18 February 2012
Once global leaders, Japanese electronics firms are tumbling
IN TOKYO’S posh Ginza shopping district the Apple Store is packed, but the nearby Sony showroom is as lifeless as a mausoleum. In recent days the largest Japanese gadget-makers said they expect to lose a combined $17 billion in the financial year 2011. Panasonic alone expects to lose $10 billion. Meanwhile South Korea’s Samsung enjoyed profits of $15 billion and America’s Apple hauled in $22 billion.
Since 2000 the big five Japanese electronics firms have lost two-thirds of their value (see chart). What ails them? High costs and a strong yen don’t help. Nor does a recent legal change that bars them from claiming certain tax credits they had counted on. But the sickness runs deeper.
Too many Japanese firms make similar things. No fewer than eight crank out mobile phones; more than ten make rice-cookers and six make televisions. The overlap is inefficient: it duplicates research and development, reduces economies of scale and destroys pricing power.
Companies often stay in markets where they cannot compete. This wastes huge amounts of capital. Rather than sticking to what they do best, they bleed their strong divisions to feed their losers. This is not sustainable. Fitch, a ratings agency, recently downgraded the debts of Panasonic and Sony to one notch above junk status and placed Sharp’s on negative outlook.
To understand how Japan’s once-mighty electronics industry has grown so flabby, consider the story of NEC. It used to be one of the world’s biggest IT and telecoms firms, but it has failed to adapt to changing times. Its shares have fallen by 90% in the past decade and by 40% in the past year alone. It has sulked from one restructuring plan to another. The latest came on January 26th, when it forecast a ¥100 billion ($1.3 billion) loss for the fiscal year instead of a ¥15 billion profit, and said it would have to sack 10,000 employees, around 9% of the workforce.
For most of the time since it was founded in 1899, the Nippon Electric Company’s main customer was the state. So NEC’s own culture has long been bureaucratic. When Japan’s telecoms market was liberalised in the 1990s the former monopoly operator, NTT, was forced to compete. But NEC was not. Quite the opposite. NTT demanded highly specialised technical specifications from its suppliers. NEC was happy to churn out weird wireless standards and arcane signalling protocols for NTT, since its giant customer guaranteed it huge sales at margins that, in effect, paid all the R&D costs. Moreover, NTT’s technical demands acted as a barrier to entry for rivals both domestic and foreign.
It was a cosy arrangement, but dangerous in the long run. It was not easy for NEC to modify the complex technology it sold to NTT for other clients. Indeed, NTT treated sales to domestic rivals as an act of disloyalty and threatened to cut orders if NEC made too many. These old ties are still strong: even today NEC holds around ¥2.6 billion in NTT shares.
Working for NTT, NEC gained little experience of how to operate its equipment inside a live network. This makes it hard for NEC to do any business outside Japan, where operators typically want vendors to help run the equipment. Such services yield recurring revenues with high margins. NEC is stuck with the hardware, which is rapidly becoming a low-margin commodity business.
NEC also deals with NTT DoCoMo, a mobile operator spun out of NTT. This is just as clubby. NTT DoCoMo does not let manufacturers devise their own products to compete against each other. Instead, it demands specific features from each of them, and tries to keep them all afloat. For example, one maker is instructed to produce a basic camera in a super-slim handset, while another is told to make a high-end camera in a brick.
This helps explain why Japan’s phone market suffers from the “Galapagos effect”. Its technology evolves in isolation and struggles to succeed elsewhere. Japan produces nearly 30m handsets a year, but sells very few abroad.
After liberalisation, NTT had to cut costs. NEC saw its earnings dip, but life was still comfortable. So it did not bother with the drastic reforms that telecoms equipment-makers elsewhere undertook. When it did try to diversify, it landed in trouble: the acquisition in the 1990s of Packard Bell, an American PC maker, was a failure. So NEC mostly stayed at home in Japan.
Despite its plodding management, NEC has often been technically brilliant. It used to vie with Cray and IBM to build the world’s fastest supercomputers. Its know-how was critical to the success of Japan’s space-satellite programme. Yet these are small markets. NEC’s research labs may be among the best in the world, but it has been forced to slash its R&D budget this year to half the level of 2008.
As its difficulties have mounted, NEC has sold assets, including stakes in its LCD-display unit, its mobile-phone arm and its personal-computer division. By dawdling, it received less. And it has not made a clean break; it retains minority stakes.
Today, NEC produces little that other firms don’t make as well. Alas for Japan, it is far from alone. Sharp’s cellphones and LCD televisions have to battle Panasonic’s and Sony’s and Toshiba’s and Hitachi’s. All are losing market share to Samsung and Apple. “When other Japanese companies see NEC, they can’t think it is only NEC’s problems,” says a former grandee at a big electronics firm. Will they do anything about it? He looks away and sighs. “Everyone knows we need to change, and no one can make the changes,” he says.