Japanese Regional Controlling Companies in Singapore
January 7 (Monday) 2008
Jianmin Jin
Senior Research Fellow
Summary
- The appreciation of the yen in the 1980s triggered a rapid increase in ASEAN investment by Japanese companies. The establishment of operations bases overseas and the small scale of the subject countries’ economies resulted in local bases of Japanese companies being sprinkling across the ASEAN countries. In addition to the production and export functions of these bases, there has been a gradual shift to functions such as sales, procurement, R&D and asset management. On the other hand, the advantages of ASEAN countries have become prominent with the acceleration of regional integration and development of industry clusters in the region, and the consolidation of local bases in ASEAN has been promoted. The controlling function of Japanese companies in Singapore has been recognized since the 90s, and this function has been strengthened since 2000. Though there have been recent examples of control functions shifting from Singapore to Thailand, where production functions are more advanced, there is no significant change in the control functions of ASEAN bases being concentrated in Singapore. There are, however, apparent differences in the content of control functions among Japanese companies in Singapore. The following is a look at the actual situation of three local Japanese bases based on interviews.
Differences in Controlling Regions and Equity Relationships
Company A (chemical maker) has 12 operating companies in ASEAN countries (three in Singapore, five in Thailand, three in Indonesia, one in Malaysia) that include both joint ventures and 100% equity subsidiaries. The scope of control of its Asia-Pacific controlling company located in Singapore ranges from ASEAN and South Asia countries, such as India and Pakistan, to Oceania countries. Company B (business services) operates 21 bases including administrative offices. All 21 locations are 100% equity subsidiaries. The scope of control covers eight countries/regions including Taiwan, India and ASEAN countries, as well as a Dubai office in the Middle East. Taiwan is included because of political considerations, and if cross-strait relations improve entry into greater China can also be expected.
Company C (information technology) operates six companies related to software services in six different ASEAN countries. The scope of control is limited to the ASEAN region. Company C’s controlling company, located in Singapore, has the characteristics of a sub-regional controlling company of the headquarters’ Asia-Pacific controlling body, and as such slightly differs from other Japanese companies such as A and B in its placement of controlling companies. Moreover, some of company C’s local bases are financed by the home company while others are financed by the local controlling company.
Differences in the Controlling Functions
The following is a look at the current situation of sales, production, shared services and other such control functions of each company.
The local controlling company of Company A, which was established for the import and sales of company A products, is striving to strengthen functions after the consolidation of back-office departments (legal, risk management and so on) two years ago. However, there is no capital relationship between the controlling company and the regional operations bases, and shared service functions such as personnel-appointment authority and F&A procurement have not yet been realized. Intellectual property management and brand management also only exist at headquarters. Marketing, sales management, and planning are done independently by each operations base. Regarding materials procurement, IT infrastructure and distribution, there is nothing more than a managers being placed at the controlling company to support the various operations bases. The control functions of the company B’s local controlling company established in 2001 are budget management, compliance, organizing the bases that deal with the same clients among the various countries, and so on. The controlling company does not hold personnel-appointment authority over the operations bases in the various countries, but top management of the controlling company also serve as board members of the various bases and are strengthening budget management. Cash flow management is strictly conducted by the controlling company. In addition, within the controlling company are virtual education functions for the cultivation of local human resources. Each operations base pays a certain level of managerial fees to the controlling company. The controlling functions of company C’s local controlling base include governance of the various bases within the region, as well as shared services and regional services. It does not have personnel-appointment authority over the various bases, but it does hold primary assessment power. The shared service control functions include IT infrastructure, education and cash flow management. A framework for regional services has not necessarily been completed, and is said to be currently under examination.
The situation of the three preceding cases is that the operations company forges ahead first, the controlling company is forced to clean up afterwards, and refined controlling functions have not yet been established. The strength and weaknesses of these controlling functions differ depending on areas such as the nature of the equity relationship and the granting of personnel assessment authority.
Business Issues in Singapore
First, difficulty in human resource recruitment is a shared issue. Company A is planning to expand its production base in Singapore, but the labor squeeze presents a significant risk. The loss of middle management to European and US companies is particularly problematic. The staff retention rate at the controlling company of A is not high, and as such no local personnel occupy top management positions. The local controlling bases of companies B and C face the same challenges, but have succeeded in holding down the turnover rate below industry average by preparing career paths such as pay raises and high level promotion opportunities.
Rising business costs are also a pressing concern. For example, the IT industry wage levels in Singapore (new university graduates at about JPY 3.5 million, middle management five years post-graduation at about JPY 7.5 million, board members at about JPY 15 million) are extremely high. During office contract renewal negotiations, company A was requested to pay three times the current price for its local controlling company.
However, it is also true that support from the Singapore government and the infrastructure environment receive high praise from each company.
Conclusion
1. The controlling functions of Japanese companies in Singapore have strengthened since 2000. The control territory of these companies, however, is handled differently among Taiwan, Oceania and India. There is no equity relationship between a majority of regional controlling companies and controlling bases.
2. The current focus is on shared service functions, such as compliance and IT infrastructure as well as the organization of the various bases. However, the stronger the equity relationship between the controlling company and the operations company, and the stronger the relationships between people, the more effective the control functions become. In sum, the controlling functions of these controlling companies have not yet been established. This largely stems from the fact that systems regarding the authority and roles of regional controlling companies have not yet been established by the home companies.
3. While Singapore’s infrastructure (physical and systemic) and the government’s services and support are highly regarded, issues such as personnel retention and rapidly rising management costs remain.