, causing the appropriation to be free of problems often inherent with
complex land ownership. Another important factor was that this land was, for the
most part, a desert, and therefore not appropriate for agricultural use. All 1,166
acres of Phase III of the Neemrana Industrial Park sitting alongside National
Highway 8, in Rajasthan was provided as an industrial park for Japanese compa-
nies. In July 2006, the Japanese government requested the state government of
Rajasthan for (1) priority purchase rights for Japanese companies over a 2 year
period (which in 2008 was extended for another year) and (2) a reduction in the state
border tax (from 4 to 0.25 %). In that same month, JETRO and RIICO entered into
a memorandum of understanding (MOU) to jointly support a “campaign to facilitate
Japanese investment”. For the first 6 months, not many companies were convinced
to set up operations in Rajasthan, but with the Indian government’s focus on infra-
structure development to lure foreign (particularly Japanese) companies, the cam-
paign became a Japanese–Indian “Delhi Mumbai Industrial Corridor Project”
(DMIC); these efforts came to be more broadly known.

6.3 DMIC: Delhi Mumbai Industrial Corridor

The Neemrana Industrial Park was an early bird project part of the larger DMIC
project. It was an important joint Japan–India industry promotion proposal.

The DMIC “is a joint Japan–India project for a major industrial area connecting
industrial parts and ports via freight railways and roads between Delhi and Mumbai,

6.3 DMIC: Delhi Mumbai Industrial Corridor 97

for the purpose of promoting foreign investment and exports.” (JETRO Delhi
“DMIC concept explanatory material, December 2009”) By constructing approxi-
mately 1,500 km of new freight railways between the interior political capital of
Delhi and the industrial port city of Mumbai, it attempts to invigorate the Indian
industry by outfitting the railway as its key traffic route, by building industrial parks,
interior distribution facilities, and new ports along the railway corridor. Preparations
for a high-speed railway scheduled for completion in 2016 are underway, and the
Japanese government has committed toward contributing construction capital out of
Official Development Assistance (ODA) funds (Fig. 6.2).

This is a massive Indian project involving six states (Haryana, UP, Rajasthan,
Madhya Pradesh, Gujarat, and Maharashtra) and multiple government organiza-
tions (state departments of commerce, offices of chief ministers, planning commit-
tees, departments of finance, infrastructure-related departments). The DMIC
Development Corporation (DMICDC) was established in January 2008 as a pan-
state special purpose development organization. The development of the DMIC
Master Plan was completed in 2010, outlining a grand concept for constructing a
total of 24 industrial cities across the six states by 2030. With acceleration of urban-
ization among the Indian population, it is estimated that 40 % of India’s total popu-
lation will live in urban areas by 2030. Because of this, the DMIC Master Plan calls
for the job creation through construction of industrial parks and for the urban

Fig. 6.2 Map of DMIC and High-Speed Railway (Source: JETRO Delhi materials from DMIC)

98 6 India’s Neemrana Industrial Park for Japanese Firms

development of surrounding regions as residential areas. The DMICDC oversees all
these projects and assumes the role of developer in concert with state
governments.

In India, the management of land not owned by citizens is the responsibility of
state governments. Accordingly, actual urban development is carried out by state
governments providing land to Special Purpose Companies (SPCs), which finance
the DMIC project through funds to develop each urban area. Projects that have a
high potential for commercialization, such as electric power projects, are under-
taken as Public–Private Partnerships (PPPs), with the expectation of joint public
private financing. Projects of a more public nature, such as roads and water services,
are managed directly by the SPCs as public works projects.

However, these development plans are still in their conceptual stages, and fund-
ing will be necessary from the Indian government to proceed with future urban
development. Also, the 24 new cities outlined by the Master Plan are, for the most
part, to be established in vacant areas. It is unlikely that companies will set up
operations in industrial parks with low infrastructure, and with no companies in
hand to occupy an industrial park, private companies will be slow to invest in
infrastructure.

It will take considerable time to carry out development according to the DMIC
Master Plan, even though early bird development projects have been set up in
advance of finalizing the Master Plan. The Neemrana Industrial Park is one such
project, and a smart factory project bolstered by the Japanese government is also
moving forward, as explained later. Another early bird project is a free trade and
warehousing zone planned for construction in the state of Haryana by Mitsui
Bussan. This will create an inland container depot (ICD) to directly transport con-
tainers via high-speed railroads from ports to the ICD, and will enable customs
clearance in inland areas. There are currently two ICDs, Dadri in Uttar Pradesh, and
Tughlakabad in Delhi, although according to the DMIC Master Plan another ICD is
expected to be built near Neemrana. The high-speed railway will not only be used
to supply parts from Mumbai to Delhi, but is anticipated to significantly contribute
toward regional economic development due to its role as the key distribution chan-
nel connecting the two large cities of Northern India and the medium-sized cities
along its pat

6.4 India’s Industrial Infrastructure

Before explaining the details of the Neemrana Industrial Park, below is a quick
overview of the infrastructure necessary for setting up manufacturing sites in India.

First are roadways, which are one method for overland transport. Most national
highways, including National Highway 8 connecting Delhi and Mumbai, are two-
lane drives, on which trucks, motorcycles, auto rickshaws, bicycles, livestock, and
pedestrians commute. Accordingly, traffic is often congested and high-speed trans-
port is impossible.

6.5 Companies Operating at Neemrana Industrial Park 99

India ranks fourth in the world in terms of railway length, with a total of
633,332 km. However, only 28 % of these are electricity operated and only 25 % are
double-tracked. Freight cars travel at a speed of only 23 km/h and although travel
fares are low, freight shipments are expensive. Thus, it is cheaper to transport goods
by truck.

The Indian federal government manages 12 main ports: Kandla, Mumbai,
Jawaharlal Nehru, Mormugao, New Mangalore, Cochin, Tuticorin, Chennai,
Ennore, Vishakhapatnam, Paradip, and Kolkata. These ports together handle 464
mn tons annually. Ports under the jurisdiction of state and local governments are
termed as “non-major ports” (or “minor ports”). These ports handle a total of 160
mn tons annually. Northern India, which has no coastline, relies on container ship-
ments from gateway ports in the western part of the country. India’s western ports
handle 69 % of all container freight.

Stable electric power supply is another requirement for an industrial park. In
2010, electric power demand in India was 8.5 mn gigawatt-hour (GWh), an increase
of more than six percent over the last 5 years. Peak electricity demand is estimated
to increase as high as 120 GW, driving overall demand far higher than the country’s
supply capacity of approximately one mn GWh. In addition, issues related to high
transmission and distribution loss rates and theft of electric power decrease the elec-
tric power availability for those who need it, making power outages a frequent
occurrence. One reason for this is the strain on power company fee schedules. Fee
schedules are constrained by low (or free) rates for farmers, which are offset by
industries paying relatively higher fees, resulting in a cross subsidy of sorts.
Companies pay high power bills to run their factories, and work with the frequent
power outages and shortages. It is therefore common for large-scale factories to
have in-house power generation.

Due to low groundwater levels and water contamination, water shortages are
common in Northern India. In an attempt to limit the overuse of groundwater and
promote its restoration, the Indian government has asked all states to enact rainwa-
ter harvesting laws (regulations that mandate the return of water to nearby regions
if groundwater usage in that region is in excess of rainwater in the region). Regions
around Delhi have plans for constructing water desalination plants; however, there
are as yet no prospects for solving water shortages.

6.5 Companies Operating at Neemrana Industrial Park

As of March 2012, 14 companies have set up operations in the Neemrana Industrial
Park (Phase III for Japanese firms). While there were some cancelations by compa-
nies that had planned to set up, particularly during the economic downturn on
account of the Lehman Brothers bankruptcy, site sales in the Park have since recov-
ered is at almost full occupancy as of 2012. Companies in the Park (and those plan-
ning to set operations) hold regular meetings to share information, during which
they discuss issues and solutions for building and operating factories, as well as
compile requests to the state government and RIICO. These combined requests are

100 6 India’s Neemrana Industrial Park for Japanese Firms

more effective rather than an independent request. In addition, receiving approval
from the administration can be extremely complicated, requiring the use of a local
consultant at certain circumstances. Even in these cases, companies can share spe-
cific information on “predatory” consultants, quality of local consultants, and dif-
ferences in rates—information that cannot be obtained through JETRO—making
the approval process relatively easier. JETRO’s investment coordinator manages
negotiations with the development company regarding joint requests made at these
meetings. Further, JETRO’s Delhi office has opened a business support center that
provides advice on Indian investments by an investment coordinator and helps solve
a myriad of minor issues that arise from Japanese companies investing in India.

Below is an interview-based overview of the current status of three companies
(auto parts maker Company A, auto materials maker Company B, and air-
conditioning equipment maker Company C) engaging in business in the Neemrana
Industrial Park.

Background and Status of Expansion in Neemrana
• Company A ventured into India as a supplier of brakes, timing their entry to coin-

cide with the release of the Honda City 2008 model. Honda has a factory in
Greater Noida; therefore, the company began its search for a property in Noida
and areas to the south of Noida along National Highway 8, such as Haryana,
Manesar, and Bawal. The industrial park in Bawal was completely sold out as of
2006. The company received word that Phase III of the industrial park in Bawal
of approximately 1,100 acres in size would be developed, thus Company A sent a
letter to the development company, HISC (Haryana Industrial State Corporation),
requesting the purchase of 30 acres. However, the Company A did not receive any
response on the tentative time or price of purchasing the property. Subsequently,
the company heard of another industrial park being built in Neemrana in the state
of Rajasthan. It learned that the cost of property in Haryana was INR 1,800 per
square meter, while that in Neemrana was INR 970 per square meter. The com-
pany analyzed the distance factor (Manesar was 20–30 min away from Neemrana)
and lot size and decided to set up operations in Neemrana because Honda decided
to build a factory in Tapukara, located in Rajasthan as well.
• On Company B’s entry the Indian market, they selected a site near Delhi in the
north, near Honda and Maruti Suzuki, after considering Bawal, Manesar, and
Noida, but soon realized that the land suitable for an industrial park was scarce.
In coordination with JETRO and RIICO, the company was introduced to
Neemrana, an industrial park for Japanese companies, making Neemrana a
potential candidate as their location. They selected Neemrana as it was less
expensive and clearly defined property rights (provided by the state government
of Rajasthan). JETRO being the intermediary to Neemrana, Company B thought
of negotiations with the local government as credible.
• After thoroughly analyzing India to set up operations, including Mumbai, Pune,
and Bangalore, Company C found that Neemrana was the only place they could
acquire a substantial amount of property on which they could begin construction
in the near future. In addition, Company C’s Indian sales subsidiary was located
in Gurgaon.

