A Clouded Outlook

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Andreas Seibert for TIME

Up against it Salarymen in the town of Sendai take a cigarette break. Many Japanese companies are no longer as competitive as before

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Japan's corporate sector hasn't been any more enlightened. The biggest names of Japan Inc. have been steadily losing ground in key industries and markets around the world, often to more nimble competitors from elsewhere in Asia. That is especially the case in the crucial emerging markets of the future — China and India — where Japanese managers have been slow to adapt product lines to the different needs of their up-and-coming, but still low-income, consumers. In India, for example, South Korea's Hyundai sold two-and-a-half times more cars in the rapidly growing market in 2009 than Toyota and Honda combined, according to J.D. Power & Associates. Japanese brands are also falling behind in hot, new consumer markets. South Korea's Samsung and LG Electronics are tops in the expanding LCD TV business, not Sony, Sharp or Panasonic, while Taiwan's Acer is winning in the mini-PC netbook market.

If Japanese companies continue to lose global market share, consulting firm Bain & Co. warns, they could shed half of their mid-2009 market capitalization by 2012. Their problem is outdated boardroom practices. Work-your-way-up-the-ladder promotion systems and consensus-based decisionmaking have made managers risk-averse and opposed to outside influences. As a result, says Jean-Philippe Biragnet, a partner at Bain in Tokyo, Japanese firms don't absorb talent from around the world or identify new growth businesses as well as their American, European or even other Asian competitors. "Japan's consensus-based management becomes counterproductive in certain situations, when they use it as an excuse to not make tough decisions," Biragnet says. "What needs to be done is not rocket science. You need leaders who will be bold enough to make certain decisions."

Of course, some sound decisions are getting made. Japanese companies still possess the smarts to churn out some of the world's most inventive and beloved products — from Toyota's hybrid Prius sedan to Nintendo's Wii video-game console — and top-notch technology in key industries for the future, such as nuclear power and solar panels. Corporate managers are also learning to adjust to the needs of emerging markets. Toyota will begin production of its first model designed specifically for the India market, called the Etios, in late 2010, while in mid-July the company announced it will build a $600 million plant in Brazil to manufacture small cars for local consumers. In another sign Japanese companies are thinking more globally, both Internet retailer Rakuten and the company that operates the Uniqlo clothing-store chain announced this year that English would become their official language. Young people also appear more inclined to start their own businesses instead of automatically signing up with big corporations or government ministries as they did in the past. "Younger Japanese are definitely not company men in the old salaryman sense," says Kenneth Grossberg, a marketing professor at Waseda Business School in Tokyo.

The question is, What will they do instead? The economy is still so wrapped up by the old-fashioned bureaucracy that starting new businesses is a tough task. In fact, Japan's entire economic model needs an overhaul in order to create new opportunities for the nation's youth. Policymakers must break once and for all from the export obsession held dear for decades and find new sources of growth at home. That means ending its traditional bias toward manufacturing and developing the inefficient services sector by slashing the red tape that stifles competition. Japan also requires major labor-market reform in order to boost wages, productivity and worker welfare, thus stimulating more consumer spending. Softening the protection of permanent employees to encourage more hiring would help, as would enhancing the benefits and training offered to part-timers. Japan could also do with a greater role for women in the workplace and wider acceptance of immigration to ease the burden of an aging society. More broadly, the Japanese should finally jump on the globalization bandwagon by opening more to foreign investment and talent while seeking greater international experience. In a disturbing trend, the number of Japanese students enrolled at American universities sank 38% to 29,264 over the past decade, while those from China increased 80%, according to the Institute of International Education.

Such a sweeping vision for the nation's future and its role in the world is regrettably absent. Katsuji Konno, president of Igeta Tea Manufacturing, a Sendai-based chain of specialty tea shops, complains that the country's leaders are too focused on short-term fixes rather than long-term solutions. "You have to think of more drastic measures," he says. "You need to think 10, 30, 40 years ahead." Until Japan stops living in the past, it may not have a future.

— with reporting by Terrence Terashima / Sendai

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