Japanese companies have fallen behind their European and US counterparts in the burgeoning Chinese market, a study released today by McKinsey, the research group, says.

The study says Japanese companies have been hampered by an insular corporate culture, which fails to reward and promote local talent. It suggests many groups simply export their management systems to overseas markets and many use Japanese as their official language, even in China.

China has seen an explosion of growth over the past 10 years, with global companies seeking a foothold in a market boasting an increasingly potent middle class with a formidable disposable income.

McKinsey's study comes as Japanese companies are stepping up their efforts to globalise their operations, targeting the Chinese market in particular amid a shrinking domestic market.

The highest-profile example recently was last year's purchase by Nomura of the Europe, Middle East and Asian operations of failed bank Lehman Brothers.

The study lauds European and US companies for being good at developing a Chinese presence by localising operations and attracting local talent. Procter & Gamble, the US consumer goods group, has been successful at developing its presence in the country for these reasons, the study says. Out of 24 leading foreign players identified by McKinsey across 12 consumer-oriented markets in China, only four are Japanese: Toyota, Sharp, Suntory and Shiseido.

Japanese PC makers have only a 2 to 3 per cent market share of China's rapidly growing PC market, compared with their 12 per cent global market share, according to McKinsey.

In the white goods market, Japanese companies have just a 6 per cent market share, while in mobile handsets their share is 3 per cent, the report states.

“The root of the problem is the differences in organisational management and talent development structure” between Japan and the rest of the world, including China, said Brian Salsberg, a McKinsey principal in Tokyo and one of the authors of the report.

“The Japanese lifetime employment system . . . is unappealing to Chinese employees, and the Japanese workplace is typically much more hierarchical than in Chinese or western companies,” the report notes.

Japanese companies have had difficulty recruiting and retaining local talent, it stated. “Japanese companies have often had the wrong people in China or those who don't have the flexibility to act quickly enough,” Mr Salsberg said.

This in turn has led to a failure to adjust products to the needs of Chinese consumers, and to identify and make use of important distribution channels and ensure smooth government relations.