6.5 Companies Operating at Neemrana Industrial Park 101

Factory Operations
• According to Company A, labor employment at Neemrana is inexpensive,

despite the expenses such as bus fares for training and commuting. Indian factory
worker capacity is not very different from its Chinese counterparts, and Company
A considers worker quality as satisfactory. The company uses local suppliers for
some raw materials, although most of it is imported from countries like Japan,
and aims to increase the percentage of locally sourced parts.
• Before beginning operations in its Neemrana factory, Company B produced
materials in Thailand, which it then supplied to a finished goods manufacturer in
India. These materials entered the country at the Mumbai port, which were then
transported by rail. The company currently imports most of their raw materials,
but finds the need locally procure so as to strengthen its future cost competitive-
ness. The company employs 46 Indians and six Japanese workers, and plans to
become more localized by gradually reducing the number of Japanese expatri-
ates. Ceasing operations according to Indian law is complicated for companies
with more than 100 employees, inhibiting the company’s progress as it considers
expansion.
• Company C procures almost none of its materials locally, but instead imports
them from countries such as Japan, Thailand, and China. Thus, the need to begin
sourcing them locally is felt; however, they find it difficult to do so because of
quality and other issues.

Risk Factors in Indian Industrial Parks and Expansion into the Indian Market
1. Company A was aware of the issues related with electricity, water, and sewerage

when it conducted a feasibility study on entering the Indian market. It had
already determined and created a budget to prepare and handle such issues.
• According to Company A, several reports must be filed with various depart-

ments of the Indian government, and the use of a local consultant is manda-
tory. Inquiries and requests are compiled during information sharing meetings
and are submitted to RIICO. A Japan desk has been created within RIICO,
which has proven invaluable by providing a one-stop service.
• Company A also notes that local negotiations are difficult for Japanese com-
panies, making it important to hire quality locals as heads of general affairs
and other positions.
• Groundwater was the biggest issue for Company A, the first company to
begin operations at the Neemrana Industrial Park. Water shortages were evi-
dent with the second company setting operations in the park, and conditions
on methods for drawing water, and the amounts they could draw became more
stringent. Company A negotiated with the government agency having juris-
diction over water through JETRO and RIICO.
2. Company B conducted a feasibility study before its entry into India, analyzing
labor management (union issues), infrastructure (e.g., focusing on electricity and
water issues, and incorporating in-house power generation into their plans), and
other issues.

102 6 India’s Neemrana Industrial Park for Japanese Firms

• Company B was not of the notion that water-related issues would pose a
potential problem. Because of no wastewater facilities, the company took it
upon itself to process its own wastewater, using it in a garden. It thus feels that
factories with large amounts of wastewater will have problems. Receiving
approvals for water was most cumbersome. Water harvesting regulations
required the company to replace groundwater used in excess of the amount of
rainfall. However, the region is a desert receiving little rainfall.

• Company B also reports of complicated taxation policies. Cases of double
taxation, as well as several different types of taxes, such as duties, state taxes,
excise taxes, and inter-state taxes, are imposed and are understood only by
Indian consultants. The company has trouble understanding refunds such as
incentives.

3. Company C also notes of a severe water-related problem. They were unaware of
rainwater harvesting before setting up operations; however, they are able to com-
ply with regulations because they own an expansive property. All companies in
the park have water-related issues, and are working in association with JETRO
to resolve them. As a result, RIICO is in the process of constructing a reservoir,
and the water stored there will be distributed to each company. In addition, in-
house power generation via diesel is expensive.

6.6 The Smart Factory Concept at Neemrana Industrial Park

The DMIC provides a tremendous opportunity to solve infrastructure issues and, as
a project of the Indian government supported by the Japanese government, is per-
ceived to be an opportunity to increase commerce in the surrounding area. In the
summer of 2008, Hitachi set up a business support center in Delhi to develop new
projects in India and also promulgated the concept of a joint energy center within
the Neemrana Industrial Park, a joint-use facility to supply electricity to companies
in the Park. Electric power supply is constantly constrained within India, and power
outages are common lasting for few hours during the course of a day. These circum-
stances have caused companies at the Park to move toward in-house generation,
although the costs to do so are high and can lead to an operational slow down. Also,
because water is necessary to run diesel-based, in-house power generation systems,
the joint energy center will serve to conserve water.

However, companies operating in the same region have already implemented in-
house power generation equipment, and so a proposal to install and jointly use new
gas turbine generators was not adopted. In 2009, Hitachi obtained funding from the
New Energy and Industrial Technology Development Organization (NEDO) for
research into the feasibility of an interchangeable system to supply stable electric
power supply to Indian industrial parks by implementing micro grids and smart
grids that would connect approximately 40 in-house diesel power generators (power
generating capability of 20,000 kilo watts) where companies may freely share
power generated by such a system.

6.7 Significance of This Case Study and Suggested Questions 103

Ultimately, technical challenges surfaced and it was concluded that deployment
of such a system was too complicated. However, Hitachi’s efforts have endured as
the smart factory concept in the Neemrana Industrial Park. This concept received
certification as an “outsourcing project for research on infrastructure export promo-
tion” from the Ministry of Economy, Trade and Industry (METI) in Japan, and with
Sumitomo Corporation acting as the managing company, feasibility studies were
conducted on three projects: (1) an electric power generation project, (2) a water
treatment project, and (3) a logistics project. The power generation project was led
by Kansai Electric, and with an anticipated increase in demand for electric power
caused by new companies beginning production within the Park, the company is
planning an electric and heat supply operation based on a co-generation system
using on-site gas turbines (or gas engines). The water treatment project was led by
Hitachi, which considered providing a treatment system for on-site wastewater. As
a result of the feasibility study, the wastewater treatment project was canceled due
to anticipated demand shortages required to make the system economically feasible.
However, groundwater levels at Neemrana are found to be dropping, and it is pos-
sible that the project would become economically feasible in the event that the
Rajasthan government imposed stricter water recovery regulations. The logistics
project was led by Nihon Express, which considered a proposal to make logistics
both inside and outside of factories more efficient via a milk-run system. However,
freight theft is common in India, and implementing the project was deemed as dif-
ficult because, among other reasons, procedures to handle theft of goods from mul-
tiple companies were complex.

METI outsourced this survey of infrastructure exporting under a system created
to promote exports of infrastructure packages, such as electric power and water.
Specific projects have been initiated as a result of the Neemrana feasibility studies.
Project entities are accumulating the necessary know-how, expected to be laterally
expanding to similar projects at other industrial parks. The DMIC is a large-scale
regional development project sponsored by both Indian and Japanese governments,
and latent demand for electric power and water systems within the Neemrana region
alone is thought to be significant. However, companies in the industrial park are
required to expand operations within the confines of their own production plans and
are not used to moving in tandem with implementing large, joint-use systems to
become more efficient. Accordingly, the project entities providing infrastructure
must make investments somewhat ahead of the curve, requiring them to forecast
demand and ascertain profitability by appropriate means.

6.7 Significance of This Case Study and Suggested
Questions

This case study was conducted to increase the understanding of operating environ-
ments in India from the perspective of manufacturers and cultivate a sense based on
actual examples that having friendly relations with local governments (in this case,
the government of the state of Rajasthan) is pertinent to expanding businesses

104 6 India’s Neemrana Industrial Park for Japanese Firms

within developing nations. Further, this case study highlights the support provided
by the Japanese government owing to the expansion of automotive parts companies
into India, thus influencing the industrial competitiveness of automakers.

Companies in the Neemrana Industrial Park are primarily parts and materials
suppliers to local automakers such as Suzuki and Honda; we began our discussion
with their expansion into India. However, there are many lessons to be learned from
this case study in regards to risk management during a foreign expansion. In addi-
tion, the smart factory concept used by industrial parks provides a basis for further
consideration of the possibility of infrastructure operations (for example, the com-
plex service operations case study in Chap. 5) in India.

Using this case study, the following questions can be considered to further
deepen the understanding of global strategy:

• The Neemrana Industrial Park was created in cooperation between the Indian
and Japanese governments. Why did both governments work together on this
project? Why is government involvement needed?

• What are the risks for building factories in India? How can companies reduce
their risk by locating their facilities within an industrial park, such as the
Neemrana Industrial Park?

• The smart factory concept was the subject of a feasibility study sponsored by the
Japanese government. Is this project feasible? Detail the feasibilities of electric
power, water, and logistics services.

• It is thought that infrastructure services (electric power, water, logistics, etc.)
provide extensive business opportunities in India. How should Japanese firms
participate in these opportunities?

Open Access This chapter is distributed under the terms of the Creative Commons Attribution
Noncommercial License, which permits any noncommercial use, distribution, and reproduction in
any medium, provided the original author(s) and source are credited.

Part II
Fundamentals of Strategic Planning

Alliance-Based Global Strategy 7

7.1 Introduction

When creating new operations overseas, companies must fulfill various require-
ments, such as providing benefits for local employees, finding sources for materials
and parts, creating logistics infrastructure including new distribution channels, and
gaining regulatory approval for the operations. Instead of doing these tasks indepen-
dently, it is more practical for companies to cooperate with local businesses. In
addition, companies can reduce their overseas investment risk through joint ven-
tures (i.e., joint investment companies) with local entities instead of creating wholly
owned local subsidiaries. Without cooperation with a local company, it becomes
difficult to smoothly launch new business operations in emerging nations such as
China and India, which have business environments that are very different from
those of advanced countries. As stated in Chap. 4, these emerging countries do not
possess adequate market mechanisms or economic legislations such as corporate
law, making business transactions unpredictable. Alliances with local companies
are effective in filling such institutional voids (Khanna and Palpu 2010). However,
expanding operations via joint ventures with local companies does have the disad-
vantage of diminished autonomy because of the intervention of local firm’s manage-
ment. Even when companies decide that increasing headquarters’ control in a
company-wide global strategy is an appropriate course of action, it is possible that
the strategy might not come to fruition because of opposition by joint venture part-
ners. In this chapter, we first analyze the option of a joint venture with a local part-
ner when expanding globally, and then present a formal discussion on strategic
alliances. A joint venture is a form of alliance; however, companies can also form
contractual alliances, such as licensing agreements and joint operating agreements.
In addition, many relationships with strategic alliance partners extend to the long
term, and alliance management skills after establishing a joint venture or entering
into an agreement have a tremendous impact on performance. In this chapter, we

© The Author(s) 2015 107
K. Motohashi, Global Business Strategy, Springer Texts in Business
and Economics, DOI 10.1007/978-4-431-55468-4_7

108 7 Alliance-Based Global Strategy

discuss the following three necessary management phases: (1) the alliance project
development phase, (2) the alliance structure design phase, and (3) the alliance exe-
cution phase.

Finally, we examine local government partnerships. As discussed in Chap. 5,
overseas infrastructure development operations often take the form of Public–
Private Partnerships (PPPs), in which a government and a private industry jointly
manage operations that have been the domain of local governments in the past. In
emerging countries, many Western companies aggressively participate in infrastruc-
ture operations such as water distribution, railways, and roadways. Moreover, there
has been a lag in Japanese companies’ participation; however, the Japanese govern-
ment has recently taken measures to encourage “infrastructure exports.” Currently,
these infrastructure operations in emerging markets have gained momentum from
both public and private sectors. As an example of an alliance with government or
public institutions, we discuss infrastructure operations and deepen our understand-
ing of management issues specific to PPPs which are different from alliances
between private corporations.

