Jun 5, 2020 in Analysis
International Analysis of Organization Design

With China’s transition to market economy and opening of the borders, it became increasingly attractive to Western businesses in terms of both workforce and potential customers. The country’s large population size creates the largest market in the world for American and European companies. However, doing business in China requires a specialized approach because legislation, business ethics, mentality, culture, language, and, finally, needs and wishes of Chinese customers differ from western ones so significantly that adjustment to Chinese environment becomes a challenging task for a westerner. In most cases, globalization trend is combined with the necessity to localize a company’s products. Peculiarities of the country’s local market often require developing an organizational structure or adjusting the existing structure of foreign entrants. This paper will study the case of Panasonic Corporation on Chinese market and the adjustments the company had to make in order to ensure its competitiveness.

Panasonic corporation

Panasonic Corporation is a developer of the world-famous brand and an icon of Japanese business. It produces a variety of household appliances, electronic devices, and offers industrial solutions for businesses. The company’s branches are located in different regions worldwide. Global success of the company may be explained by high quality, elegant design, and universal application of its products.

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China business environment

Chinese civilization is over 4,000 years old. Since the establishment of trade relations, China’s wealth and technologies have attracted the interest of the western world. During the long period of communist rule, the country was closed to foreigners. With the adoption of capitalist economy and opening of its borders, the country experienced an influx of foreign investment. Within a short time, China accumulated considerable wealth and became one of the world’s superpowers. Moreover, it has acquired the status of the world economic leader by having taken it from the USA. China’s GDP was ranked 2nd among other countries in 2013. Services comprise 46.1% of the country’s GDP, industry – 43.9%, and agriculture – 10% respectively (Schweitzer et al. 73).

According to the CIA (Central Intelligence Agency) data of 2014, the population of China accounts for 1.36 billion people (qtd. in Schweitzer et al. 70). Currently, the country’s middle class is rapidly growing in number, thus increasing its purchasing capacity. A large size of the population and a well-to-do middle class in particular makes Chinese market attractive to foreign companies that seek for new consumers.

Nevertheless, transparency of laws and procedures needs to be developed. China takes the 90th place in the rating of 189 nations by the ease of doing business and is only the 80th least corrupt of 177 states and territories (Schweitzer et al. 73). However, the anti-corruption agency established by the Communist party of China conducts investigations to combat this problem.

Many foreign companies have built successful and lasting business relationship with Chinese partners; however, there have also been cases of failure. Apart from economic and organizational factors, insufficient knowledge of Chinese mentality and culture, as well as neglect of the cultural gap, could be the reason for it. In many cases, foreigners lack the “tacit knowledge”, inherent to the representatives of Chinese nation; this concerns all spheres, ranging from communication patterns, rules of politeness, and relevance of humor to fashion, food preferences, views on beauty and convenience, and other peculiarities that native Chinese receive from their life experience.

Our Process

Chinese business ethics and etiquette

Business ethics comprises different rules accepted in business environment. Due to the fact that China is an Asian country, multinational corporations sometimes create departments for Asiatic region or Asia Pacific, as Starbucks did (Daft 234). Cultures and mentalities of Asian countries are closely related; however, there exist certain significant differences, for example in religious issues or in core values. Probably, for this reason Panasonic Corporation did not consider establishing a specialized structure for Chinese market (Daft 4). Japanese business etiquette and mentality are similar to those of China. On the contrary, for western business people, however, these rules are more challenging and demand respectful and careful attitude.

Business cards

Exchanging business cards precedes any interaction between possible business partners. Both the giver and the receiver hold the card with both hands and read attentively. The Chinese pay much attention to correct pronunciation of names, for it is a basic sign of respect. Chinese names can be difficult for Japanese as well as for English speakers. The color of ink denotes social status; to be more specific, gold is used by high-ranked individuals, black – by more modest positions, whereas red is considered inappropriate (Schweitzer et al. 77).

Gifts

Gift-giving is embedded in Chinese cultural and business tradition. It is typical to exchange gifts during the first meeting and later. The gifts should not be expensive, but they should show respect and appreciation. Appropriate gifts include domestic-made items and office utensils, such as pens, bowls, trays, memorabilia, scarves for women, etc. Since black and white symbolize mourning in China, the gifts should not be black and white. Red and gold are considered the best colors for wrapping (Schweitzer et al. 78).

