Chrysanthemum-and-Dragon-JAFCO-Asia-in-China

9-706-012REV:OCTOBER17,2006________________________________________________________________________________________________________________ProfessorRawiAbdelalandGlobalResearchGroupSeniorResearcherDavidLanepreparedthiscasewiththeassistanceofMasakoEgawa,ExecutiveDirectoroftheJapanResearchOffice,andResearchAssociateChisatoToyama.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Certaindetailshavebeendisguised.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2006PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.RAWIABDELALDAVIDLANEChrysanthemumandDragon:JAFCOAsiainChinaThepastisaforeigncountry;theydothingsdifferentlythere.—L.P.Hartley,TheGo-BetweenIntheautumnof2002,JAFCOAsia,asubsidiaryofJAFCOCo.,Ltd.,becamethefirstforeignprivateequityfirmtoopenanofficeinBeijing’sHaidianSciencePark.Thepark,widelyknownasChina’sSiliconValley,washometoChina’sfastestgrowingandmostpromisingtechnologyfirms.ForJAFCOAsia,thedecisionwasimportantandsymbolic.JAFCOwasbelievedtobetheonlyJapaneseprivateequityfirmoperatinginChina.Assuch,ManagingDirectorVincentChanobserved,“JAFCOisthebridgebetweenJapanandChina.”1Yetunderthatbridgethewatersappearedincreasinglychoppy.WhiletheeconomicrelationshipbetweenJapanandChinahadgrownclose,theirpoliticalrelationshadnot.InApril2005,anti-JapaneseriotinginChinalastednearlytwoweeksandledtothedamageofJapanesedepartmentstoresinChengduandShenzhenandtheremovalofJapanesegoodsfromstoreshelvesinnortheastChina.Asusual,contestedhistorywasoneofthesparks,asChineseprotestorsobjectedtowhattheyconsideredtobearevisionisthistoryofJapan’swartimeexperience.2Despitetheseongoing“hoteconomics,coolpolitics,”astheyweredescribedinJapan,almostnoonebenefitedfromthepersistenttensions.SomeJapanesefirmshadbeguntoreassesstheircommitmenttoChina.ObservedJAFCO’sPresidentandCEO,ToshiakiIto,“ThepoliticaltensionswithChinachangetheinstinctsofJapanesefirms.Itisverydifficulttodividepoliticsfromeconomics.”3MuchwasatstakeforAsia.Wouldcapital-richJapanandcapital-poorChinafindawaytotranscendtheirtroubledhistory?CouldJAFCOAsiabeacatalystforcooperation,orwoulditsmanagersfindtheirownoperationsaffectedbytherivalrybetweenAsia’stwomostimportantcountries?ThemixofformalrulesandinformalpracticesthatgovernedforeignprivateequityfirmsinChinawascomplexintheextreme.OpeninganofficeinBeijingsignifiedarenewalofJAFCOAsia’seffortstomasterthesechallenges,andcoincidedwithanaccelerationofthefirm’sinvestments.ButJAFCO’sfirstyearsofengagementwithChinahadnotbeennotablysuccessful,andwithoutsomefundamentalchangestherewaslittlereasontobelievethattheadditionofaphysicalpresencethereFortheexclusiveuseofT.SATOThisdocumentisauthorizedforuseonlybyTakuyaSatoinInternationalManagementSpring2011taughtbyDavidMethefromApril2011toOctober2011.706-012ChrysanthemumandDragon:JAFCOAsiainChina2wouldyieldbetterresultsnow.WithitsestablishmentoftheBeijingoffice,however,somewonderedifJAFCOhaddiscoveredthesecrettosuccessinChina.JapaninAsiaFormostofthetwentiethcentury,JapanwasthepreeminenteconomicpowerinAsia.Japan’sextraordinarypost-wareconomicsuccesscreatedthesecondlargesteconomyintheworld,andasJapangrew,sodidthereachofitsfirmsandinvestorsthroughouttheworld.InAsia,Japanesecorporationscreatedregionalproductionnetworksthatspurredgrowthinandhelpedintegratetheeconomiesofneighboringcountries.Incontrasttopost-warEuropeanregionalism,whichwasdeeplyinstitutionalizedandcodified,AsianregionalismprimarilyreflectedtheimpactofJapanesefirms’technologyandcapital.NetworksofoverseasChinesealsoconnectedthenationaleconomiesofAsia,butprimarilyonacommercialratherthantechnologicalbasis.4Asthedollardeclinedinvaluefollowingthe1985PlazaAccord,Japanesefirmsbegantorelocatemanufacturingandassemblyfacilitiestolow-costproductioncentersoverseas.Athome,thesefactorscombinedwithlowyeninterestrates,whichpromoteddomesticassetinflationandheavybuyingofforeignassetsthroughoutthelate1980s.LandpricesinTokyoandOsaka,aswellastheNikkeistockmarketaverage,morethantripledinlessthanadecade.Thepartycametoasuddenend,however,whenthecentralBankofJapanin1989movedtoconstrainspeculationbyraisinginterestrates,deflatingJapan’sassetbubbleandusheringinoveradecadeofanemicperformance.5ThestagnantdecadechangedinterpretationsoftheJapanesemodelathomeandabroad.InAsia,themodelwasadmiredless,andthefearsoftheU.S.inthe1980sofbeingovertakencompletelyappearedinretrospectquaintandover-hyped.Japan’seconomylanguishedinrecessionasbankssoughttorecoverfromhugeloanlossesinthebubble’saftermath.6Consumerspendingwithered,despiteseveralyearsofdeflationinthelate1990s.EvenastheBankofJapanpushedtherealinterestratetowardzero,corporationsfocusedonreducingco