7.2 Wholly Owned Subsidiary or Joint Venture
with Local Companies

In this chapter, we discuss the options of establishing a wholly owned local subsid-
iary and creating a joint venture with a local company. In joint ventures, the influ-
ence of the local partner on management varies in terms of the share of investment.
As a general rule, if the parent company is the majority investor (i.e., 51 % or more
of the total investment), it can control the operations for those matters that can be
decided by the majority vote. However, critical management issues sometimes
require a two-third vote or an agreement of a super majority, during which the com-
pany cannot ignore the influence of a minority partner on the management.

Furthermore, in emerging countries, companies must exercise caution because
government regulations often cap the level of investment by foreign firms. For
example, in China’s automotive industry, foreign firms are limited to hold up to a
maximum stake of 50 % in a joint venture. Toyota and Volkswagen have entered the
Chinese market through joint ventures with local companies: Toyota partnered with
the FAW Group and the Guangzhou Automobile Group Co., and Volkswagen part-
nered with the FAW Group and the Shanghai Automotive Industry Corp. In emerg-
ing countries, private companies are not adequately mature, and joint venture
partners are often government owned. Toyota’s and Volkswagen’s joint venture
partners are government owned. Therefore, in such cases, companies negotiate joint
ventures with governments, making it difficult for companies entering the market to
firmly negotiate conditions. In this book, we discuss the cases of Hitachi Construction
Machinery (Chap. 8) and Shiseido (Chap. 10), and their entry into the Chinese mar-
ket, as well as Suzuki Motor Corporation’s (Chap. 14) entry into the Indian market.
In all of these cases, the governments in the host countries requested the companies
to enter their markets as joint venture partners. Investment regulations for foreign

7.2 Wholly Owned Subsidiary or Joint Venture with Local Companies 109

firms have recently begun to relax in emerging countries; however, even in cases
where companies enter a market via a wholly owned local subsidiary, it is best to
maintain good relations with the governments in the target countries.

We now summarize the strengths and weaknesses of wholly owned subsidiaries
and joint ventures with the assumption that companies entering a market can freely
choose either form. One advantage of a wholly owned subsidiary is the freedom of
management toward the local entity. In particular, when entering via a globally inte-
grated management as per I-R grid (i.e., “I”-type management) covered in Chap. 2,
a company must ensure that the local entity is given a certain degree of discretion in
management. On the other hand, when entering via a joint venture, companies can
mitigate their market entry risks. Suzuki Motor Corporation entered India in 1982
via a joint venture with Maruti Udyog with a total investment of 26 % in the venture.
This was the first case of a foreign company entering India’s automotive industry,
thereby placing Suzuki in a high risk situation. This is why Suzuki decided to limit
their level of investment. The Indian government, in fact, offered Suzuki to make a
40 % investment; however, Suzuki was adamant about maintaining the lowest pos-
sible share, sufficient for the company to exercise veto rights for important
management-related decisions (where a three-quarters vote was required).

In addition, when companies expand overseas via joint ventures, their likelihood
of having a smooth local launch increases. In the case of production facilities, such
as factories, companies do not have much to gain technically from companies in
emerging countries, but local sales necessitate the creation of customer relation-
ships and retail and distribution channels, which can be difficult without support
from local partners. Partnering with companies with already existing local channels
enables the rapid launch of operations. Furthermore, when government-owned
companies are joint venture partners, companies can make allies of the government,
which is necessary in running operations in emerging countries. This model has
many advantages for local operations.

When deciding between a wholly owned subsidiary and a joint venture, compa-
nies must weigh the advantages of “freedom in managing the local entity” versus
“local risk factors.” In other words, companies must balance between the expected
profit from the management resources of their joint venture partners (e.g., distribu-
tion channels or local government relationships) and the costs related to those
resources. For example, companies may discover that the retail stores and other
parts of the distribution channel held by the joint venture partner are inefficient, and
the benefits of using existing channels are low. In that case, local entities must create
new distribution channels and strengthen their sales capability, despite the possibil-
ity that the company cannot establish new sales routes as was hoped because of
opposition from existing retail stores. On the other hand, if a joint venture partner
has a powerful distribution channel, they are likely to demand more in return. How
should companies respond to joint venture partners that predicate cooperation on
receiving high-level product technology? Although this process is rather difficult to
achieve, entering companies must clarify the joint venture partner’s management
resources and the conditions of forming a joint venture, while both parties attempt
to disclose information to each another during negotiations. This is particularly true

110 7 Alliance-Based Global Strategy

for companies that speak different languages with different business environments.
Accordingly, entering into a joint venture with a local company can be an effective
means of reducing investment risks in the target country when a company signs a
joint venture agreement. However, companies must be careful of the increased risk
as compared with entering a new market as a wholly owned subsidiary.

The company’s ability to manage such an increased risk is significantly depen-
dent on its global business experience. The business environment, government rela-
tions, and the types of risks that are manifest are different in target countries.
Therefore, management style undertaken by the company in China should differ
from the one undertaken in India. Risk analysis in each country should not only
utilize various information sources and the advice of consulting firms, but also cre-
ate a knowledge base of experiences of companies to create an infrastructure that
makes the most of new project formulation.

In Chap. 2, we stated that Japanese companies often use a “globally integrated”
form of organization, compared with their European and US counterparts. However,
as a result, Japanese companies often enter markets as wholly owned subsidiaries
rather than create joint ventures. For example, according to the results of a 2005
survey on medium- to large-sized foreign manufacturing firms in China, the per-
centage of foreign subsidiaries was approximately 60 % among Japanese compa-
nies, and only approximately 40 % among Western companies (Motohashi 2011).
Japanese companies lack the ex post risk management ability required for joint
ventures, resulting in a higher percentage of wholly owned subsidiaries and increas-
ing the likelihood of companies not enjoying the benefits offered by joint ventures.
Typical Japanese companies striving for a transnational form of management orga-
nization must strengthen their local orientation, for which reinforcing the manage-
ment capability of joint ventures with local companies becomes critical.

7.3 Alliance Forms and Management Methods

For global businesses leveraging joint ventures, the economic value derived from
the joint venture is an important consideration. Joint ventures require win–win situ-
ations that are beneficial to both the company and its alliance partners. Alliances
include capital transactions with a partner company, as in the case of joint ventures,
as well as agreement-based relationships, such as licensing or joint operating agree-
ments, with local companies. In a discussion of whether a company should have a
joint venture or a wholly owned subsidiary as per the preceding paragraphs, a com-
parison is made for capital transaction between the case of an alliance with another
partner and that of external transactions where the acquiring company has an initia-
tive. When creating a local entity that is a wholly owned subsidiary, they can do so
via green-field investment or acquisition of a local entity. The latter is done as an
external capital transaction and differs from a joint venture such that the transaction
focuses on the acquiring company (Fig. 7.1).

Contract-based transactions sometimes require alliances with other companies
and involve subcontracting or outsourcing while maintaining company focus.

7.3 Alliance Forms and Management Methods 111
Capital Transaction

Joint Joint Wholly Company-
Operation Venture owned based
Subsidiar
License
Agreement/ Sub-contract-
Research ing and

Outsourcing

Contract Base

Fig. 7.1 Comparison of business transaction types

Regarding the differences between capital transactions (joint ventures) and con-
tract-based licensing and joint operating agreements, as was explained in the pre-
ceding paragraphs, the joint infusion of capital from a foreign and a local company
to create an entirely new local entity is characteristic of joint ventures. On the other
hand, a license agreement does not involve new entity creation, but is rather a way
to launch a new business in partnership with a local company on contract basis. For
example, a foreign company may provide the technology with which a local com-
pany manufactures products on the basis of a technology introduction agreement,
and sells them to the local market. In doing so, as defined by the license agreement,
the local company pays a certain percentage of revenue to the foreign company as a
license fee. Joint operations, such as joint development or joint production, are man-
aged by contract that decides capital splits and the attribution of results to achieve a
specific operational goal held by multiple companies. We divide the management
used to promote these alliances into three phases: (1) the alliance formulation phase,
(2) the alliance structure design phase, and (3) the alliance execution phase (based
on Kale and Singh (2009)).

The alliance formulation phase begins with a search for a joint operation partner.
For example, let us consider a Japanese consumer electronics manufacturer that is
intent on entering the Chinese market and is in search of an alliance partner. It is a
fact that operations in China will reduce the cost of production; however, for this
they will require the creation of distribution channels. The manufacturer realizes
that a local partner is necessary as this will not be feasible with company resources
alone. What are the requirements of an optimal partner? Having complementary
business resources are certainly important in forming an alliance. The Japanese
consumer electronics manufacturer possesses production technology with superior

112 7 Alliance-Based Global Strategy

low-energy requirement and functionality. However, from a price perspective, sell-
ing these products will be difficult in China, therefore requiring the manufacturer to
reduce production costs and trim functionality to localize the product. Furthermore,
the company needs to establish distribution channels in the Chinese market.
Integrating all of these requirements, we conclude that the optimal partner for this
company will be a large consumer electronics manufacturer with a high market
share and a certain amount of technical capability in China, thus creating a win–win
situation for both parties. Assume that the Chinese consumer electronics manufac-
turer asks for technology that it does not possess currently, such as energy-saving
technology, in exchange for its distribution channels. The Japanese manufacturer
must carefully analyze and respond to these demands with caution, for the risk of
losing the deal because of inadequate incentives to form an alliance with the foreign
company.

Selecting an alliance partner in this manner requires identifying business
resources that are complementary to both parties and finding a form of partnership
that is beneficial to both. However, it is often the case that neither of the two parties
fully understands the benefits of the alliance until it is operational. Thus, in addition
to the complementarity of the business resources, consistency of management styles
and a mutual commitment to the alliance is also important (Beamish 1987). For
example, in terms of management styles, companies may choose to focus on short-
term profits or build long-term businesses, or several other areas, such as respond to
environmental issues. When these fundamental management philosophies are
aligned, companies will most likely not hold adversarial opinions in their partner-
ship. In terms of commitment, it is ideal for both parties’ managements to commu-
nicate regarding the alliance and work constructively toward the goals of the alliance
when any differences in opinion arise.

Deal formulation takes place at the alliance structure design phase: should a
company create a capital partnership or an agreement-based partnership, and what
specifically should the contents of the agreement look like? Large capital invest-
ments by both parties of the joint venture require a strong commitment from both
sides to jointly manage the business; this form of alliance has the benefit of engen-
dering an awareness of both parties being “in the same boat” (Hennart 1988). In
addition, the rules for distributing results generated by the alliance are made clear
by the levels of investment made by each party. However, establishing the new joint
venture company entails a large sunk cost, making it difficult to rectify major course
corrections in managing operations and compromising flexibility. For example,
after the initiation of joint venture operations, if the economic environment changes
or results do not meet expectations, reaching an agreement to dissolve the joint
venture can be difficult. Even for a single company, the decision to exit an unprofit-
able business is difficult and takes time. In the case of a joint venture, the decision
must be made simultaneously by both companies.