Greetings and personal space

Rank and status determine the initiator of the greeting. The Chinese slightly bow as a sign of greeting. Handshaking is less firm than in the West, which is typical for all East Asian cultures. The host initiates handshaking. Sometimes, the Chinese applaud after greeting, and it is polite to applaud in response. Physical contact during a business conversation is inappropriate, and a comfortable distance is two arms’ length (Schweitzer et al. 78).

Business meetings

The Chinese are more formal and reserved than westerners. In hierarchical societies, where China and Japan belong, the person of the highest rank is the first to enter and the last to leave. Politeness suggests a small conversation on general topics before passing to business. Clarity, modesty, and simplicity are highly valued, so jokes and gestures may seem inappropriate. The Chinese often make deals at business lunches; however, they never discuss business before or while eating (Schweitzer et al. 80).

Chinese mentality

Like all oriental cultures, the Chinese are collectivists. They are more concerned about the success of the group and their affiliation than about individual appreciation. This may be confusing for American counterparts; however, partners from Japan or Korea feel the same. In China, conforming is more than mere politeness; it is “a signal that you understand and embrace key values of Chinese culture” (Schweitzer et al. 85).

Business and politics

In China, business is inseparable from politics, which is explained by communist regime that is peculiar to China alone in Asian region. Government officials oversee business interactions even if they are held privately. In this reference, there exist extensive legislation as well as unwritten rules. However, the laws are flexible, and their application depends upon attitudes and relationships. Authorities may pose obstacles to business or even apply regulations to close it. For example, obtaining a decision can take 15 days or can last for many months (Schweizer et al. 87). For straightforward Americans, such system seems unfair and unpredictable. For the Japanese, whose state is the 18th least corrupt in the world (Schweitzer et al. 157), it is also challenging. Therefore, successful business in China is only possible with a Chinese manager that is proficient in formal and informal aspects (Schweizer et al. 87). Power and authority of Chinese companies depend on the company’s history, form of ownership, personalities of its owners and investors, banking relations, market performance, etc. (Schweizer et al. 93).

Lifestyle differences

Although Chinese mentality was not a predicament for the managers of Panasonic, the “tacit knowledge” of local lifestyle became a core problem. Cultures of the two countries involved, namely, Japan and China, are related; however, their lifestyles differ drastically. On everyday level, the differences are apparent in housekeeping, eating, dwelling, views on rational, beautiful, and prestigious, brand preferences, etc. These disparities root in religion, ideology, customs and traditions, level of welfare, and physical conditions of living.

The case of Panasonic in China

Panasonic Corporation enjoyed favorable attitude of Chinese government, since it had been invited by China’s leader Deng Xiaoping to modernize the country’s industries. The first joint venture, called Beijing-Matsushita Color CRT, was launched in 1987 (Wayakama et al. 68). Panasonic found employing Chinese workforce extremely profitable and with time organized many independent business units (BUs) specializing in separate product categories. By the 1990s, there were 40 Panasonic-related companies in China (Wayakama et al. 69). China became a production hub of Panasonic goods and manufactured 30% of the company’s products (Wayakama et al. 70). However, Chinese BUs were responsible only for production stage, whereas Japanese companies performed research and development of new products, testing of technologies, and creation of design. Consequently, the latter did not broaden their knowledge of Chinese market and its consumers (Daft 231).

In 2003, under Kunio Nakamura as CEO, Panasonic established higher-level business entities called “business domain companies” to facilitate coordination and sharing resources among different units of the company. At this stage, Panasonic Corporation was organized according to the global product division structure. It had fourteen business domain companies, every of them having a specific line of products. One of such business domain companies was Panasonic Home Appliances China, founded in 2003 to coordinate local businesses. The same year, Panasonic Corporation of China was established in Beijing to offer various higher-level services, such as sales, logistics, legal administration, R&D, and HR management, to local subsidiaries (Wayakama et al. 69).

The need for localization

Panasonic invested in the study of lifestyle of Japanese customers in order to adjust its products to their needs, preferences, and possibilities. Japanese Lifestyle Research Center in Kusatsu closely collaborated with the planning department. However, the company neglected such an extensive study of the overseas customer’s lifestyle, although its management realized the need for exploration of local markets. Therefore, while Panasonic global sales grew, localization was not the first issue on the company’s agenda (Wayakama et al. 72).

