Multinationals in japan addressing the human capital challenge

• MNCs see a gap between the skills and attributes needed for senior positions and those available in the workforce The survey results show quite clearly why many MNCs are not satisfied

capital challenge

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An Economist Intelligence Unit survey

Contents

Despite Japan’s lack of growth in recent decades—a situation set to be exacerbated by its shrinking population—it remains the world’s third-largest economy, and one that no multinational company (MNC) can afford to ignore MNCs operating in Japan can face a multitude of challenges, from sometimes seemingly impenetrable markets to unique business practices and opaque regulations

One puzzle that MNCs must solve is how to attract, retain and get the most out of the local labour force The successful integration of domestic management into international teams adds layers of complexity

As Japanese companies looking abroad for growth must learn to rely further on local management, so must multinational companies in Japan

The aim of this report, written by the Economist Intelligence Unit and sponsored by British American Tobacco, is to assess how non-Japanese MNCs are coping with the challenges of hiring and retaining talented workers in Japan and integrating local management into their workforces The report looks at the skills required by MNCs, whether local hires are fulfilling those needs and what the companies can do about it when they are not

The findings are based on a survey conducted in November 2011 of 180 senior executives from multinational companies with operations in Japan Some 21% of respondents were from the manufacturing sector, 19% from financial services, 12% from professional services, 11% from IT and technology and 7% from the healthcare, pharmaceutical and biotechnology sectors The respondents were C-level executives and board members (32%), directors, vice-presidents, department and business-unit heads (42%) and other senior managers responsible for hiring Around half the respondents were from companies with global revenues of over US$5bn

Our thanks are due to everyone who took part in the survey

Key findings

• Many MNCs in Japan are not satisfied with their new recruits—and they

must extract talent from a shrinking and risk-averse labour pool

The survey shows that only 54% of non-Japanese MNCs are satisfied with those they have hired over

the past two years for managerial and specialised positions in Japan (Figure 1) Some 20% report

they are unsatisfied or highly unsatisfied with their recent intake for these positions in Japan, while

the remainder are neutral

This is far from a ringing endorsement, but it may not be surprising given that MNCs have to find

talent in an increasingly shallow labour pool Although unemployment—even amongst well-qualified

graduates—has been climbing, this has not helped MNCs Working for a foreign company or a start-up

is still seen as something of a risk, and one that fewer in the labour force are prepared to take in the

current climate If anything, worsening unemployment and concerns about Japan’s economic future have

increased the appeal to job-seekers of large Japanese companies and public-sector employment MNCs

therefore face an even bigger challenge than usual in finding quality candidates to fill their managerial

and specialised positions in Japan The trend will not improve as the population ages and labour resources

become scarcer

Figure 1: Unsatisfactory

How satisfied has your firm been with the quality of new hires in Japan for managerial and specialised positions over the

past two years?

(%)

Highly satisfied

Somewhat satisfied

Somewhat unsatisfied

Neutral

11

26 16

Highly unsatisfied

Source: Economist Intelligence Unit survey

4

43

Worryingly, this risk-aversion is extending to new entrants to the workforce, with many new graduates

seemingly reluctant to seek international positions, learn foreign languages or generally expand their

career horizons In part this is because students fear that if they don’t join the traditional process of job

hunting at big Japanese companies before graduation (shushoku katsudo) their future prospects in the

job market will be greatly diminished Although unemployment, hovering around the 5% mark, remains

low in comparison to most industrialised nations, the falling number of students who have job offers

before they leave university continues to make headlines Only 16% of respondents disagree with the

proposition that the risk of losing out in the university job-hunting system makes graduates less likely to

apply to international companies

• MNCs see a gap between the skills and attributes needed for senior positions and those available in the workforce

The survey results show quite clearly why many MNCs are not satisfied with the quality of their recent hires for senior positions in Japan Respondents were asked to pick the three most important skills and attributes they look for when hiring for managerial and specialised positions in the country Leadership (picked by 59% of respondents), technical knowledge (54%) and management expertise (47%) are the most sought-after skills, while the ability to collaborate with international colleagues (52%), problem-solving (42%) and self-motivation/initiative (31%) are the most important attributes—as they are likely

to be for any comparable position worldwide

Respondents’ scoring of recent hires on these skills and attributes reveals some large gaps On the skills side, only 32% of respondents are satisfied with their recent hires’ leadership proficiency, and only 34% are satisfied with their management capabilities (Figure 2) Technical skills are less of a problem: nearly 60% report satisfaction on this measure Regarding attributes, only around one-third of respondents are happy with their new hires’ self-motivation and initiative, and only 40% are satisfied with their ability to collaborate with international colleagues—the most important attribute for MNCs hiring in Japan

Figure 2: The skills gap Skills and attributes sought for managerial/specialised positions in Japan

