Inside Fortress Europe: (Japanese) strategies for the European Single Market and the Trojan Horse pretence

8th March 2019

Outside Fortress Europe Excerpts
This Global Business Strategy Blog post is based upon unabridged excerpts from Chapter Seven, A Practical Framework for Global Business Strategy Success, in a section that examines the motivations of foreign companies when including FDI as part of their global business strategy.

It also includes a brief extract from Chapter Eight, Implementing Global Business Strategy, both excerpts taken from Outside Fortress Europe: Strategies for the Global Market.


Context References

Collingridge, J. (2019, February 3). Nissan scraps new SUV launch for Sunderland plant.
Porter, M. E. (1990b, June 9th). Europe’s Companies after 1992: Don’t collaborate, compete. The Economist.
Vincent, M. (2019, February 4). Nissan’s Sunderland U-turn is all about the EU — but not Brexit.
Wallis, W. (2019, February 20). Honda decision stokes anger in Brexit-voting Swindon.

A striking characteristic of the current Brexit debate is the complete lack of reflection of the last major UK Euro-drama, the prolonged and meandering ‘1992 Process’ which embraced the Maastricht Treaty in February 1992 en route to the official launch of the European Single Market on January 1st, 1993. With Nissan in the news, both immediately following the Brexit referendum and in the last few weeks (see previous post), it is worth reflecting upon the circumstances which led to the wave of UK-bound Japanese Foreign Direct Investment (FDI) in the late 1980s.


Outside Fortress Europe Excerpt

A simple but important example relating to FDI will give further insights here, along with a direct reference to a book this author co-wrote twenty-five years ago, Inside Fortress Europe: Strategies for the Single Market (Egan and McKiernan, 1993) and what its purpose was. That book was commissioned by the highly respected Economist Intelligent Unit (EIU) and its principal focus was on foreign company preparations for the impending European Single Market which came into effect on January 1st, 1993. The book examined American and Japanese companies but primarily the latter because, intuitively, it appeared that their strategic and organizational challenges in dealing with the looming ‘European Fortress’ were more daunting than those of US firms, not least because of stark cultural differences between Japan and any country-else.

An additional and under-reported challenge faced by Japanese companies was the way in which the US and the soon-to-be EU had dealt with chronic Japanese trade surpluses between the trading blocs, especially during the late 1980s. It was brutal and extremely myopic. The American central bank, the Federal Reserve (the ‘Fed’), and European Community (EC) central banks intervened in the global financial markets to artificially increase the value of the yen, thus making exported Japanese goods more expensive in their destination markets.

Both the US and the EC also imposed unit quota restrictions on the number of units of targeted goods categories, e.g. automobiles, which Japanese companies could export into their markets. Imagine presenting this one-paragraph case scenario to Eiji Toyoda, president of Toyota at the time, or a first-year economics undergraduate student at any college anywhere in the world, and ask the question: what would you do? Have a look at Figure 1 for clues as to what happened next Inside Fortress Europe.

Made in England, built by Japan!

President Toyoda and his fellow countrymen at Honda and Nissan combined two strategies to deal with the market conditions described, solutions which even an eleven-year-old child would recognise, the first from the classroom, the second from the playground: (i) the Trojan Horse pretence; (ii) divide and rule, i.e. play-off member EC states against each other. Regarding the Trojan Horse pretence, if your rivals are building fortresses then it makes strategic sense to embed yourself within the walls, i.e. seek sanctuary inside the fortress (hence the title of the EIU book). Regarding (ii), all twelve EC member states were competing for Japanese inward investment (FDI) ahead of the much tougher regulations which the European Single Market would bring. Enticement sweeties were everywhere in abundance and the UK’s were the sweetest (even in 2018 the UK boasts that it attracts 40% of Japanese inward EU investment despite tougher EU regulations relating to incentives).

The Japanese companies were more than happy for EC countries to squabble amongst themselves to ensure that they secured the most attractive incentive packages for their inward investment. For non-Anglophiles looking at the map in the image, Honda located its manufacturing facilities in Swindon, Toyota in Derby and Nissan in Sunderland. The only thing that Swindon, Derby and Sunderland have in common, apart from the ubiquitous ‘hard-working labour force’, is crappy football (soccer) teams.

On a more serious note, Toyota arguably made the smartest location choice: Derby is the home of Rolls-Royce Aerospace and Bombardier Transportation, and the entire city and its universities and its colleges and its schools and its citizens are all soaked-through to the core in a cutting-edge precision-engineering culture unrivalled anywhere outside of the US, including Germany and Japan.

On the second strategic front, faced with unit import quotas, the baby-logical strategic solution was to try and extract more value per unit from the market. This is what Toyota did when they created the up-market brand Lexus; Nissan also created Infinity and Honda designed Acura, primarily for export from Japan to the US and Canadian markets, whilst simultaneously building manufacturing facilities within the NAFTA fortress for the lower value ‘subcompact’ cars they sold.

So, the solution to the single-paragraph, dual-issue case scenario was simple: manufacture the mainstream high-volume brands inside the walls of the fortresses to get around the quota impositions and export the higher value-per-unit products to extract maximum margins from those markets.

To suggest that this case solution is simply common-sense belies the reality of organizational complexity in global strategic management (see Chapter Ten, Theories of Organizational Behaviour and Strategic Management), but the Japanese companies were given no choice, other than to retreat, which their corporate histories suggest would have been a last resort, not the proactive response to an adverse market situation which they successfully executed.

Outside Fortress Europe Excerpt Reference

Egan, C.E. and McKiernan, P. (1993). Inside Fortress Europe: Strategies for the European Market. London: Addison-Wesley/Economist Intelligence Unit.


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