This paper discusses the changes in the relationship between Japanese firms doing business in China and their Chinese partners. It divides the 35 years history of Japanese firms’ direct investment in China into four stages. The first stage was during 1979–92, when only a few foreign-invested enterprises ratified by the government were allowed to enter China’s domestic market. The second stage was during 1993–2000, when there was the first boom among Japanese firms to invest in China. During this period, Japanese household electronics manufacturers established many production sites throughout China, hoping to open up a huge market there. The third stage was during 2001–2009, when, triggered by China’s entry to WTO, the second boom to invest in China took place. Japan’s major automobile manufacturers’ entry into China in this stage was followed by many investment projects in automobile parts, plastics, and steel manufacturing. The fourth stage was during 2010–2014, when the third boom occurred, which was soon followed by the deterioration of Sino-Japanese relations and a rapid drop of new investments.
During the first and second stages, Japanese firms created joint ventures mainly with China’s state owned enterprises if their purpose of investment was to sell their products in China. The operation of joint ventures, however, had to overcome many obstacles stemming from differences in the motives of operating a joint venture, and differences in work norms and corporate culture between the partners. Therefore, since the third stage, when wholly foreign-invested enterprises were allowed to sell products in domestic market, Japanese firms preferred the form of wholly-owned subsidiaries when establishing new sites in China. However, Japanese-invested subsidiaries often suffer from the lack of responsiveness to the quickly changing Chinese market, stemming from the lack of autonomous decision making power at the subsidiaries, which resulted in the decline of their market share. It is noteworthy that there are a few successful cases in which the local managers demonstrated their ability to quickly respond to market demand, and these cases have evolved from wholly-owned subsidiaries to joint ventures. The author forecasts that the form of joint venture will revive among Japanese firms’ business in China, especially when they want to tap into the managerial capabilities of the locals.

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This article is a case study of Hisense Hitachi, which is a Sino-Japanese joint venture that produces central air conditioners. Before establishing the joint venture in 2003, both parties struggled to expand their sales in central air conditioning equipment. Hitachi had a good technology but it was not good at marketing its products in China. Hisense was good at marketing but the quality of its product was unstable. The two companies decided to create a joint venture to combine the advantages of both parties. The joint venture, Hisense Hitachi, introduced Hitachi’s product technology, quality standard, and manufacturing system. It has created a nationwide sales network consisted of licensed dealers and branch offices that support the dealers. So far the joint venture has been very successful, elevating its position in the central air conditioner market to the second largest manufacturer in China. Existing theories on multinational enterprises pointed out that the investor must have advantages over local competitors. Previous studies on Japanese multinationals focused on how their advantages had been transferred to their overseas subsidiaries. These studies ignore the possibility that their local partners may have advantages too. The case of Hisense Hitachi suggests that the advantages and capabilities of the local partner can be a key to the success of international investment.

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