(% respondents selecting in their top three) Leadership skills

Technical knowledge Management skills

59

47

Ability to collaborate with international colleagues Ability to solve problems

Self-motivation/initiative

52 42

31

54

Attributes Skills

Satisfaction with skills and attributes

(% respondents selecting “highly satisfied” or “satisfied”) Leadership skills

Technical knowledge Management skills

32

34

Ability to collaborate with international colleagues Ability to solve problems

40

58

Attributes Skills

• Language skills remain a problem

The Japanese workforce, despite its many positive attributes, has never been

renowned for its strength in foreign languages Language-related issues are

the second most common shortcoming cited by survey respondents when

asked to compare their hires in Japan with those internationally Although

a few forward-looking Japanese firms such as online mall Rakuten and Fast

Retailing (owner of the Uniqlo clothing chain) have grabbed media attention

by announcing that they would switch their official language to English, the

overall competency level in the workforce remains comparatively low

It is true that only one-quarter of companies report outright dissatisfaction

with recent hires’ English abilities Conversely, however, only 42% report

satisfaction on this score (Figure 3), perhaps illustrating why only a minority

is satisfied with their new hires’ ability to collaborate with international

colleagues And unsurprisingly, more than half of the companies in the survey

report that less than 10% of their international management team comes from

Japan

Although foreign companies face increasing competition for bilingual and multilingual candidates

from Japanese firms, which are themselves expanding overseas, the continued language skill shortage

bodes ill for the economy and workforce as growth within Japan continues to slow Nearly half of all

respondents agreed with the statement: “The primary problem with Japan’s workforce is a poor standard

of English”, while only 21% disagreed (the rest offered no opinion)

• MNCs must do more to help employees overcome skills shortages

Despite the shortcomings outlined above, a surprisingly small proportion of MNCs in Japan offer training

to help remedy these problems Only 35%, for instance, say they offer international management

training, while just 29% offer local management training (Figure 4) The situation for leadership training

is somewhat better, provided by nearly half of respondents’ companies Nevertheless, given that a

“Reluctance to take responsibility” is identified as a principal shortcoming in management-level hires in

Japan (cited by almost one-quarter of MNCs), it seems clear that there is more that they could be doing in

this department

Similarly, despite the widespread concerns over language skill deficiencies, only just over half of

respondents offer formal training in English for their staff—though this was the most commonly provided

training and development opportunity

Furthermore, only 30% of MNCs report that they are satisfied with the creativity of new hires, and

“Limited creativity in overcoming challenges” is cited by 42% as a principal shortcoming of

management-level hires in Japan compared with the rest of their global workforce—the single biggest concern But only

14% of companies say they offer change-management training to counter these tendencies, suggesting

that MNCs are not doing all they could to address the issue

Figure 3: Speak for yourself Regarding your company’s new hires in Japan for managerial and specialised positions over the past two years, how satisfied are you with their English skills?

(%)

Source: Economist Intelligence Unit survey

Very satisfied/satisfied

42%

Neutral 32%

Unsatisfied/ very unsatisfied 25%

Not applicable 1%

Figure 4: Spotty training Which of the following training and development opportunities does your firm offer employees in Japan? Select all that apply.

(%) English language training Training in your company’s corporate culture

Regular appraisal of international career opportunities Leadership training

57

48 39

39 35 29

22 14

1

Technical training International management training Local management training International conference/networking opportunities with industry peers Change-management training

Other,please specify

Source: Economist Intelligence Unit survey

53

Figure 5: Better on some scores

In general, what are the principal advantages of management-level hires and/or other specialised workers in Japan, when compared with the rest of your workforce globally? Select up to three.

(%) Greater attention to detail Greater loyalty to firm and/or brand

Better ability to help build consensus for change Greater technical skills

43

34 22

20 17 15 13

Greater willingness to take responsibility Greater ambition to progress career Greater creativity in overcoming challenges Better formal qualifications

Greater language-related skills

39

• Japan’s workforce possesses greater technical skills and pays greater attention to detail than its international counterparts

While it is commonplace to note the degree to which Japan’s workforce lags its international counterparts

in terms of language ability, the areas where it outperforms are cited less often According to the survey respondents, there are three core advantages of hiring in Japan compared to overseas: a greater

attention to detail (picked by 43% of companies), greater loyalty to firm and/or brand (39%) and greater

technical skills (34%) Only 6% did not perceive any particular advantages (Figure 5)

Despite these positives—reflecting that the best aspects of Japanese corporate culture are also evident

in foreign companies’ local hires—the survey does reaffirm some commonly held conceptions about the

characteristics of the Japanese workforce More than half of respondents (54%) agree that “Compared

to international employees, those in Japan are more likely to prefer maintaining the status quo than

embracing change,” while nearly half agree that “Our employees in Japan are more inclined to wait for

instructions than to act on their own initiative.”

