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Can the Japanese consumer electronics industry resuscitate itself?
Re-thinking the overblown approach to product development

Atsushi Osanai
Associate Professor, Waseda Business School, Waseda University

Since sometime last year, we have been seeing a lot of stories in the news about the Japanese consumer electronics industry losing its international competitiveness. I think that there are many people under the illusion that because almost all products at consumer electronic stores have been Japanese brands for a long time, the same applied overseas. However, consumer electronic stores overseas have by no means been dominated by Japanese consumer electronics, particularly stores in North America and Europe. Sony had the leading share of the global television market around 2000, and although Sony has now been outperformed by South Korea's LG Electronics and Samsung Electronics in terms of market share, Sony's market share has not declined that significantly. Even before the recent business downturn among Japanese TV manufacturers, LG and Samsung were major brands in the North American and European markets, while many Japanese brands did not enjoy the same level of presence as they did in the Japanese domestic market. Actually, brands such as Mitsubishi Electric and Sanyo Electric that were not exactly top brands in the Japanese domestic market displayed significant brand strength in the television market in North America and Europe. Although Sony held the top share of the global television market for many years, up until the mid-90s Sony was only a medium-sized company that had the third or fourth highest share of the Japanese domestic television market. It was no coincidence that events took an opposite turn in Japan and overseas. Many major Japanese consumer electronics manufacturers had become reliant on business in the fairly large and somewhat closed-off Japanese market.

In addition, although Japanese brands have been popular in Asia for large household appliances, Japanese air conditioners and refrigerators have been almost unseen in the North American and European markets since before the turn of the century. The current problems with Japanese consumer electronics manufacturers are the results of not being able to keep up with the rapid decline in product prices and adopting business structures that are overly-reliant on the Japanese market. The rapid deterioration in the business performance of Japanese electronics manufacturers and the declining presence of Japanese brands overseas are not necessarily one and the same thing.

Another issue is that Japanese media reports tend to convey a misunderstanding of the competitive environment for consumer electronics. For this reason many people believe the narrative that high added-value strategy used by Japanese manufacturers became ineffective due to the excessive price competition resulting from the large volumes of low-priced LCD TVs forced upon the market by emerging manufacturers in South Korea. However, this is not exactly the case. The North American market is the largest market for large televisions, and it is Japanese companies themselves that sped up price cost competition through the low-price strategies they adopted for plasma and LCD TVs in these markets. There were several manufacturers with flat panel manufacturing facilities in Japan which produced flat-screen TV with their own panels that had high brand recognition and market share in Japan but were not recognized as major brand in North America and Europe. Having in-house panel manufacturing facilities meant that the manufacturers needed to sell large enough volumes of products using these panels to cover the fixed costs for panel production, and it was not possible to sell these volumes based on Japanese domestic demand alone. However, because large flat-panel TVs are expensive and the industrialized countries in North America and Europe had been the principal markets for these products up until that time, Japanese manufacturers had to focus their products on these markets. Because of the low brand recognition of Japanese manufacturers in these markets, manufacturers had to take on the role of price leaders in order to get their brands into circulation.

Japanese-made large LCD TVs lined up beside low-cost Taiwanese brands at a discount store in the US (photo by Atsushi Osanai)
The low-priced LCD TV Vizio (US owned, produced by a Taiwan-based OEM) and Japanese-made large LCD TVs at a wholesale discount store in the US. According to a sales clerk, the sales point for Japanese-made LCD TVs is that while they are priced at the same level as Samsung LCD TVs from South Korea they are 10 inches larger.

I fear that if past developments overseas are misunderstood it could lead to mistaken policies aimed at the revival of the Japanese consumer electronics industry in the future. Of course, there was a point in time during which the growth of South Korean electronics manufacturers was driven by the export of low-cost products overseas. According to Professor Cho Du-Sop of Yokohama National University, Samsung's growth as an integrated electronics manufacturer was directly caused by the success of its semiconductor business. While the semiconductor business requires massive investments, the funds for these investments were covered by the black-and-white TV business it had been consigned with by Japanese manufacturers. Because color TVs had become the main product during the 1970s in Japan, one Japanese manufacturer sold off its antiquated black-and-white TV technologies and business to the then medium-sized Samsung. Samsung then went on to sell these black-and-white TVs in emerging markets such as China and India and leveraged these successes to develop its semiconductor business aimed at the industrialized nations.

This structure has not changed today. Although the Japanese media tends to focus on the business of South Korean manufacturers in the smartphone and OEL TV markets for the industrialized nations, Samsung also manufacturers and markets low-priced products in-line with the market environments in the rapidly growing BRICs nations.