On the other hand, efforts to create agreement-based alliances, such as those
based on license agreements or joint operating agreements, enable a more flexible

7.3 Alliance Forms and Management Methods 113

response to agreement changes or perhaps even dissolution of the joint operations.
However, this flexibility comes with limitations: neither party commits to the alli-
ance. For alliances, the fact that both parties work together to create new value is
critical, and often, alliances do not work if neither party is committed. In other
words, agreement-based alliances are effective when both parties have clear delin-
eations of responsibility and results are expected in a relatively short timeframe. On
the other hand, capital-based alliances with clear commitment from both parties are
required for building cooperative relationships over a long timeframe and across
broad areas.

Finally, we discuss the alliance execution phase, a period when the joint venture
is established or a license agreement has been entered into, and the alliance shifts
into the execution stage. Returning to the example of a Japanese consumer electron-
ics manufacturer entering the Chinese market, it is expected that the local company
alliance will extend into the long term. On the other hand, the Chinese economic
environment is rapidly changing, and urbanization, along with lifestyle improve-
ment among Chinese citizens, is resulting in a change in demand for consumer
electronics products. Accordingly, the process of going ahead with a partnership
may be accompanied by unforeseen circumstances after the alliance agreement is
signed, and appropriate corrections will need to be made through mutual discus-
sions to analyze the direction of the alliance. Trust between the parties is important
in this case. Repeating the process of negotiation, mutual understanding, commit-
ment to compromise, and the execution of compromise consistently are necessary
to build this trust (Ring and Van de Ven 1994). Alliance partners share highly con-
fidential information through this process, therefore, reducing the asymmetric
nature of information among the parties. This results in clearer compromises on
both parties and lesser indulgence in opportunistic behavior, which can be detrimen-
tal to the other party. Building trust among alliance partners is the most effective
means to reduce the risk of entering into an agreement—one of the demerits of joint
ventures.

So far we have discussed the management of different types of alliances; we
conclude with the overall countermeasures that a company may undertake. As pre-
viously stated, alliance management differs by country, region, industry, and type of
operation. Because alliances presuppose multiple parties, building effective rela-
tionships greatly influences partnership results. Thus, using company experiences
and organizational efforts in a potential alliance is critical toward the overall
improvement of the alliance. Building alliance knowhow organizationally requires
a department specialized in alliance management (Anand and Khanna 2000).
Western companies, such as Hewlett-Packard, Eli Lilly, and Philips, have estab-
lished such departments, thereby increasing the success rate of their alliances (Kale
and Singh 2009). In Japan, efforts are being made to create such departments that
focus on alliance management, particularly among pharmaceutical companies;
however, Japanese companies still lag behind Western companies. Creating a dedi-
cated alliance function at the firm is an effective means to accumulate knowhow
from existing partnerships and to use this knowhow in new potential alliances.

114 7 Alliance-Based Global Strategy

7.4 Governments as Alliance Partners in PPP Infrastructure
Businesses

So far we have examined alliances between private corporations. This section ana-
lyzes the issue of partnering with local governments as a means of expanding glob-
ally. Using the example of PPPs, which mainly deal in infrastructure-related
projects, such as roadways, railways, and waterworks, we summarize the salient
features of partnering with governments and the management involved in such
partnerships.

In Chap. 5, we discussed the systems integration business in the context of infra-
structure exports. For example, providing rail transportation services for people and
freight requires the knowledge of signal systems, railcar management, and other
operational factors, in addition to hardware infrastructure such as rolling stocks,
railways, and stations. This, in turn, requires the creation of an overall consistent
system that combines all of these elements, which are fine-tuned to function with all
other parts. In addition, we discussed the necessity of systems integration, focusing
on technical peculiarities to build such a large-scale system. In this chapter, we
focus our discussion on the organizational aspects of managing actual operations, in
particular, the partnering of public and private sectors to facilitate a successful
venture.

Figure 7.2 presents a typical PPP business organizational structure. First, the
government or public institution (in the case of railways, a business management
agency such as a nationalized rail company) is the primary entity behind the public
works service. The government (or public institution) enters into a PPP agreement
with a special purpose company (SPC) established specifically for the purpose of
maintaining the infrastructure—here both public and private entities manage the

Partner

Government Investment (multiple)
PPP Agreement Investors
Public
Institutions (e.,g.

Rail Companies) Financing (multiple)
Project Financial
Special Purpose
Company (SPC)

Financing

Regulations Service Purchasing (construction,
Monitoring (e.g. Provision equipment, etc.)

Users Suppliers

fare approvals)

Fig. 7.2 Structure of PPP (Public Private Partnership)

7.4 Governments as Alliance Partners in PPP Infrastructure Businesses 115

business. One form of PPP agreement often used is the build, operate, and transfer
(BOT) method. In such a method, the government subcontracts the building and
operation of infrastructure, after which the private company transfers ownership of
the infrastructure back to the government once the business is complete, over an
extended period of 30–40 years. The business is operated according to the agree-
ment entered into with the government, thus providing rail or other public services
to ordinary users. The company is subject to safety regulations, fee approvals, and
other forms of oversight. Many SPCs involve joint ventures with multiple compa-
nies, in which an investment company provides the capital and the banks provides
the project finance. In addition, the SPC orders construction services and equipment
from construction companies, equipment manufacturers, and other suppliers to cre-
ate the infrastructure. On the project’s entry to the business operation phase, the
SPC subcontracts business management to specialists. Infrastructure companies
such as Alstom and Bombardier in the railway business, and Veolia and Suez in the
waterworks business are suppliers to specialty firms such as equipment manufactur-
ers and business operation specialists; these infrastructure companies are often SPC
investors.

When providing infrastructure and public services, the government (or public
institution) normally places orders directly with suppliers in the form of public
works projects, after which public institutions such as national railway or highway
companies operate the infrastructure. However, in PPPs, capital procurement and
operational risk are shared by both parties, and performance is often improved.
Particularly in emerging countries, infrastructure demand exceeds public funding,
and government agencies lack the necessary experience to operate the businesses.
Thus, PPPs with their private specialty technology and knowhow are analyzed with
high expectations. PPPs are a form of alliance between public and private sectors.
Note that this is different from the subcontracting and outsourcing shown in Fig. 7.1.
In the case of public works projects, the government decides the infrastructure spec-
ifications, and private companies place bids for the business, making these projects
similar to outsourcing or subcontracting. In comparison, PPP agreements promote
innovation within private companies in the process of infrastructure creation through
business operation. Such a framework is created with the intention to increase pub-
lic services’ return on investment (ROI). This does not imply that governments
completely allocate the provision of public services to private companies. The gov-
ernment must ultimately provide a stable, high-quality service to citizens, and mon-
itor the activities of private companies, while being involved in the operation of the
business as required. Alternatively, where continuing a business led by private com-
panies has become difficult because of unforeseen changes in the economic envi-
ronment at the time when the PPP alliance was created, government institutions can
support the business itself through policy benefits and funding. Between public
institutions that aim at increasing public welfare and for-profit private corporations,
there are, to a certain extent, contradictions in policy in the operation of the busi-
ness, but ultimately, creating a relationship of trust between public and private sec-
tors to establish a win–win situation is critical. This feature has a lot in common
with alliance management between private companies.

116 7 Alliance-Based Global Strategy

There are general risks in the construction and operation of infrastructure proj-
ects, such as economic changes and disasters, as well as business-specific risks such
as construction delays or a decline in the number of users. On directly operating the
business by a country, these risks fall on the country itself; however, in case of a
PPP, the risk is shared between public and private sectors. The value added of PPP
businesses arises from risk-sharing optimization. Figure 7.3 summarizes the various
risks associated with infrastructure projects that are to be assumed by government
(or public institutions) or the main driver of the business—the SPC. The overall
project is divided into the infrastructure creation stage (engineering, procurement,
and construction, (EPC)) and service stage (operation and management, (O&M)).
In the EPC stage, the government assumes the risk of land acquisition and delays in
administrative procedures. First, system design occurs before the EPC stages. This
design is formulated by specialists and is based on the government’s business goals
in terms of the public service, its scope, and service levels. The risk of design defi-
ciencies is, of course, borne by the government. On the other hand, capital procure-
ment for EPC is done by the SPC, and finance risk should be borne by the private
sector. As for procurement and construction, necessary work should be given to
equipment manufacturers and construction companies. For example, construction
risk, such as delays in construction, should be borne by the private sector (the SPC
and subcontracted construction company).

Once the infrastructure is in place, projects enter the O&M stage, with risks of
administrative procedure delays, which push back the launch of services, and politi-
cal risks that originate from regulatory and policy changes during the term of the
PPP agreement. Therefore, these risks should be borne by the government. On the
other hand, the SPC that operates the business should undertake the responsibility

EPC: Engineering, O&M: Operation and
Procurement, and Maintenance

Construction

Government Land Policy & regulatory
SPC acquisition/Delayed changes/Delayed

administrative administrative
procedures/Design procedures

deficiencies Offtake
inflation/Disasters
Finance
Contractor Finance
management (e.g., Asset & technology
construction delays)
corruption
Contractor management

(e.g., service quality)

Fig. 7.3 Risk sharing between public and private entities

7.4 Governments as Alliance Partners in PPP Infrastructure Businesses 117

of stably providing a certain level of service during the term of the PPP agreement.
To do so, the management of the infrastructure service may be contracted to a spe-
cialty company, in which case the risks in that agreement should be borne by private
companies. Asset and technology obsolescence and financial risk should be assumed
by private companies in principle. In the O&M stage, depending on the businesses,
both public and private sectors must consider the optimal sharing of risk. For exam-
ple, the risks of inflation or disasters cannot be controlled by either public or private
entities. It is normal for both parties to clearly delineate how these risks are to be
shared in the PPP agreement. Furthermore, using disaster insurance externalizes
disaster-related risks, and the fees can be added to the operating costs of the busi-
ness. Off-take risk (from users) is important during the O&M stage. However, the
risk size depends on the nature of the infrastructure. For example, governments or
public institutions enter into long-term service acquisition agreements for wastewa-
ter treatment businesses because, generally, the amount of wastewater to be treated
does not overly fluctuate, thus creating a marginal off-take risk. On the other hand,
in a railway business, the number of passengers, as well as long-term changes in
them, cannot be accurately forecasted. In addition, fares must typically be approved
by the relevant government agency; therefore, it is likely that such fares will be
offered at subsidized rates—typical for a public service. Accordingly, these kinds of
services have a high off-take risk. The off-take risk in railway services can become
too large, and it is typical for governments to undertake a certain amount of risk as
part of the PPP agreement, with provisions for government subsidies on fares when
the number of expected passengers drastically falls (so-called ridership clause).

