Electronics Makers Forced to Play Catch-Up

Kishiro Yasuyuki [Profile]

[2012.07.09] Read in: 日本語 | 简体字 | 繁體字 | FRANÇAIS | ESPAÑOL |

Japan’s three electronics giants are in a collective slump, dragged down by sluggish television sales. Meanwhile, their rivals in Asia are going from success to success in the global marketplace. But now there are signs that Japanese electronics makers are finally ready to tackle a fundamental restructuring.

Japan’s electronics makers are struggling. Sony, Sharp, and Panasonic are scrambling to get back on track after posting a massive collective loss of ¥1.6 trillion for the third quarter of the fiscal year ended March 31, 2012. The losses stem from slumping television sales. In recent years Japanese electronics makers enjoyed increased demand, thanks to the boost in sales resulting from Japan’s switchover from analog to digital broadcasting and the government’s Eco-Point Program to encourage purchases of energy-efficient products. But now, with the switchover completed in 2011 and the Eco-Point Program also coming to an end, Japan’s home electronics firms have run out of steam.

Japanese Electronics Firms behind the Curve

Japan’s electronics industry has an aggregate value of ¥41 trillion, a major chunk of which, roughly ¥6 trillion, comes from the television-related business. The industry needs substantial funds to carry out a major restructuring to revise business models and reduce personnel. Investment from China and Taiwan will allow the industry to procure those funds.

Sharp Corporation has managed to overcome its crisis thanks to a ¥133 billion in investment received from the Taiwanese electronics giant Hon Hai Precision Industry Co., Ltd. (trading as Foxconn) in March 2012. The deal gave Hon Hai roughly a 10% stake in Sharp.

Panasonic Corporation, for its part, sold off the white goods division of its subsidiary Sanyo Electric Co., Ltd. to the Haier Group, a major Chinese electronics firm, for ¥10 billion in 2011. Similarly, Sony Corp. has sold a television production plant in Mexico to Hon Hai. And NEC Corporation has formed a joint-venture company through a deal with the China-based Lenovo Group that gives Lenovo a 51% share of the company.

Global Shares of the Flat Panel Display TV Market and Year-on-Year Growth Rates

  Market share (%) Growth rate (%)
Samsung (South Korea) 26.3 18
LG Electronics (South Korea) 13.4 2
Sony (Japan) 9.8 –34
Panasonic (Japan) 6.9 –19
Sharp (Japan) 5.9 –30

Market share figures are for the fourth quarter of 2011; growth rates are year-on-year figures as compared to fiscal 2010.
(Source: Display Search)

How can we account for the decline of Japanese electronics firms since their peak period back in the 1980s? A major factor is the rapid development of digitization and of the Internet in the 20 years since then. An outcome of digitization has been the commoditization of electronics parts and the shift to a modular approach to manufacture. An intermediary market has arisen that allows any firm to engage in the production of inexpensive electronic devices by purchasing and assembling standardized parts. In this way, a “horizontal division of labor” has become the mainstream approach.

The best known of the companies adopting this approach is the US-based television maker Vizio, started up from venture capital. Its head office focuses on product planning, while the panels for televisions are procured from South Korea and the semiconductors from Taiwan. The company does not own its own production plants, preferring to outsource production to Taiwanese firms, assemble goods in China, and then sell the end-product in the United States. This allows Vizio to optimize its management, selecting the countries and regions that offer the best cost performance. The company does all of this, and competes for the top share of the US television market, with a workforce of just 90 employees.

The Costly “Go-It-Alone” Approach

Japanese electronics makers have failed to change to a more flexible approach to production. Instead, they have continued to trust in their own technical superiority and hold fast to their conventional production methods, which might be described as a “go-it-alone approach” or “vertical integration.” In the case of Panasonic’s plasma televisions, for instance, the company handles the entire production process—from the creation of semiconductors using silicon at its plant in Toyama Prefecture to the production of panels at its Himeji plant and final assembly at its Amagasaki plant, both located in Hyōgo Prefecture. Because Panasonic does everything using its own plants, employees, and technologies, there is a limit to how much it can streamline costs.

In 2009, Panasonic spent ¥200 billion to construct its third plant in Amagasaki, but by then global prices of electronics had already begun to plummet, and within just two years operations at the new plant had been halted. Similarly, after just five years of operations, Sharp had to shut down operations at its plant in Kameyama, Mie Prefecture, which had been producing liquid-crystal display televisions since opening in 2004.

In short, what accounts fundamentally for Japanese electronics makers’ losing streak is not the often cited “six hardships” (strong yen, high corporate taxes, tough labor laws, high electricity costs, stiff environmental regulations, and lagging participation in free trade agreements), but rather an inability to transition to a new production approach despite losing global competitiveness as a result of a high cost structure, a change in the direction of technology, and the globalization of management methods.

Instead of a horizontal division of labor, Japanese electronics makers have followed the strategy of launching a string of new television models, incorporating the latest technologies with high added value, in a bid to stem the fall in prices. The new three-dimensional televisions are one example of the fruit of this strategy, but sales of those models fell flat when consumers soon tired of them and of the special glasses needed to watch them.

