Innovation
Nokia, Europe and Japan's old companies versus US young champions
By Michael Hennigan, Finfacts founder and editor
Sep 10, 2013 - 7:55 AM

Printer-friendly page from Finfacts Ireland Business News - Click for the News Main Page - A service of the Finfacts Ireland Business and Finance Portal

In 1288, the Stora Kopparberget copper mine, in Falun, Sweden, issued what is believed to be the first share granted by a company. A local bishop was given an eighth of the copper mountain.

The demise of Nokia, Europe's only consumer electronics champion, that was founded in 1865, and which used to make toilet paper until it was reinvented in the 1980s as an electronics company, has highlighted how old the big companies of Europe and Japan perform compared with their mainly younger US counterparts.

Stora Enso Oyj a global paper, packaging and wood products company, with shares listed in Helsinki and Stockholm, which was formed through the merger of the Finnish Enso and Swedish STORA companies at the end of 1998, has roots that date back to the 13th century and beyond.

The Great Copper Mountain (Stora Kopparberget) in Falun, Sweden, is one of the world's most remarkable industrial monuments, according to UNESCO's World Heritage citation. A mine operated there from the 8th or 9th century until 1992.

The oldest surviving document relating to the Great Copper Mountain, which allocated a 12% share of the mine to a local bishop, was issued in 1288.

Tokyo Shoko Research calculated that 20,788 companies in Japan from a total of 2,251,071 companies doing business in September 2009, were at least 100 years old.

The oldest hotel in the world according to the 'Guinness World Records' is the Nisiyama Onsen Keiunkan in Yamanashi, Japan, a hot-spring hotel, which has been operating since 705 AD. The second oldest hotel is also in Japan.

According to the Joint Research Centre (JRC) of the European Commission, over 50% of all US firms in the Top 1,000 global R&D spenders in 2009, were founded after 1975, in Europe the figure was 18% and in Japan just 2%.

Young companies are on average almost twice as research-intensive as old companies (3.3% vs 6.1%) according to the JRC. This suggests that young companies are more likely to be found in research-intensive sectors.

The dataset analysed consisted of 287 companies from the EU, 340 from the US, 199 from Japan and 174 from other countries (OC) . 51 of the EU companies, 185 of the US companies, 3 of the Japanese companies and 87 from the companies from OC are young.

McKinsey, the US management consultancy, says that for the past 40 years, Japanese companies achieved global leadership by dominating their home market, but no longer. Japan’s population is expected to fall from 127m today to less than 100m between 2040 and 2050. A declining population will almost certainly reduce the absolute level of private consumption, along with tax revenues and, potentially, overall GDP.

Despite a handful of world-leading industries and companies, Japan has among the lowest labour productivity rates of any major developed country. Japanese companies are therefore generally less competitive and more vulnerable to foreign attackers at home. Japanese workers tend to be among the world’s most diligent, but they are both collectively and individually inefficient - - particularly those who do not toil in factories.

"Our conversations with senior executives suggest that Japanese managers are acutely aware that their headquarters are overstaffed, that employees focus more on work effort than on impact or outcomes, and that Japanese companies have hobbled efficiency by limiting outsourcing and offshoring to a handful of IT-related functions," McKinsey said.

McKinsey says Japanese companies once were leaders in providing innovative products appealing to consumers in developed markets. But consumers in fast-growing emerging markets have different needs. Japan has found that trying to identify them in R&D labs at home - - the typical approach - - is a challenge. That issue is not relevant only to emerging markets; Japanese companies must get closer to their customers everywhere. The current, made-in-Japan model is insufficient.

Investment in research and development is often seen as a proxy for innovation, and it is true that Japan is a leader in R&D, spending 3.8% of GDP on it. But this view misses a crucial point: innovation across many categories once dominated by Japan now comes from outside the country.

A 2009 report (pdf) by the Boston Consulting Group and US-based National Association of Manufacturers listed Singapore and South Korea as the world’s top two countries for innovation - - far ahead of Japan and even ahead of the eighth-ranked United States.

In 2009, Japan had the lowest score of any of the International Monetary Fund’s advanced economies on the Test of English as a Foreign Language, administered to foreign students who want to study in the United States. It had the second-lowest score among Asian nations, outperforming only Laos.