While Japan may be stereotyped as conservative and slow to change, foreign firms do rate their

own local workforces as relatively flexible and quick to learn More than half (53%) of MNCs described

being satisfied with their local workforce’s “Ability to learn quickly,” with only 16% saying they were

unsatisfied Likewise, 43% reported satisfaction with local workers’ “Adaptability,” against 22% which

were unsatisfied

Although 57% of respondents agreed that “Compared to international employees, those in Japan tend

to take more time in making decisions,” the overall implication would seem to be that, given the right

training and guidance, local hires can overcome many of the shortcomings identified by MNCs

• MNCs need to tailor their incentives to the local market

While a high salary is identified by MNCs as the most important single motive for attracting workers

globally, it is deemed only the fourth-ranked priority for attracting Japanese hires Training and

development locally, and then training and development internationally, are listed as the most important

Figure 6: Playing a different tune?

Which of the following incentives do you believe are the most powerful to attract and retain the following groups of managerial or

specialised employees? Select up to three.

(% respondents)

A higher salary

Clear career path

Training and development internationally

Training and development locally

Intellectual stimulation

Direct access to senior management

Dedicated mentoring

Association with brand

Source: Economist Intelligence Unit survey

International employees Japanese employees

A high degree of autonomy

33

38

47

Better benefits (eg, housing, car, etc)

35

37

19

17

8

24 19

19

18

4

17 12

14

40 38

factors in attracting Japanese candidates, followed by a clear career path Benefits, such as housing and company cars, are also thought by MNCs to be more important in attracting workers globally than for their Japanese counterparts (Figure 6)

Whether Japanese candidates are actually less concerned with monetary rewards, or just less inclined

to display their mercenary tendencies, is open to question Either way, MNCs should certainly examine whether the packages they offer in Japan are tailored suitably to attract the best candidates

Similarly, they should examine whether they are using best practices for motivating and retaining employees in Japan While a high degree of autonomy is seen by MNCs as the third most important incentive for global workers, it ranks fifth for those in Japan What is more important to Japan, it would seem, is mentoring: more than twice the proportion of respondents that think the provision of direct mentoring is crucial internationally think it is a priority for hires in Japan

The benefits of attracting and retaining the top candidates can be considerable Company loyalty is probably the attribute most closely associated with Japanese workers, and this extends to those who work for foreign firms Nearly 40% of respondents report that their Japanese hires show more loyalty to the firm or brand than workers globally, while fewer than 20% list it as a shortcoming of local management

• MNCs can use their image to attract top Japanese candidates

Uncertainty about the economy has certainly made Japanese employees more risk-averse in their career choices And although their motivations and priorities may be subtly different from those of their international counterparts, foreign companies often have an advantage in that they are perceived to treat employees more equitably than traditional Japanese companies Meritocratic and talent-based remuneration and advancement can be powerful in a corporate culture that has traditionally placed more weight on longevity

Are MNCs in Japan using this image to their advantage? Asked about whether they make a particular effort to appeal to Japanese candidates on the perceived strengths of foreign firms (such as merit-based promotion systems and better careers prospects for women) when advertising vacancies, 59% said they did so Some 14% think they have no particular advantages over domestic firms in these areas However, this leaves 27% of foreign firms that are failing to take advantage of these differences when recruiting staff

The potential benefits of doing so are considerable For instance, the situation for women in Japanese companies is still lagging behind that in global firms in nearly every respect Only 10% of managers

in Japanese companies are women, as compared to 46% in US firms Female workers in Japan are also more likely than their global counterparts to quit their jobs when they marry, and less likely to return

to work after having children With Japanese women viewing foreign firms as less sexist than domestic companies, and a large pool of underutilised female talent existing in Japan, this would appear to be a big opportunity that is being passed up by a large number of foreign companies

One in five multinational companies in Japan reports that they are unsatisfied with their local

management-level hires, from one of the most conscientious and dedicated workforces in the

world Only 54% report overall satisfaction Clearly there are specific skill and attribute requirements

that are not being met

Language remains a major issue, with nearly half of respondents describing it as the biggest single

problem with the Japanese workforce The other major shortfalls are in management, leadership and

creativity The reasons for these oft-cited problems are in some senses deeply engrained in Japan’s

business culture and education system—issues that MNCs cannot hope to fix themselves (even if there is

plenty of debate within Japan on how to do so; particularly when it comes to university education and the

way in which large companies recruit graduates)

Yet focusing on the negatives ignores the areas in which Japanese hires continue to stand out

compared to their global counterparts—particularly with regard to high levels of technical skills,

attention to detail and loyalty The findings also suggest that the MNCs, for their part, could be doing

more to address those shortcomings that do exist, and to make more of their own advantages to attract

better quality candidates in the first place