Multinational companies tend to insulate their headquarters from operations in emerging markets. Sure, they welcome the opportunity to save money by manufacturing in China or managing customer service out of India, and they’re especially pleased when they make profits selling to customers in such markets. But regardless of their global footprints, American, European, and Japanese companies remain fundamentally American, European, and Japanese. The home country’s executive offices too often have an “us” and “them” mind-set and encourage a one-way flow of ideas and directives—from us in the home country to them in emerging markets. Local initiatives are expected to stay local. Companies do this to minimize cost and risk, and because they believe that their brands already hold enough cachet to woo emerging-market consumers. Multinationals may bein global markets, but they’re often not of them; therefore, they’re unable to expand their products’ appeal to broader audiences around the world.
It’s surprising, then, when an established giant goes to an emerging market seeking the usual benefits of cheap labor and low manufacturing costs and comes back a changed company. That’s what has happened to Panasonic in China over the past decade. After the Japanese company’s leaders saw growth slow in China, they realized that they needed to engage more deeply with customers there. Panasonic’s desire to do that was rather remarkable because of the historical animosity between Japan and China, which can suddenly flare up. In October 2012, for instance, after Japan announced the purchase of the disputed Senkaku Islands, protests in China forced several Japanese companies, such as Canon, Toyota, and Panasonic, to suspend their China operations temporarily. Although the difficulties have subsided, they have probably created a sense of awkwardness among the Japanese and Chinese employees of multinationals.
Through its efforts in the Chinese market, Panasonic learned to bridge two strategies that are often seen as mutually exclusive: on the one hand, finding competitive advantage through expertise in integrated, worldwide operations, and on the other, focusing locally to meet consumers’ particular needs. The inherent tension is well understood: Worldwide integration calls for cooperation and uniformity; local adaptation values independence and diversity. The tension is especially high in multinationals that are chasing growth in emerging markets while desperately trying to keep costs down at home.
In China, Panasonic learned to treat the two objectives as equally important. Indeed, it found a way to ensure that deeper localization invited greater worldwide integration, which in turn enabled even more localization. Over time, ideas began flowing from China to Japan. The company embarked on new initiatives to understand consumers all over the world, and Panasonic’s leaders began to think of the company as a global, rather than Japanese, powerhouse. Some of the changes have been subtle—and it could be argued that they aren’t as deep as they need to be—but they are real.
Panasonic’s story, which we studied in collaboration with Takafumi Kikuchi, a senior manager of global consumer marketing at Panasonic, has much to teach multinationals about building competitive advantage by exploiting the tension between cross-border integration and local adaptation, rather than ignoring or simply tolerating it.
Crossing the East China Sea
The story begins with Chinese leader Deng Xiaoping’s 1978 visit to Japan, during which he met with Panasonic’s founder, Konosuke Matsushita, and asked for help modernizing China’s industries. Panasonic began licensing technologies to China, and in 1987 established Beijing Matsushita Color CRT, its first joint venture there. This subsidiary was a cornerstone of Panasonic’s subsequent strategy and led to the establishment of more than 40 China-based manufacturing operations, making such products as washing machines, air conditioners, and TVs.
Soon China became Panasonic’s global manufacturing hub. By the early 2000s, some 30% of the company’s global output of “white goods” home appliances was made there. The company poured resources into the plants: manufacturing process know-how, quality management techniques, and supply chain knowledge. Panasonic’s main purpose at that time was to take advantage of the lower cost of manufacturing in China, and much of the output was destined for export. Chinese consumers weren’t yet recognized as an important market.
In Japan, Panasonic had long invested in detailed studies of how individuals and households used products. Panasonic’s Home Appliances Company, for instance, had its own Lifestyle Research Center, which worked closely with product planning teams and helped create such offerings as compact countertop dishwashers for small kitchens and front-loading washing machines with tilted drums that improved water efficiency and made loading easier.