McKinsey said many Japanese companies should be global leaders, given their manufacturing and technological prowess and overall size and scale. But they are not.

The consultancy analysed the ten largest Japanese companies in each of 16 industries to better understand their global profiles. On average, Japan’s ten largest companies in 15 of these industries - - automotive is a notable exception - - are less global than their overseas peers, as measured by the percentage of revenues, assets, and stock ownership outside Japan. By those measures, Japanese companies made no progress toward globalization from 2006 to 2009.

Some of the best-known Japanese companies lack proper marketing functions, believing that a product-development group, a sales team, and a contract with a leading Japanese advertising firm will suffice. But this approach has had its day. The ever-faster pace of product development - - homogenizing products, prices, and channels - - makes marketing and branding more important than ever. Samsung, for example, introduced the Galaxy Tab in November 2010, just six months after Apple launched its iPad.

In the past decade, Japanese technology groups have lost almost a third of their overall market share to Taiwanese and South Korean rivals, according to a survey by CLSA, a Hong Kong headquartered brokerage. In televisions the decline has been sharper: Japanese companies make less than 10% of the LCD panels that are the core of modern flatscreen sets, down from half a decade ago and virtually 100% when the technology was first commercialised in the 1990s.

Finfacts: Japan's Labour Market: Lifers, temps and banishment rooms

McKinsey:

Japan’s globalization imperative

Rebooting Japan’s high-tech sector

Updated Feb 07, 2014: Japan: Sony in a sorry state

Europe and US

According to the Economist in 2012: "The number of public companies has fallen dramatically over the past decade - - by 38% in America since 1997 and 48% in Britain. The number of initial public offerings (IPOs) in America has declined from an average of 311 a year in 1980-2000 to 99 a year in 2001-11. Small companies, those with annual sales of less than $50m before their IPOs—have been hardest hit. In 1980-2000 an average of 165 small companies undertook IPOs in America each year. In 2001-09 that number fell to 30."

A report [pdf] prepared by Richard Foster of Yale University, illustrates the level of creative destruction in the US.

Almost a century’s worth of market data, corporations in the S&P 500 in 1958 lasted in the index for 61 years, on average. By 1980, the average tenure had shrunk to about 25 years. Today, it stands at just 18 years based on seven year rolling averages.

Nicolas Véron of the Bruegel European think-tank, in a paper published in 2008, provided an analysis of the FT's top 500 global companies as at Sept 30, 2007.

Europe’s corporate landscape is dominated by old, established companies. A look at the age distribution of the world’s 500 largest listed companies showed that European ‘champions’ are generally much older than American ones, let alone those from emerging markets. Strikingly, Europe’s corporate giants included only 12 companies born in the second half of the twentieth century, against 51 in the US and 46 in emerging countries; of these, only three were created after 1975 in Europe, compared with 26 in the US and 21 in emerging markets.

Véron  in a policy brief co-authored with Thomas Philippon, of New York University's Stern School of Business, noted that the prominent old, established firms which form most of Europe’s large-company landscape were doing well in the global competition, even better by some measures than their US counterparts. They said that large US companies are not only being challenged from abroad but also from within.

In Europe the largest companies are likely to stay on top for a long period; in the US they are vigorously challenged by new entrants and also by their own shareholders, who often force them to divest non-core activities or to split into separate entities. Similar pressures are mounting in Europe but remain less powerful than in America.

A recent World Bank report on Europe's prospects said:

Europe’s most successful companies seem to grow by doing what they are already doing—but better. Following the slogan of the German car manufacturer Audi— Vorsprung durch Technik (Leading through Technology)—they have developed evermore efficient versions of traditional technology hits. But European companies have not shifted to radically new technologies, especially information and communications technologies (ICT)....But the average productivity gap between Europe and the United States will likely persist until Europe’s larger continental economies emulate their intrepid northern neighbors in innovative enterprises. Europe’s most successful new entrepreneurs are small: while Europe does produce internationally competitive innovators in niche markets, the United States dominates among the world’s leading innovators, and this has Europewide effects."

Check out our subscription service, Finfacts Premium , at a low annual charge of €25


© Copyright 2011 by Finfacts.com