Japan's tech industry banks on 'cool factor'
Despite a protracted recession and unprecedented competition, Japan is discovering that the world will still pay up for cool-looking stuff.
Tech industry banks on the 'cool factor'
By Michael Kanellos
Staff Writer, CNET News.com
December 6, 2004 4:00 AM PST
TOKYO--More than a decade after plunging into one of the steepest financial declines in modern history, Japan is turning increasingly back to its roots in an industry that made the country a postwar economic powerhouse: consumer electronics.
In the 1960s, transistor radios and solid-state TV sets propelled the country's phenomenal economic growth. Today, it's the demand for sleek digital products--combined with corporate reforms and governmental actions initiated over the last decade--that is breathing life and confidence back into Japan's battered technology sector, which is key to the country's overall economic recovery.
"In digital electronics, Japan is playing the leader," Sony President Kunitake Ando said in a recent speech. "The champion of the narrowband was the U.S., and it was mostly on the PC. Now it is a vessel of communications and entertainment, and that is the strength of the Japanese."
The trend can be seen in the recent financial results of many of the country's largest conglomerates. In late October, Toshiba announced a net profit of $79.1 million (8.38 billion yen) on sales of $25 billion for the first half of 2004, compared with a 32.2 billion-yen loss for the same time last year. Hitachi's first-half net profit grew to $371 million (41.2 billion yen), a 763 percent increase from the same period a year ago.
In the near term, that means Japanese companies and policymakers are counting on this holiday shopping season to accelerate their momentum in these markets. So far, it's a mixed bag. While TV sales are up overall, Sony admitted that it underestimated demand and is having trouble filling all its orders. But in the long run, these areas will be important testing grounds for broader changes in the evolution of Japanese business and culture, including the keiretsu heritage of interlocking relationships that has endured for generations.
Having witnessed some false starts in recent years, economists remain cautious in their projections. In August, the government said the gross domestic product only grew 1.7 percent, below expectations and an abrupt change from strong job and GDP numbers of the previous 15 months. In addition, the recent rise in oil prices has led some to reduce projections or caution about future sales.
In the technology industry, these uncertainties translate to a mixed bag of assessments that vary from company to company. For many, success will depend on finding a winning formula of higher-than-average prices, high-end design, novel technology and brand awareness, along with crucial cost-cutting techniques such as outsourcing and standardized components.
"Panasonic is a company that actually gets it," said Van Baker, an analyst at research company Gartner. "I still have some doubts about Sony."
Three devices lead turnaround
The products cited most often in Japan's consumer electronics rebirth are the successors to the film cameras, analog television sets and video recorders the nation has cranked out for decades. These include digital cameras, high-definition TVs and DVD players, along with the components that go in them.
In these devices and others, domestic manufacturers have continued to hone an edge in turning aluminum, plastic and little cartoon characters into art. The "emotional" aspect of product design--a largely foreign concept in the computer industry--is discussed often by Japanese executives and cited as part of the success of things like the Nintendo's game devices, Hello Kitty and mobile phones.
"What I thought while developing iMode is that Japan is very strong in developing products for middle-class people," said Kei-ichi Enoki, executive vice president and managing director of products and services at NTT DoCoMo. "We initially targeted young people because they are the most sensitive to new products."
The fundamental changes in Japanese business philosophy have been necessary to address revolutionary developments in the global marketplace. Manufacturers from other parts of the world, such as Samsung and Apple Computer, have figured out how to design--and more importantly, sell--consumer electronics products.
Rivals from China to Wal-Mart
Moreover, contract manufacturers in China and Taiwan have allowed newcomers to enter the market. Wal-Mart Stores, Sears, Roebuck and Co., Westinghouse and Best Buy now sell CE products under their own brand name.
To remain competitive, Japanese companies have adopted such practices as offshore outsourcing and entered into mergers and alliances with foreigners, such as joint ventures crafted by Samsung with Sony and Toshiba. In one particularly close arrangement, Fujitsu is designing servers with Sun Microsystems and Intel while stationing engineers in the labs of Linux maker Red Hat.
New alliances are replacing longtime rivalries in areas such as processor and memory chip production to cut costs and help finance factory construction. Such changes have led Japan to become one of the more active markets for expanding semiconductor facilities in the last year alone.
"Most of them had to give up doing it themselves," said Douglas Sparks, a consultant at DSK Associates. "They understand there is no going back."
Top sellers in flat-screen TVs
So far, many of the changes seem to be paying off. In LCD and plasma TVs, Japanese manufacturers occupy most of the top five spots in sales. Sharp Electronics and Matsushita Electric Industrial lead the production of the flat glass screens featured in such sets, with Matsushita surpassing Samsung in the second quarter for the first time, according to market researcher DisplaySearch.