Emerging countries do not often have a legal code governing PPPs, and govern-
ment agencies lack such knowledge. This sometimes causes negotiations for agree-
ments and business operation to go awry. There are also great political risks due to
agreements being trashed by political instability or regime changes. These political
risks must be accepted as part of conducting business for private companies over-
seas, and are likely to be the greatest risk factor in the infrastructure business within
emerging countries. However, PPP businesses must not exclusively be perceived as
businesses between governments and private companies; there is an analytical
framework that accounts for the intent of service recipients, such as civic action in
the partner nation (Kivleniece and Quelin 2012). This framework treats civic actions
referred here as a force that confronts political risk with a bias toward the govern-
ment’s objective of maximizing public interests in politicians’ election cycles. In
democracies such as India, where one can relatively depend on the power of civic
action, it is possible to minimize political risk by providing quality public services
to local residents. Corporate social responsibility (CSR) activities are another effec-
tive means to this end.

That said, in emerging countries with little government experience in PPP busi-
nesses, one cannot depend on risk sharing, as shown in Fig. 7.3. Generally, in these
cases, it is appropriate to have an agreement that offers a high degree of indepen-
dence to private operators, which, to the extent possible, does not allow interference
by the partner government through monitoring of the business. However, in such a
case, the private company must bear a larger share of risk. Accordingly, the needs

118 7 Alliance-Based Global Strategy

may be high for PPP businesses in emerging countries, but in reality, the risks are
too high for private companies to independently undertake, and therefore not many
companies enter the infrastructure businesses in these countries. Japanese compa-
nies, in particular, have a strong track record as equipment suppliers, such as water
treatment membranes for water projects and train cars for railway systems, but have
not participated as operators of these businesses. Infrastructure exports have been
prioritized in the government policy and measures have been taken to strengthen the
trade insurance system and utilize official development assistance (ODA). However,
conducting risk analysis for projects or countries and painstakingly negotiating the
required risk sharing with the partner government agencies is what is required the
most. In doing so, companies must select businesses that are in high demand in
specific countries to develop compelling proposals that have merit for these coun-
tries too. It will also be effective to partner with local companies or companies in
countries, such as Singapore, that are working actively on expanding infrastructure
businesses in India and China.

7.5 Conclusion

In this chapter, we discussed alliance strategy and management for global busi-
nesses. The creation of a local entity presents pros and cons to wholly owned sub-
sidiaries and joint ventures. In summary, selection of the tradeoff is between
reducing pre-market entry risk (joint ventures) and post-market entry risk (wholly
owned subsidiaries). Reducing ex post facto risk through joint ventures requires a
management appropriate to each phase in an alliance: alliance formulation, alliance
structure design, and alliance execution. It is also effective for companies to create
a knowledgebase of alliance experience and establish a specialized division that
focuses on alliances to effectively move forward with new deals. Companies with a
high level of alliance management capability can reduce the ex post facto risk of
joint ventures, and thus opt to make business transformations through alliances with
local companies.

In this chapter, we discussed the expansion of global businesses through alli-
ances based on the creation of complementary relationships with local companies.
Strategic international alliances can take on the forms of co-specialization (partner-
ships with complementary assets), co-option (selective partnerships with competi-
tors) to pursue scale merit at a global level, and learning and internalization with the
objective of strengthening internal capabilities through an alliance (Doz and Hamel
1998). Co-option is prominent in the electronics industry, which requires speedy
business decision-making and scale merit. On the other hand, learning and internal-
ization is appropriate to the automotive industry, where it is critical to increase pro-
ductivity by adopting strength in production and other technologies that differ from
one company to another. Japanese companies tend to exhibit the “not invented here”
syndrome and lag behind in terms of creating international alliances. However, alli-
ance strategy is an important component in a company’s management strategy from
a global perspective, and it is thus important for companies to deepen their under-
standing of various forms of alliances and proactively work on these alliances.

References 119

We concluded this chapter by discussing government alliances in the form of
infrastructure businesses through PPPs. They do not merely involve the subcon-
tracting of operations by governments to private corporations, and must be under-
stood as an alliance between public and private sectors to increase business values
by sharing business risks and maximizing benefits to both parties that form the
alliance. Governments in emerging countries possess limited ability to manage PPP
businesses, thus private companies have no other option but to undertake excess
risk. Despite the high risks, the incentives to pursue infrastructure business-related
PPPs in emerging countries is strong, and such business opportunities abound.
Japanese companies must therefore carefully analyze the underlying risks related to
infrastructure projects and make business proposals on the basis of governments’
needs in these countries, and patiently negotiate the sharing of appropriate risk lev-
els. Companies may also find it effective to enter into alliances with local compa-
nies in negotiating projects with governments in host countries.

Open Access This chapter is distributed under the terms of the Creative Commons Attribution
Noncommercial License, which permits any noncommercial use, distribution, and reproduction in
any medium, provided the original author(s) and source are credited.

References

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Beamish, P. (1987). Joint ventures in LDCs: Partner selection and performance. Management
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Doz, Y. L., & Hamel, G. (1998). Alliance advantage: The art of creating value through partnering.
Boston: Harvard Business School Press.

Hennart, J. (1988). A transaction cost theory of equity joint venture. Strategic Management
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Kale, P., & Singh, H. (2009). Managing strategic alliances: What do we know now and where do
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Khanna, T. & Palpu K. G. (2010). Wining in emerging markets: A roadmap for strategy and execu-
tion. Boston: Harvard Business School Press.

Kivleniece, I., & Quelin, B. V. (2012). Creating and capturing value in public-private ties:
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relationships. Academy of Management Review, 19(1), 90–118.

Hitachi Construction Machinery: 8
Becoming a Wholly Owned Chinese
Entity

8.1 Introduction

In 1995, Hitachi Construction Machinery Co., Ltd. (HCM) established a Chinese
subsidiary, Hitachi Construction Machinery (China) Co., Ltd. (HCMC). Since then,
the company has established close relations with the city of Hefei in the Anhui
Province and has steadily built a strong business reputation of being a quality com-
mitted local firm. HCM’s operations in China began as a joint venture (JV) with a
local, state-owned firm, Hefei Mining Equipment (Hefei Mining). Later dissolving
this JV, HCM now operates as a wholly owned subsidiary. HCM’s China business is
often cited as a successful example of a global business, although the road to acquir-
ing that success was not often smooth and included negotiations with the JV partner
and the creation of an internal management system.

In 1970, HCM spun off from Hitachi Ltd. to become an independent construc-
tion machinery manufacturer. It currently holds the world’s third largest market
share in construction machinery manufacturing following Caterpillar and Komatsu
(Table 8.1).

Apart from HCM’s widely popular hydraulic excavator, the company is also
globally known for its other construction machinery, such as wheel loaders, mini
excavators, dump trucks, cranes, and forklifts. The company does not rely too heav-
ily on demand from any one specific region, and its sales headquarters in Japan
manage operations in six regions throughout the world, in addition to Japan: North
America, EMEA (Europe, Russia, and the Middle East), China, Asia-Pacific, India,
and Africa (as of October 2012).

Responsible for this global expansion is the powerful “Made by Hitachi” brand
that delivers the same quality no matter its country of origin. Along with the increase
in headcount as a result of the group’s overall expansion, HCM has built an educa-
tion system for global employees and has aggressively attracted employees from
overseas companies to its research institute in Kasumigaura, Japan, built in 2007.
The Kasumigaura Institute offers programs for language instruction, development

© The Author(s) 2015 121
K. Motohashi, Global Business Strategy, Springer Texts in Business
and Economics, DOI 10.1007/978-4-431-55468-4_8

122 8 Hitachi Construction Machinery: Becoming a Wholly Owned Chinese Entity

Table 8.1 Global Company Revenues (100
construction machinery Caterpillar millions of yen)
manufacturers’ revenue Komatsu 15,734
(fiscal year 2011) Hitachi Construction 18,431
Equipment 7,738
Volvo Construction Equipment
Case New Holland 7,279
3,038

Source: Corporate annual reports

Table 8.2 Hitachi Construction Machinery’s revenue by region

Units: 2004 2005 2006 2007 2008 2009 2010
M yen 150,029 203,425 238,549 248,733 213,703 171,700 172,700
Japan 91,490 119,222 125,129 88,518 79,178 37,200 62,400
US 92,304 132,647 195,209 291,942 180,843 97,000 131,600
EMEA 75,423 103,608 126,280 184,021 151,148 141,200 202,400
APAC 38,797 67,555 71,286 127,323 119,295 158,700 204,800
China 448,043 626,457 756,453 940,537 744,167 605,800 773,900
Total

Source: Hitachi Construction Machinery Co., Ltd

of overseas application skills, and strengthening in areas of specialization. In addi-
tion, the increasing demand in emerging markets has accelerated the transfer of
production technology to overseas manufacturing locations to reduce costs. In 2005,
HCM created the “Global Production Improvement Headquarters,” sending welders
and other skilled technicians to visit foreign plants and partner companies to
improve quality. Seen from a company-wide perspective, in 2011 HCM’s global
operations remained high, with overseas sales constituting 75 % of its total.
However, the Chinese share of overseas revenue is the largest; therefore, making it
a strategically important market for HCM (Table 8.2).

8.2 Hitachi Construction Machinery (China) Co., Ltd

8.2.1 Background

Since the latter half of the 1980s, HCM has implemented a global strategy of expan-
sion by creating sales and manufacturing bases in North America, Europe, and Asia.
The construction machinery market in the 1980s was dominated by Chinese-made
hydraulic excavators that sold for CNY 400,000 apiece. By comparison, HCM’s
hydraulic excavators were CNY 800,000. However, Chinese excavators did not
meet customer requirements in China; therefore, second hand excavators by
Japanese manufacturers are imported and mainly used in China. In the beginning in

8.2 Hitachi Construction Machinery (China) Co., Ltd 123

the 1990s, HCM was attracted to China not for its factories, but for its markets,
because it anticipated strong Chinese economic development. After evaluating
manufacturing sites in China, HCM established a list of candidates in several
regions. Around this time, China was coming off Deng Xiaoping’s Southern Tour
Speech, which for the city of Hefei meant pressure to bring in foreign capital. Hefei
was searching for a JV partner for the local powerhouse, Hefei Mining. Hitachi was
already well known in China at the time and its brand name was the source of gov-
ernment incentive for the JV.