During the period of high economic growth in Japan, Japanese manufacturers had no need for strategy. As long as they developed products like TVs and video players and then conducted technology developments to improve function and performance, it would lead to product value. In addition, many Japanese manufacturers grew reliant on high sales in the Japanese domestic market when demand was vibrant due to the strong economy, and the Japanese grew attached to the pursuit of high-functionality and high-performance. These are the major factors that contributed to the Galapagos Syndrome (a phrase originally coined to describe Japanese mobile phones, which had become so advanced compared with phones in other countries that they did not resemble them; akin to the species that developed differently in the isolated habitat of the Galapagos islands) in the Japanese mobile phone market. Before people began to look down on the Japanese mobile phone market as a Galapagosized mutation, Japan's highly functional mobile phones attained much popularity as the "mobile phone equipped with every function imaginable." Japanese manufacturers were convinced that increasing the number of functions and improving performance was sufficient as a product strategy.

On the other hand, South Korean companies did not rely on the domestic market from the beginning. Although Japan is a nation of 120 million people, South Korea still remains a small nation with a population under 50 million. In South Korea it would not have been feasible for manufacturers to develop business based on domestic demand alone. While Japan continued to adopt new technologies one after another as the evolution of functions and performance began to get out of hand, South Korean manufacturers would use technologies from previous generations to provide products in line with local purchasing power and use the funds generated to conduct large investments in businesses including semiconductors, LCD, and mobile phones. In doing so, South Korean manufacturers became able to provide products with the same level of technology as Japanese products in the markets of industrialized countries at a lower cost. Low-cost does not necessarily equate with low value. For products such as LCD panels and semiconductors, demand often exceeds supply, and for this reason there had been no reason to engage in cost competition in these markets, allowing South Korean manufacturers to conduct a more profitable business than their Japanese competitors. These profits allowed them to make even larger investments for the future. Semiconductors and LCD panels are equipment industries, meaning the size of investments has a direct impact on productivity. In contrast, Japanese manufacturers tended to hurry on to develop more advanced next generation technologies (product innovation) after developing their products up to a certain level. In the meantime, South Korean and Taiwanese manufacturers would focus on technology improvement (process innovation) aimed at improving productivity for products using standard-level technologies. This strategy enabled these manufacturers to develop manufacturing lines more productive than the lines of Japanese companies for the same generations of technology.

Considering this history, one thing that Japanese manufacturers really need to do is to seriously address the challenge of manufacturing low-cost products. In our current era, advanced technologies have been adopted and production processes have been automated for many consumer electronics products, meaning that labor costs no longer make up much of the differences in manufacturing costs. Saying that Japanese manufacturers are not capable of making cheap products like South Korea and Taiwan manufacturers is just an excuse, shifting the focus from the important fact that not much serious thought has been given to innovations aimed at improving productivity.

Another issue is that a more precise definition is needed for the "high value-added strategy" that is often given lip service by Japanese companies. We need to think about what "high value-added" actually is. Like the mobile phones equipped with every function imaginable, does making everything high-function and high-performance actually equate to adding high value? While Apple products such as the iPhone and iPad may not compare favorably with Japanese products when only functions and performance are considered, Apple is beginning to make things difficult for Japanese manufacturers. The value of Apple products is generated through the provision of the user experience (UX) and an intuitive and easy to-use user interface (UI), as well as the resolution to get rid of unneeded functions if they interfere with these superior user interface and user experience qualities. Recently, manufacturers have paid lip service to the idea of smart consumer electronics, but I fear that this could lead to further Galapagosization. It will be difficult for Japanese manufacturers to resuscitate their industry unless they try to rethink their overblown product development philosophy.

Atsushi Osanai
Associate Professor, Waseda Business School, Waseda University

Born in Tokyo in 1972, and graduated from the Faculty of Economics, Kyoto University. Received a Doctor of Economics degree from the Graduate School of Economics, Kyoto University, in March 2007 after serving at Sony Corporation in the TV Business Group, Product Planning Department, Technology Planning Department, and as an assistant for Senior General Manager, Product Strategy Department. In 2007 appointed as an associate professor at the Research Institute for Economics and Business Administration, Kobe University. Appointed to his current position in 2011. Also serves as an advisor for the House Foods research center, a trustee of the Academic Association for Organizational Science, and deputy managing editor of the journal Organizational Science [Soshiki kagaku]. In addition, he serves as a director at the International Academy of Strategic Management and his recent publications include Aftermarket Strategies [Afuta maketto senryaku] (co-authored with Kiyonori Sakakibara), Hakuto-Shobo Publishing Company.