Saturday, Jan. 1, 2011

AT JAPAN'S EXPENSE?

Digital age leaves myopic Japan facing manufacturing crisis

By Kazuaki Nagata

Staff writer

First in a five-part series exploring how Japan and its East Asian neighbors are separately handling five common issues

SOURCE: CABINET OFFICE

2010 was another year of a humiliating setbacks for Japan as blue-chip companies kept losing share in key markets and China finally surpassed it as the world's second-largest economy.

The long-term outlook is not bright for Japan Inc. Companies in South Korea are rapidly increasing their presence in the world as the Japanese market shrinks while its population ages.

Experts say Japan Inc.'s business model isn't working any more at a time when the rapidly evolving digital technology market requires more emphasis on software, quicker decision-making, and cheap assembly of module parts sourced from around the world.

Indeed, the speed at which the Japanese manufacturing empire is collapsing is almost astounding, a recent report by the Ministry of Economy, Trade and Industry said.

Japanese firms have watched their dominance plunge across the board, from more than 80 percent in the global LCD panel market in 1997 to 10 percent by 2005, from over 80 percent in DVD players in 1998 to 20 percent in 2006, from 90 percent in car navigation systems in 2004 to 20 percent in 2007, and from 50 percent in solar panels in 2005 to 20 percent in 2007, the report released in June said.

"This is not only about particular companies or industries. (Japanese firms) have lost in every single competition, one after another," METI said in the report.

"Rather, this phenomenon should be recognized as a business model problem shared by many (Japanese) companies. And the speed of the downfall is even accelerating," METI warned.

The report, titled "Industrial Structure Vision," caught the eye of several analysts in Japan for the frank way METI — the champion of Japan's blazing postwar reconstruction — admitted to the structural problems being created by the technology-oriented and bureaucratic nature of Japanese manufacturers.

According to the report, Japanese firms manage to grab substantial market share in the initial stage of marketing because their products boast a technological edge. But when it comes to marketing digital products, particularly in emerging economies, those advantages quickly evaporate.

The Japanese drew strength from their vertically integrated manufacturing processes, from product design to parts production and assembly. This closed model, supported by Japan's mammoth pyramid-style group firms, was successful at improving product quality and established a high reputation for the "Made in Japan" label all over the world.

But from the 1990s, the core technologies for many electronic products, including computers, TVs and DVD players, went digital, and with modular components.

The priorities for gadget makers today are now quick software design, global module procurement, and the ability to assemble a product in any country where cheap labor is available.

This has rapidly eaten into the relative competitiveness of Japan's pyramid-style manufacturing groups, METI said.

The pyramid model remains successful in only a handful of fields, most notably automobiles and single-lens reflex cameras, METI said.

In these two particular industries, the total integration of sophisticated technologies, rather than module assembly, remains critically important — the apparent reason Japanese automakers like Toyota Motor Corp. are maintaining their competitiveness against foreign rivals, the report said.

"However, (the auto industry) is accelerating its shift to electric vehicles. Attention should be paid to whether the Japanese auto industry can cope with the trend for modular (EV parts)," the report said.

Keita Nishiyama, executive managing director at Innovation Network Corporation of Japan, a semipublic investment fund, said the pyramid model has created barriers between different industries and prevented innovative technologies from interacting.

Japan's GDP per capita ranking among OECD countries SOURCE: CABINET OFFICE

"My key word is 'recombination,' " said Nishiyama, who is also an industry ministry bureaucrat.

"Manufacturing EVs requires technologies that are different from producing gasoline-powered cars, and some of those technologies exist outside of the auto industry pyramid," said Nishiyama, who stressed the need for Japan to innovate by flexibly combining technologies and breaking these pyramids.

The shrinking domestic market, together with rapid growth in emerging markets, poses another threat to Japanese corporate culture, the report said. This was backed by various experts.

"When thinking about the Japanese companies' business model, their target has been the domestic market, where they customize products specially for notoriously picky Japanese consumers," said Hiroshi Nakamura, professor at Keio Business School.

For example, although the Japanese cell phone sector has developed cutting-edge technologies, the industry — vertically integrated all the way from from handset makers to service providers — has been preoccupied solely with supplying the domestic market.

As a result, Japanese handset makers lag behind their foreign rivals in the global market.

"The domestic market is now peaked out, so it's important that firms' top executives shift their focus more to emerging markets," said Nakamura.

The nature of Japan's tightly integrated group structure also can be a disadvantage in rapidly growing emerging countries like China and India, where low prices and quick marketing decisions that cater to local needs are often the key to success.

South Korean manufacturers are particularly strong in emerging markets, thanks to their quick decision-making and particularly strong focus on local marketing, said Hidehiko Mukoyama, senior economist at The Japan Research Institute, who watches the South Korean economy.

Indeed, South Korea has increased its economic presence with its powerful "chaebol," the zaibatsu-esque business conglomerates led by the likes of Samsung Electronics Co. and Hyundai Motor Co.

South Korean companies are particularly quick to react to the needs of overseas markets because they are heavily dependent on exports, as the domestic market is relatively small, having a population of 45 million.

Midok Kim, professor at Tama University's School of Management and Information Sciences, said the South's export competitiveness is likely to increase because it has been strategically and actively signing free-trade agreements in the European Union, the United States, and elsewhere, a total of 45 countries.

"FTAs push (South Korea's strengths) even further," Kim said. "It has secured international competitiveness and can get ahead of other countries unless they expand their own FTA networks."

Japanese manufacturers also must keep a close eye on their Chinese counterparts, which are seeking to become export leaders on a global scale. Given the country's rapid economic development, and government assistance and aggressive investment in research and development, its manufacturers may soon emerge as powerful rivals, pundits say.

"It seems that China is following the path of Japan and South Korea, which boosted their economies by fostering strong competitiveness in their manufacturing industries," said Hiroyuki Kato, economics professor at Kobe University's Graduate School of Economics.

China is now shifting its exports from labor-intensive products, such as textiles, apparel and foods, to more technology-oriented, electronic products, said Kato.

"The change has been of course led by mainly foreign companies, but domestic companies are surely growing and now competing with them in the domestic market," Kato said, pointing to Chinese carmakers as a notable example.

According to Shinichi Isa, former science and technology attache at the Japanese Embassy in Beijing, Chinese investment in science and technology has been growing by more than 20 percent a year under the banner of "innovation."

Isa, current secretary to the senior vice minister of education, said China has the potential to become a strong force in information technology.

"Creativity is China's specialty. They are good at creating something completely new based on new ideas, while Japanese are good at perfecting what has already been created," he said.

Since software is becoming more crucial than hardware for many products, "China is expected to grow in this field," Isa said.