The head of the Anhui Province, Hui Liangyu, as well as Hefei’s mayor, Zhong
Yongsan, played key roles in the initial stage of HCM’s into China. Former Deputy
General Manager of HCMC, Norio Hirota, noted the fervent invitations of Mayor
Zhong to HCM (Japan Association for the Promotion of International Trade 2004):

As China began to attract foreign capital, Mayor Zhong approached Qiu Yonghan, known
for being highly knowledgeable about Japan, serving as an economic advisor to the city of
Hefei, while he was on a trip down the Three Gorges, and repeatedly informed to him about
the level of urgency with which China wanted to bring in foreign capital into Hefei. Because
of an introduction from Qiu Yonghan’s company, Hefei was included in a feasibility study
that listed strong equipment manufacturers. Therefore, a relationship with Hefei began, and
Mayor Zhong invited all involved parties to visit our company’s factory. Interactions of
company executives and the parties associated at the factory, resulted in clearing of any
doubts about Mayor Zhong’s fervency toward the introduction of foreign capital; it was just
as Qiu Yonghan had described. (Interviews with Norio Hirota, July–October 2009)

On witnessing the mayor’s zeal and the support system put in place by the city
government, Hirota reflected that “the support system of the mayor’s city govern-
ment and its strong leadership was an important factor in our decision to enter into
the JV at Hefei, and this became a key to resolving issues that arose later.” (Interviews
with Norio Hirota, July–October 2009)

For HCMC, the city of Hefei was attractive for reasons other than the mayor’s
warm invitation. Hefei Mining, a worthy partner for HCM, was located there. In
addition, Hefei is the capital of the Anhui Province and government organizations
are concentrated there, making it easier to gain necessary approvals to operate a
business. Additionally, Hefei has the China University of Science and Technology,
a well-respected school, providing not only a readily available quality workforce,
but also cheap labor because of Hefei’s location toward the interior. Other factors
included the ease of distribution due to the presence of a port, proximity to areas in
need of construction machinery, and the ease in securing a vast site of 360,000
square meters.

8.2.2 Creation of a Joint Venture

In April 1995, a JV called “Hefei Hitachi Excavating Equipment Co., Ltd.” was cre-
ated in the economic technology development zone outside Hefei, some distance
from Hefei Mining. The JV was primarily involved in the production of hydraulic

124 8 Hitachi Construction Machinery: Becoming a Wholly Owned Chinese Entity

excavators. The major shareholders were HCM, Hefei Mining, and Mitsubishi
Shoji, in addition to Qiu Yonghan’s investment company, the Qiu Yonghan Group.
The company began with a total of 320 employees, with HCM bringing over 20
expatriates from Japan and 300 employees from Hefei Mining. HCM was respon-
sible not only for sales, manufacturing, production technology, production manage-
ment, and procurement functions, but was also in charge of management, because it
had a 55 % majority stake and had provided the chairman of the board and general
manager of the JV. At the time, it was rare for foreign firms to control management
of JVs in China, and there were complicated negotiations regarding which side
would lead the company. However, these difficulties were overcome through the
efforts of the Hefei government. The JV primarily focused on sales and manufactur-
ing of construction machinery. It procured simple parts (plate structures from
welded steel plate, for example, booms, arms, and buckets) domestically, and
imported all strategic parts (cylinders, engines, and hydraulic pumps) from Japan
(Fig. 8.1 and Table 8.3).

Hefei Mining was a typical, large-scale, state-owned company with 2,500
employees with its own dormitories, hospitals, and schools. Although regarded as a
quality manufacturer of mining equipment, it was incapable of designing the equip-
ment independently, and the WY-type hydraulic excavators it produced, although
less than half the price of Hitachi-manufactured excavators, exhibited poor perfor-
mance and broke down quickly. With foreign firms’ entry into the Chinese market
via the market-liberalizing policies of the Chinese government, Hefei Mining’s con-
struction machinery quickly lost its market competitiveness. After the merger,
HCMC made several proposals to revive Hefei Mining’s operations; they also con-
structed a parts factory for HCMC within Hefei Mining that employed about 300
workers. This parts factory received technical guidance from HCMC. It primarily
manufactured plate structures and supplied them to the JV, using production facili-
ties and jigs loaned by HCMC.

Cylinder

Boom

Arm

Pump

Engine

Bucket

Fig. 8.1 Hydraulic excavator

8.2 Hitachi Construction Machinery (China) Co., Ltd 125

Table 8.3 Development of Hitachi Construction Machinery (China)

1995 Creation of the joint venture
1997 Change in brand name from “Hefei Hitachi” to “HITACHI”
1998 Conversion from joint venture to wholly owned subsidiary
Creation of Hitachi Construction Machinery (Shanghai) to provide sales and service
1999 Cumulative sales reach 1,000 units; operations in black
2001 Kigawa Rijiro awarded by China’s State Administration of Foreign Experts Affairs
2002 Cumulative sales reach 5,000 units
2005 50 hydraulic excavators exported to Japan
Creation of wholly owned subsidiary, Hefei Hitachi Construction Machinery
2006 Creation of joint research center with Zhejiang University
2007 Release of ZAXIS60 model for the Chinese market
Creation of Hitachi Construction Machinery Leasing (China) Co., Ltd.; 51 %
2008 participation in Qingdao Chengri Construction Machinery sales company
Deputy General Manager Xian Feng selected as National People’s Congress
Representative from Anhui Province

8.2.3 Dissolution of the Joint Venture and the Move
to a Wholly Owned Subsidiary

Hefei Mining’s operation suffered from poor performance, and profits from the
HCMC parts factory were transferred to support the Hefei Mining employees. After
completing the JV, Hefei Mining’s anticipated performance gains failed to material-
ize, and due to a mindset that the perception of JVs would be damaged if state-
owned firms acting as JV partners performed poorly, it continued to compensate for
Hefei Mining’s deficits, making the JV non-profitable. This continued through the
second and third years of the JV, after which HCMC began to work on dissolving it.
However, it was not that simple. Hefei Mining had many employees and, as a pow-
erful local firm, many of its former employees worked as executives in the city
government. For example, the head of Hefei’s “Foreign Economic Trade Committee,”
the Hefei government organization that oversees foreign firms, was formerly the
Communist Party Secretary for Hefei Mining. Because Hefei Mining was a large
enterprise and there was a danger of its poor performance being reflected over the
local economy, the dissolution of Hefei Mining is difficult choice for the local
government.

Hirota describes the situation: “The city’s Communist Party Secretary, Mr.
Zhong saw that nothing was happening even with intervention of the city govern-
ment, so he began to help us out of our plight.” (Japan Association for the Promotion
of International Trade 2004) Thus, Zhong, who was mayor when the JV was cre-
ated, began to work toward a solution. The solution was finally achieved in July
1998 wherein the board of directors dissolved the JV agreement. Out of concern of
a negative effect on the local economy, the two companies agreed on two measures
to support Hefei Mining. The first was not only for HCMC to buy back 25 % of the
JV’s shares from Hefei Mining despite the venture’s losses, but to also pay the
employee tuition costs. The second was to enter into an agreement to give priority

126 8 Hitachi Construction Machinery: Becoming a Wholly Owned Chinese Entity

to Hefei Mining for parts to support the company’s production volumes. When
reflecting upon on the dissolution of the JV, Hirota mentioned of the deep impres-
sion that Zhong’s words left on him: “You are now free to make your way in the
market without any hindrance, but you will find it difficult!”

As Zhong said, after the JV was dissolved the company ran into various issues,
including contract defaults. Hefei Mining was dissatisfied with the price-setting
rules outlined in the above mentioned agreement and intentionally made late ship-
ments before finally halting these shipments altogether. Because HCMC had entered
into an agreement that did not allow procurement from other vendors, it had a tre-
mendous impact on HCMC’s production lines. Therefore, HCMC proved that Hefei
Mining breached the contract merely 3 months after signing the agreement and
cancelled the prioritized procurement agreement. A failure to maintain standard
practices in international trade on the part of Hefei Mining, such as not returning
equipment, manufacturing counterfeit HCMC parts, and supplying HCMC parts to
other manufacturers, led HCMC to take legal measures and the two companies
entered into arbitration. There are two methods in China for legally resolving dis-
putes: litigation in court and arbitration via organizations created for that purpose.
Litigation in China is mostly similar to civil litigation in Japan. However, arbitration
is not done in court, and when disputes arise decisions are handed out by mutually
agreed upon arbitrators. Sales contracts in China generally have conditions regard-
ing arbitration of disputes. In the event that no such condition exists in a sales con-
tract, neither company can request arbitration. Disputes between foreign and
domestic firms fall primarily under the Chinese International Economic Trade
Arbitration Committee (CIETAC), which took 4 years to pass judgment in the
HCMC case, handing down its final findings in 2003. However, under the Chinese
system, if the conditions of an arbitration decision are not enacted within 6 months
of the decision, then the arbitration decision is no longer in effect and litigation
becomes impossible thereafter. HCMC’s former JV partner used this to its advan-
tage, not abiding by the decision of arbitration before it expired in August 2003. In
the end, HCMC recovered the loaned jigs and manufacturing equipment as the city
government forced Hefei Mining’s top management into taking action. In addition
to these direct troubles with Hefei Mining, company employees close to Hefei
Mining disclosed confidential information, thus sabotaging production. Resentful
terminated employees forced the company into labor arbitration.

Hirota commented, “We thought a joint venture was a good idea because of the
Chinese government’s policies for foreign capital introduction at the time, and to
secure employees and sales channels, but in reality we faced many troubles with our
joint venture partner. Also, because companies do not generally know the inside
details of our joint venture partners in China, it can be difficult to ascertain their real
financial status. For example, it is difficult for foreign companies selling and pro-
ducing locally to know the actual production cost of the joint venture’s products.
This is because the accounting system in China is unique, and the joint venture
company normally holds accounting information close to the vest.”

8.2 Hitachi Construction Machinery (China) Co., Ltd 127

8.2.4 Post-joint Venture Management

HCMC worked on product quality control, developing their resellers, and under-
standing market needs while expanding their business in China. Because it provided
thorough direction on technical and quality issues from the time its subsidiary was
created, currently, from a technical perspective, the welding, assembly, and other
areas in its Chinese products are indistinguishable from its Japanese counterparts.

Because of briskness of demand and a skyrocketing used-vehicle market, work
previously done with small- and mid-sized hydraulic excavators was accomplished
through the use of mini excavators, making HCMC’s operating environment
extremely difficult; Japanese-style excavators did not fit the needs of the Chinese
market, and so, with the cooperation of its distributors, HCMC researched on how
customers were using their equipment. The result of this research was the develop-
ment of the ZAXIS60 mini excavator, specifically designed for the Chinese market.
The ZAXIS60 has the durability of a mid-sized excavator, increased horsepower, a
faster front arm, and other features that reflect the needs of Chinese operators more
closely. This Chinese model has been received well, resulting in the company being
able to increase its market share in the mini excavator market, which was previously
an oligopoly by Korean manufacturers.