In the early 2000s, China entered a period of rapid economic growth. Chinese companies began producing competitive items that were successful on local markets and tried to enter global ones. One of these new companies was Haier that launched an output of electric household appliances. Suddenly, Panasonic noticed that Haier had an annual increase of 20-30%, whereas the sales of Panasonic goods remained low (Daft 231). To understand the reasons of such failure and restore its market position, Panasonic established China Lifestyle Research Center in Shanghai in 2015. The Center used group polls and other traditional marketing research tools to cover the existing information gap. In particular, its employees visited Chinese homes to assess their interior space and arrangement. As a result, they discovered that the 65-centimeter-wide Panasonic refrigerators did not fit into the narrow space of an average kitchen that allowed only a 55-centimeter width. Production of slimmer fridges boosted their sales tenfold (Daft 231; Wayakama et al. 72).

Our Benefits

Furthermore, China Lifestyle Research Center elaborated a database of customer geographical preferences for various categories of goods. For example, they learned that the Chinese in different regions preferred different sorts of rice, with different cooking time, and of different consistence. Therefore, Panasonic could design of its rice cookers taking into account such distinctions (Wayakama et al. 73). The Center shared its knowledge with local BUs and their subsidiaries.

The success of China Lifestyle Research Center showed the importance of studying the peculiarities of local markets and customers. As admitted by Daft, Panasonic Corporation “learned to treat the goal of meeting local consumers’ needs as equally important as the goal of achieving competitive advantage through uniformity with global integrated operations” (231). The company conducted extensive research of its local markets on a global scale. It allowed increasing its profits and resulted in structural changes of the organization. Moreover, it has proved to be an effective way of embracing tensions between global uniformity and local adaptation.

Organization structure at the current stage of development

Currently, Panasonic Corporation operates according to the global matrix structure. The company’s management takes decisions based on the balance between product standardization and localization. It allows combining the benefits of global economy and customization to regional markets, in other words, “being local worldwide” (Daft 9). Thus, Panasonic Appliances Company develops, produces, and sells various household appliances, ranging from TV panels and air conditioners to fuel cells and bicycle-related items. Eco Solutions Company manufactures lamps, solar panels, ventilation, air purifiers, and similar products. AVC Networks Company is engaged in production of video, audio, and radio equipment, such as surveillance cameras, computers, cellphones, and social infrastructure systems equipment. Automotive & Industrial Systems Company develops and produces automotive-related products, for example, car electrical components, multimedia devices, various energy batteries, electronic components and materials for industries, etc. Every subsidiary has its own distinct structure that includes R&D, production, and sales departments. Furthermore, subsidiarier are responsible for all aspects concerning the range of products and their performance on global market. Moreover, every regional market has a product specialized subsidiary that supervises a corresponding group of BUs, such as Panasonic Home Appliances China. Local subsidiaries receive a high level of autonomy at every step of business development. All regional markets have Lifestyle Research Centers responsible for collecting, analyzing, and interpreting information about customer preferences in the region. Lifestyle Research Centers provide the flow of knowledge between the company’s subsidiaries. Every region also has a corporate entity to coordinate the resources of the subsidiaries in R&D, logistics, sales channels, etc., and to overview Panasonic regional market. Such structure enables the CEO of Panasonic Corporation in Japan to oversee the entire business process, but at the same time allows every regional department to choose its own best development strategy.

 

The case of Panasonic in China shows how a multinational corporation has adjusted its organizational structure to market needs. It showed the importance of investment in marketing research and obtaining “tacit knowledge” about local lifestyle. While globalization strategy benefits the multinational corporation in terms of economy of scale due to standardization of products, it does not target large segments of local markets. Such failure on a global scale results in the loss of market share and, hence, smaller profits. At the same time, responsiveness to the needs of the local market helps to increase the number of customers locally but results in higher production cost. Panasonic took these opposing forces into consideration and managed to embrace the tension between localization and globalization by modifying its organizational structure. Global Matrix Structure, currently employed by Panasonic Corporation, combines global and local strategies in order to arrive at the best decision.

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