Now Japanese makers are developing the new 4K2K television, with a screen resolution of 4,000 horizontal and 2,000 vertical pixels—about four times the amount of a high-definition television today. This high resolution is on par with that of movies shown on the big screen of movie theaters, but TV broadcasts at present cannot create the content suited to that level of clarity. This raises the question of whether a television really needs to have such high resolution at this point.

Meanwhile, in the area of organic electroluminescence televisions, the odds-on favorite to be the next-generation screen technology, Japanese firms were initially at the forefront of development but ended up abandoning the technology at one point; now they are trying to catch up to the market leaders from South Korea, Samsung and LG Electronics. At some point the Japanese electronics makers seem to have become irrelevant.

Looking Outside and Overseas for Change

What path can Japanese electronics firms take to open up a brighter future for themselves? The most pressing task in the short term for Japan’s three electronics giants is to restructure their television businesses, which have been hemorrhaging losses. Other urgent tasks include outsourcing production overseas, closing down domestic plants, consolidating affiliate companies, and downsizing the workforce. As the new president of Sharp, Okuda Takashi, put it, there is a need to “rethink the go-it-alone approach that was taken too far.”

This is indeed the correct remedy for the problem, but succeeding in this endeavor is no simple matter. In Japan, the true enemy is inside the company. Transforming the business model followed until now will require the strength and finesse to overcome internal resistance to change, so company leaders must have skills that go beyond the level of just picking up on the surrounding situation. Success or failure will depend on having the will to channel the current sense of crisis in the direction of corporate regeneration.

Each of the three electronics giants must make the most of their respective areas of strength. Sony can focus on its digital imaging business, which includes digital cameras, video cameras, and semiconductor sensors. Panasonic can utilize its group companies Panasonic Electric Works Co., Ltd. and Sanyo to beat out the competition through a “smart house” initiative that integrates household appliances, photovoltaic cells, and storage batteries. Finally, Sharp has strong potential to handle outsourcing production of televisions via Hon Hai should Apple decide to enter the television business, raising good opportunities for Sharp to make use of its proprietary liquid-screen panel technology.

In carrying out restructuring it is important for the Japan’s electronics makers to recognize how money from China and Taiwan can be a godsend. For instance, when Haier purchased the former Sanyo brand from Panasonic, the design of the refrigerators and washing machines was quickly upgraded, and in just half a year the Aqua brand gained a top market share.

The employees of the former Sanyo, who had once had to make do with meager funds for development, now have ample development funds and are also savoring the excitement of going head to head against the world’s top firms. It is also likely that the new firm will become the development hub for Asia as a whole under Haier’s global strategy.

The task for Japan’s electronics manufacturers is to penetrate newly emerging markets, but the affluent consumers in those markets will not necessarily purchase the latest, high-tech products made in Japan. These manufacturers will need to seriously examine how China, Taiwan, and South Korea have been successful in emerging nations by skillfully and promptly designing products suited to local lifestyles.

Embracing New Global Opportunities

In the past, Japanese corporations were on their guard against being bought out by foreign firms, but this attitude has been changing. Realizing that they have reached a dead end and will go bust unless changes are made, Japanese corporations now welcome foreign capital that utilizes their technology and personnel because it allows the firms to maintain their production and payrolls. Moreover, even after a company is acquired by a foreign entity, it continues to pay tax as a Japan-based corporation, thereby contributing to the country’s GDP.

Looking beyond the electronics industry, we can see that robust change is going on in Japanese industry under the surface. In fiscal 2011, for example, the number of foreign firms that either merged with or were acquired by Japanese corporations increased by 20% year on year, to 474, with the value of those deals doubling, to ¥7.33 trillion (according to Recof Corp.)—an outcome that occurred against the backdrop of a record high Japanese yen.

This is a snapshot of what Japan’s industry is like today, with foreign firms coming to the rescue of Japanese electronics firms on the one hand, while more and more Japanese corporations are acquiring foreign firms to boost their own global development on the other.

Internationalization involves more than establishing a foreign affiliate or setting up an overseas production base. A company also needs to have the foresight of putting in place production, logistics, sales, and other functions in the most appropriate locations around the world in order to rise to the ranks of a global presence with the optimal system of management in place.

The shift to this new approach is likely to transform the face of industry over the next few years.

(Originally written in Japanese on June 18, 2012.)

  • [2012.07.09]

Born in 1946. Journalist covering business and science. Graduate of the Faculty of Engineering of the University of Tokyo. After working as a technician for NEC, joined the staff of the Asahi Shimbun, where he worked until June 2010 for the newspaper’s business desk. Currently chairs a study group comprised of businesspersons and academics that aims to examine and make proposals regarding technical innovation, management overhauls, and policy formulation. Writes for the website Webronza, run by Asahi Shimbun. Author of Jimintō zeisei chōsa kai (The LDP’s Tax System Research Council), and other works.

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