Although the company had huge operating losses at the outset of its establish-
ment, as a result of the above efforts, HCMC realized an annualized profit within
3 years (1998). In the decade between 1998 and 2008, revenues grew dramatically.
Even in the initial stages when the company’s revenues were small, its market share
stood at 30 %. The company sold only 30 units in 1996, growing to more than
5,000 in 2003. However, due to tighter auto loan policies, including loans for con-
struction machinery implemented by the People’s Bank of China in 2004 and 2005,
the number of units subsequently sold dropped to around 3,500. Yet, sales figures
recovered after 2006, and the company sold more than 10,000 units in 2008. HCMC
expanded production in 2008 due to a lack of capacity; however, with the impact of
the economic crisis in the fall of 2008 and the wearing off of the Chinese govern-
ment’s measures to bolster the economy, production of equipment in recent times
has been sluggish.

HCMC succeeded in producing low cost machinery at the same level of quality
expected in Japan; this has been a source of strength for HCMC overall. In 2007,
HCMC began exporting products to other countries, and has made many innovations
toward technological improvement and personnel development, such as creating a
school for technical development and sponsoring a skills competition. The Hitachi
Technical School is a joint collaboration with a local vocational training school that
provides training for second- and third-year students. In their first year, students learn
the basics, such as reading design drawings and welding in theory, while in the sec-
ond year they are taught to weld (lean practice) and other work. In 2008 the school
received more than 1,000 applications, out of which it accepted 200. Graduates are
given priority placements at HCMC. In addition, since 2007, HCM has sponsored an
annual international skills competition that includes all factories in HCM group com-
panies worldwide. In 2008, measuring and painting events were included.

128 8 Hitachi Construction Machinery: Becoming a Wholly Owned Chinese Entity

When running a JV in the Chinese market, companies often use the sales channels
of their JV partner. However, because HCMC became a wholly owned subsidiary, it
had no sales network, and therefore the process of creating resellers was cumber-
some. Customer service creates future demand, however, because Chinese resellers
were unaware of the concept of customer service that exists in other countries,
HCMC needed to exhaustively teach its resellers that service was something that
was directly tied to revenue. In the early stages, 80 % of its resellers were state-
owned businesses that thought of customer servicing as incomprehensible and sub-
sequently, but they are dropped out from HCMC partners. In 1998, HCMC split its
manufacturing and sales functions, creating HCM Shanghai (HCMS), which man-
ages 28 resellers. As an incentive, HCMS has 1-year agreements with each reseller.
Operating times for hydraulic excavators in China have increased to 20 h daily,
including weekends, a figure much higher than in Japan. The company has placed
service personnel at each reseller, sending these personnel to repair broken down
machinery, a system that was set up to meet the needs of customers requiring imme-
diate repairs. In 2008, for the first time, HCMC invested in a Shandong reseller,
Qingdao Chengri Construction Machinery Co., Ltd., and is in the planning stages of
creating a direct sales structure. Elle Construction Machinery (Tianjin) Int’l Trade
Co., Ltd. imports HCM machinery to China, catering to those customers who insist
on having “Made in Japan” products. As a means of further expanding its sales
channels and retaining customers, HCMC created the Hitachi Construction
Machinery Leasing (China) Co., Ltd. Direct purchases are currently the most com-
mon way to purchase machinery in China, and leases make up only 10 % of sales.
In Japan, however, the reverse is true, with 70 % of acquisitions made via leasing.
Late lease payments are increasing due to the economic crisis, and bad debt preven-
tion is a concern.

As of October 2012, HCMC had almost ten subsidiaries and affiliated companies
in China, each of which is managed by the China division at HCM’s headquarters
(Fig. 8.2).

8.2.5 China’s Business Environment and Its Risks

The complexity of running a business in China generally boils down to “sudden
policy changes,” especially the frequent changes in customs inspection standards.
When importing an engine into China, one must file monthly applications, even
though the annual total number of engines is already established. Thus, a sudden
change in policy may cause the number of permissible imports to be lower than the
previously set annual total. Also, even though imports may have tariffs levied on
them as finished goods, the tariff rate is often left to the whim of the customs officer.
China also poses land use risks. For example, although a company may have a
50-year lease agreement to use a property, it may suddenly be asked to return the
property. Preferential policies set by local governments are also subject to risk,
which may be eliminated by central government policies. Hirota explains “I learned
the importance of maintaining relationships through the many troubles we faced

Hitachi Construction Machinery Co., Ltd. 8.2 Hitachi Construction Machinery (China) Co., Ltd

Components Machinery Elle Const. Mach. (Tianjin) International
Trading Co., Ltd.

Hitachi Construction *Not a subsidiary; sales of Japan-made
Machinery (Shanghai) machinery only

Hitachi Construction Machinery (China) Co., Ltd. Machinery

plate steel Machinery Machinery Machinery Cu s t om e r s
Hefei Hitachi Excavators Machinery
HefeiJigang Rili Heavy Industry Co.,Ltd. 27 Resellers Hitachi Construction
Qingdao Chengri Const. Mach. Machinery Leasing (China)
Cust. svc.
Hitachi Sumitomo Heavy Industries Construction Co., Ltd.
Crane (Shanghai)

Crane sales Clients
TCM (Anhui) Co. Ltd.

Forklift prod. & sales

Elle Const. Mach. Co. Ltd.
Taiwan sales

Fig. 8.2 Structure of HCMC and its subsidiaries (Source: Interviews with Hitachi Construction machinery personnel)

129

130 8 Hitachi Construction Machinery: Becoming a Wholly Owned Chinese Entity

and while confronting various risks.” To build relationships based on trust, Central
government officials must be treated cordially on their visits. Compensation stan-
dards must be clarified to employees, with employee benefits made available to
them according to Chinese practices (such as the distribution of moon cakes in mid-
autumn). HCMC was one of only five companies recognized as an A-grade business
by the Anhui Province Taxation Bureau for its efforts in maintaining good relation-
ships with local government and employees. This made things convenient for the
company in a number of ways. Hirota says, “We can solve most issues through our
networking and legitimate activities.”

Aside from “sudden policy changes,” China presents risks in regard to debt col-
lection. Construction machinery products in China are often sold in installments,
and many customers do not pay even if they have the cash to do so. HCMC has
fought exhaustively to obtain payment through litigation. The advent of GPS moni-
toring systems made possible through recent technological advances, allows HCMC
to remotely monitor the location and operating information of its equipment.
Therefore, in case of delayed customer payments, HCMC can have its equipment as
inoperable. The company also set a down payment of 30 % in an effort to reduce
non-payment.

Protecting intellectual property is an increasingly important issue for conducting
business in China. The country as a whole has a low awareness of the necessity of
protecting IP, which has become a constraint on the sale of new products. For exam-
ple, because the number of quality local parts manufacturers is limited, a parts man-
ufacturer may supply multiple customers. Sometimes price, design, or other
information may leak from these suppliers to competitors. Preventing these techno-
logical leaks by former employees is also an important issue. Dealing with this
problem is difficult; HCMC employees are rigorously trained and are required to
sign non-disclosure and non-compete agreements.

8.3 Global and Chinese Construction Machinery Markets

The internationally highest selling five types of excavating and loading machinery
are as follows: hydraulic excavators, mini excavators, wheel loaders, bulldozers,
and backhoes. Of these, hydraulic excavators have the largest share. Since 2008, due
to urban infrastructure and resource development in China, India, and other emerg-
ing nations, global demand for hydraulic excavators has risen sharply. These coun-
tries have more than a 60 % market share, which now dwarfs that of Japan, North
America, or other developed markets (Fig. 8.3).

Evidently, whether a construction machinery manufacturer succeeds is abso-
lutely dependent upon its success in China and other emerging markets. HCM ranks
third in global sales. Caterpillar, ranking first, is strong in transportation equipment
such as wheel loaders, but weak in hydraulic shovels. HCM, on the other hand, is
overwhelmingly strong in hydraulic excavators, but weaker in transportation equip-
ment. Number two Komatsu’s strength lies in its optimum balance of products in its
portfolio.

8.3 Global and Chinese Construction Machinery Markets 131
250
200
150
100
50
0

2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000

Japan Europe NA
Other
China APAC

Total Global Demand

Fig. 8.3 Global demand for hydraulic excavators (units: in thousands) (Source: Hitachi
Construction machinery)

In examining country-wise demand for hydraulic machinery, China has the larg-
est market for hydraulic excavators in the world. Demand for hydraulic excavators
diminished somewhat in 2009 due to the 2008 economic crisis, although the impact
of the crisis was set off by the Chinese government’s economic policies (infrastruc-
ture construction in the country’s interior). In examining region-wise demand struc-
tures, the Huadong region, including its coastal areas that are experiencing ongoing
development, has the largest market. However, it is expected that future demand
will originate from the interior sources such as large government development proj-
ects in western China and plans to promote growth in northeastern China. These
trends are becoming particularly evident in light of lessened construction demand
from export bases along the coast due to the recent economic crisis (Fig. 8.4).

In terms of competition for the Chinese market, Japan clearly has the largest
share, dueling with its second place counterparts in South Korea (Doosan Infracore
and Hyundai Heavy Industries). Hyundai Heavy Industries’ share of the six-ton-or-
larger hydraulic excavator market dropped significantly between 2002 and 2008,
with Komatsu gaining some market share during that period. As of 2008, HCM held
a market share of slightly less than 20 %, Komatsu of more than 20 %, and Doosan
Infracore, Hyundai Heavy Industries, and Caterpillar each held between 10 and

2012(Forecast)132 8 Hitachi Construction Machinery: Becoming a Wholly Owned Chinese Entity
2011
2010200
2009Foreign Manufacturers Domestic Manufacturers
2008
2007150
2006
100

50

0

Fig. 8.4 Chinese demand for hydraulic excavators (units: in thousands) (Source: Hitachi
Construction machinery)

20 %. In the less-than-six-ton hydraulic excavator market segment, in which Doosan
Infracore had a virtual monopoly, Hyundai Heavy Industries, HCM, and Komatsu
increased their market share from 2002 to 2008, while that of Doosan Infracore
dropped dramatically. As of 2008, Hyundai Heavy Industries and Doosan Infracore
each had a 30 % market share, while HCM had nearly 20 % and Komatsu less than
10 %. As seen from these figures, Komatsu is HCM’s largest competitor in China in
the six-tons-or-larger segment, while Doosan Infracore and Hyundai Heavy
Industries are the largest competitors in the less-than-six-ton segment. Komatsu has
a long history in the Chinese market, first exporting finished products to China in
the 1950s and subsequently working to help state-owned enterprises on technology
improvements during the late-1970s through the mid-1990s. Their serious efforts to
enter the Chinese market began in 1995, with the creation of three JVs around that
time: Komatsu Changlin Construction Machinery Co., Ltd. and Komatsu Changlin
Foundry Corporation, both with Changlin Co., Ltd.; and Komatsu Shantui
Construction Machinery Co., Ltd, with Shantui Construction Machinery Co., Ltd.
Komatsu currently has eight production facilities in China, procures most of its
parts locally, and is dramatically increasing its share in the Chinese market. However,
Komatsu also faces issues, such as slow decision-making, due to the JV arrange-
ment and sales channel distribution problems resulting from using the JV sales net-
work. Doosan Infracore belongs to the Doosan Group and is a Korean manufacturer

8.4 A Company with Balanced “Hardware,” “Software,” and “Regions” 133

of construction machinery. In 2007, the company announced its mid-term goal of
becoming the world’s third largest construction machinery manufacturer after
Caterpillar and Komatsu by 2012. Within Korea, Doosan competes with the general
heavy industries manufacturer, Hyundai Heavy Industries.

In addition to foreign firms, local companies in China have increased their com-
petitiveness. This is due to startups being established by engineers from former
foreign firms, the purchase of strategic parts, and the supply of low cost parts. The
market share of these local firms has risen to 20–30 %. For example, Sany Group
Co., Ltd. is a large construction machinery manufacturer that looms as a fierce com-
petitor. Sany Group is a private company listed on the Shanghai Stock Exchange. In
2007, the company planned to construct factories in India and the state of Georgia
in the US. Sany focuses on research and development, and has more than 2,000
employees dedicated to R&D, which is about 10 % of its total employees. In addi-
tion, it pays higher wages compared with other companies in the industry, and is
said to attract top talent.

8.4 A Company with Balanced “Hardware,”“Software,”
and “Regions”

HCMC has steadily improved its performance to date, although it faces barriers to
achieve further gains. In addition to Komatsu from Japan, the Korean companies
have focused on small-sized excavators, and apart from the world’s largest construc-
tion machinery manufacturer, Caterpillar, other local companies such as Sany Group
are becoming strong competitors within the Chinese market.

Ever since the economic crisis, Sichuan redevelopment construction and govern-
ment economic stimulus measures worth four trillion yuan (approximately JPY 56
trillion) for projects such as public works infrastructure in the Sichuan Province, the
demand for construction machinery has increased in the country’s interior. However,
HCMC’s resellers have a weak presence in the interior, which has caused a drop in
market share. Furthermore, an increase in demand stemming from public works
investment in China ceased, causing a larger than anticipated drop in demand for
construction machinery.

According to HCMC’s general manager, “the question of which is better, a JV or
wholly owned subsidiary, depends on the JV partner. We had disagreements with
our partner, and therefore chose to create a wholly owned subsidiary, but I think
there are positives to a JV if one can find a good partner. For example, foreign firms
find it difficult to obtain information regarding contracts for public works projects,
and a company with a JV partner might be able to win more contracts.”

Another issue is the best use of high-quality workforce. For example, when
HCM implemented finance and accounting systems in China, a young Chinese
employee was sent to Japan for 4 months. Before his visit, the employee understood
no Japanese, but studied Japanese during the non-working hours during his 4 month
stay, learning to read and write the language for the most part. China has many
human resources who possess a strong desire and extensive ability to learn, and
using them well has many advantages for HCM on a whole.

134 8 Hitachi Construction Machinery: Becoming a Wholly Owned Chinese Entity

HCM Global is expanding production not only in China, but also in the emerging
markets such as Indonesia and India. In September 2007, the company built a manu-
facturing facility in Indonesia for ultra-large hydraulic excavators used in large
structures in the Cibitung plant that has operated since 2001. In India, HCM sells
hydraulic excavators through Tercon Construction Equipment as a JV with the Tata
Group (of which HCM has 40 % ownership). This venture has approximately 50 %
of the Indian market. In March 2010, HCM increased its ownership in the JV to
60 %, and has aggressively begun to operate as a subsidiary within India.

HCM’s 2011–2013 mid-term plan titled “Go Together 2013” lists the three axes
of its management foundation: hardware (products), software (services), and
regions. The plan states that a balanced strengthening of these axes is critical.

The theme of the first axis “hardware” is “strengthening what is already strong.”
For example, the company aims to further improve the development, production,
sales, and service capabilities of its cornerstone product—hydraulic excavators—
and thereby accelerate its growth. In addition to hydraulic shovels, the company
aims to increase its competitiveness in mini excavators, wheel loaders, dump trucks,
cranes, and forklifts as its next cornerstone product. Due to increased awareness of
rising energy prices and global environmental issues, HCM aims to focus on the
development of energy-saving technologies. In terms of “software,” HCM aims to
differentiate itself from its competition by providing a total solution that combines
qualities of all its group companies in system sales, repair services, rentals, used and
refurbished equipment, financing, and logistics.

Finally, HCM aims to strengthen its sales and service network and expand its
market share in emerging markets, or “regions.” To quickly provide products that
precisely respond to market needs in each region of the world, HCM is aiming
toward the localization of its business by locating engineers throughout the world.
They are exploring diversity in its organizations, including new human resource
systems that provide positions to quality local personnel. Caterpillar, Komatsu, and
other global players are also committed to emerging markets, and Korean firms
must be analyzed closely, due to their low cost strategies. For the HCM group, mov-
ing ahead toward the localization for each country and region may lead to decentral-
ization of management resources. HCM stands at a strategic crossroads as it moves
forward with global-minded management, whether to further strengthen its response
to the Chinese market that accounts for a large share of its global revenues or to
make long-term investments in regions such as India.

8.5 Importance of This Case Study and Suggested
Questions

HCMC entry into the Chinese market started as a JV with a local firm. However, it
is an important case study from the standpoint of a company that ultimately became
a wholly owned subsidiary after facing several drawbacks, the process of which has
been depicted vividly. It unfolds the realities of the post-hoc JV risks, as explained
in Chap. 7. HCM perhaps did not have the option to set up operations in China as a

Reference 135

wholly owned subsidiary because companies entering the Chinese market in the
mid-1990s did so at the behest of the government. This situation is far widely dif-
ferent from the foreign capital deregulation that companies enjoy today, but it nev-
ertheless provides valuable information to global companies as they consider how
to balance reducing market entry risk as a JV versus the increased risk they experi-
ence from entering into the JV.

There are hints to be gleaned and considerations to be made regarding the neces-
sity of alliance strategies in light of increasing competition between foreign and
local firms. Furthermore, HCM operates worldwide, and not just in China. This case
study provides the basis for further reflection regarding the positioning of Chinese
operations and the integration of management strategies on a global level.

Using this case study, the following questions can be considered to further
deepen the understanding of global strategy.

• What are the various strengths and weaknesses of JV’s and wholly owned sub-
sidiaries as a company expands into foreign countries?

• What did the mayor of Hefei mean when he said, “You will find it difficult!” after
the HCM JV was dissolved?

• As competition with other foreign and local firms increases, what strategy should
HCMC pursue?

• For HCM overall, should its focus be on strengthening operations in China or in
Indian and other emerging markets?

Open Access This chapter is distributed under the terms of the Creative Commons Attribution
Noncommercial License, which permits any noncommercial use, distribution, and reproduction in
any medium, provided the original author(s) and source are credited.

Reference

Japan Association for the Promotion of International Trade. (2004, February). Kokusai Boueki.
Tokyo: Japan Association for the Promotion of International Trade.

Marketing Theory in Global 9
Business Context

9.1 Global Strategy and Marketing in Emerging Countries

Advancements in emerging countries present new market opportunities for Japanese
corporations; however, to do so, they must confront the threats posed by local com-
panies playing catch up by moving from a “build it and it will sell” product model
to a customer value model that maximizes the value to the customer. To overcome
this dilemma, companies must understand markets in these emerging countries
(i.e., customer needs) at product- and service-planning levels, accordingly design
products and services that maximize value to the target customers, and create chan-
nels to get these products and services to the consumers. These activities comprise
marketing activities.

Compared with their counterparts in the West, Japanese companies have little
understanding of marketing activities. Japanese companies heavily emphasize sales.
In Europe and the US, marketing and sales denote different functions, but in Japan,
they are often mixed. The Japanese word for sales, eigyou, refers to activities that
increase the revenue from existing products, for example, a sales representative
visiting customers in an effort to book orders. Marketing, on the other hand, is based
on a principle that encompasses a strategic philosophy that determines the types of
customers—including new customers—a company should target, and the types of
products that should be developed to increase customer satisfaction. With the “build
it and it will sell” concept, marketing is not essential, and sales activities alone are
sufficient. However, a customer value model that designs products and services that
maximize customer value requires a company to grasp the needs of its customers
and prioritize marketing activities.

Marketing activities can be divided into two main steps. The first is a strategic
step of segmentation of market information by customer type, and the selection of a
target customer group. In taking such a step to facilitate global businesses, the
CAGE framework explained in Chap. 2 is valuable to analyze the differences
between a company’s home country and other countries. A company will have a

© The Author(s) 2015 137
K. Motohashi, Global Business Strategy, Springer Texts in Business
and Economics, DOI 10.1007/978-4-431-55468-4_9

138 9 Marketing Theory in Global Business Context

deep understanding of the history of its own country, and the CAGE framework will
provide hints to deepen a company’s understanding of other target countries. A
company must gather important points from the CAGE framework to develop mar-
keting strategies and conduct a more detailed analysis using market survey data and
various types of statistical data.

The second step moves into execution with the careful consideration and imple-
mentation of product, price, place, and promotion based on the aforementioned
strategies. These elements are collectively called the 4Ps of marketing. For exam-
ple, in Shiseido’s marketing in China, covered in the next chapter, the company
switched its brand names and distribution channels when selling its products to
high-income and middle-income consumers. Companies must, thus, select the right
target customers and 4P marketing mix on the basis of a marketing strategy, and
execute the plan accordingly.

In this chapter, we discuss the important concept of the “good enough market” as
we examine marketing strategies in emerging countries. The average income levels
in these countries are lower than those in developed countries; however, they consti-
tute a rapidly expanding middle class who wish to own low-cost products with a
certain level of quality. This is called the “volume zone.” Reducing a product’s
functionality to what is required by customers in an effort to minimize costs is one
way in which companies can develop products for particular markets, thereby
enabling high returns in the huge markets within emerging countries. In this chapter,
we discuss the strategy for the “good enough” product market in both China and
India as we analyze the markets in each country.

We conclude this chapter by examining the bottom of the pyramid strategy or
BOP. Of the entire global population of approximately six billion people, four bil-
lion have an annual income of less than USD 1,500. This amounts to living on an
income of just a few dollars per day. BOP businesses require strategies to target this
lowest level of the population pyramid. In India, consumer packaged goods (CPG)
manufacturer Unilever and the micro-financing giant ICICI Bank both target the
BOP layer. Among Japanese companies, Ajinomoto’s work on improving nutrition
in Ghana is one such example. BOP has been the focus of attention for companies
thinking about their global business; it is a business model that provides valuable
hints for companies’ business in emerging countries, such as relationships with
local governments and nongovernmental organizations (NGOs).

9.2 Steps in Marketing Strategy

Using SWOT analysis described in Chap. 2 to clarify the internal management
resources of a company (its strengths and weaknesses) and the external manage-
ment environment (opportunities and threats), steps in marketing strategy can help
determine a company’s direction as it invests in new management resources. In this
step, companies create management strategies; however, it requires a more detailed
analysis to move to the execution phase of specific product development and distri-
bution channel creation.