But Japan's technology industry might face one of its most serious tests in another market in which it has enjoyed much success: digital photography. Japanese companies are the dominant fact of life in the digital-camera market, according to research firm iSuppli, and shipments are expected to rise from 46 million units in 2003 to between 58 million and 62 million units this year. The top five manufacturers are Sony (23 percent), Canon (22 percent), Fuji Photo Film (15 percent), Olympus (15 percent) and Nikon (11 percent). They comprise 86 percent of the market.
Copy editor: Leslie Katz
Design: Ellen Ng
Production: Mike Markovich
"The digital camera was invented in Japan," said Shyam Nagrani, an analyst at iSuppli. "They jumped on it early."
Japan also has a dominant position in manufacturing chips and other parts for these cameras. Sony makes roughly 40 percent of the CCD, or charge-coupled device, sensors for capturing images, followed by Matsushita, Toshiba and Sharp. The flash memory cards that go into these devices run on NAND technologies. Toshiba is the second-largest NAND producer, but as the inventor of NAND, also gets royalties from other manufacturers.
Next battle in camera phones
Competition, however, is intensifying. Camera cell phones--which already come with telescopic zoom lenses in Korea--are hollowing out the low end of the market, and silicon sensors made in the United States and elsewhere are growing in power and popularity. Although digital-camera revenue rose from $10 billion in 2002 and will likely peak at more than $14 billion this year, iSuppli predicts that sales will then sink to about $12 billion in 2006.
Sony, which has proved to be one of the more successful companies at selling camera phones, has responded by producing silicon sensors of its own. Common standards for new 3G models will also let Japanese manufacturers sell phones outside its country.
Similar dynamics have already run their course in the market for DVD players, which were commoditized early on by companies such as Apex. Japanese manufacturers have tried to trump competitors with more sophisticated DVD recorders, including those that can play Blu-ray discs, an emerging disc technology that holds far more data. But sales have been relatively small.
"The question is going to be, how long do you have to ride the price down?" said Stephen Baker, an analyst at The NPD Group.
Even if companies are successful, life won't necessarily be easy. Consider Matsushita, the parent company of Panasonic and JVC.
The company began major changes in 2001, consolidating divisions, spinning off companies and streamlining product development and logistics. A net loss of $187 million in fiscal 2003, which ended in March 2003, turned into a $405 million profit in fiscal 2004, and profits have continued to rise. Overall revenue, however, has barely budged, growing only 1 percent to $71.9 billion in fiscal 2004, well below the $87 billion revenue goal set in 2001 for that year.
Compare that to IBM, one of the few U.S. high-tech companies with similar revenues and numbers of employees--between 200,000 and 300,000. Big Blue saw revenues of $89.1 billion and a net income of $7.9 billion in 2003. Put another way, IBM's net profits were more than 18 times higher off a similar revenue base in the same basic period.
$900 million for nanotechnology
If the country's economic turnaround lasts, many Japanese companies hope to grow revenues in a different direction--specifically, in emerging technologies. For instance, Japan's government will invest roughly $900 million in nanotechnology research this year, as much as all of Europe and nearly as much as the United States, according to the National Science Foundation, though the economies (and populations) of the United States and Europe are substantially larger.
"We want to be on the front end of the commercialization of nanotechnology," said Jun'ichi Sone, general manager of NEC's Fundamental and Environmental Research Laboratories. NEC invented the breakthrough single-walled carbon nanotube and has begun to seek licensing revenues for its patents from companies that want to make or sell products based on them. Sumitomo has already signed a deal.
A history of energy conservation, prodded in part by tax breaks, is also paving the way for gains in the growing alternative-energy market.
Toyota, others tap alternative energy
Toyota and Honda jumped ahead of North American manufacturers in promoting hybrid cars and have reaped the benefits. In September, Toyota said it would double the U.S. allocation of Prius hybrids in 2005 to 100,000 units and increase monthly worldwide production next year from 10,000 units a month to 15,000. California Gov. Arnold Schwarzenegger is trying to woo Toyota to build a hybrid factory in his state.
Elsewhere on the environmental front, Panasonic will begin to sell hydrogen systems for heating homes. "Toyota, Canon, Panasonic...the companies that stuck to the importance of technology and the technology of making things are still strong," said Akira Yamanaka, corporate vice president of Fujitsu's server group.
What remains unknown is how far that strength will go in the economic turbulence of the new millennium. "The general trend line is pretty good. There is kind of a 'two steps forward, one step back' phenomenon," Thomas Lifson of consulting firm Lifson and Associates said.
Like many others, however, he finishes his thoughts with a poignant observation on a country obsessed with tradition: "Nobody talks like they have a job for life anymore." 
Copy editor: Leslie Katz
Design: Ellen Ng
Production: Mike Markovich
5 facts about Japan's economic recovery
Nothing is ever certain in the technology industry, but Japan is counting on continuing demand for consumer electronics to help the country out of an economic crisis that has lasted more than a decade. Below are five important facts that support an outlook for recovery and outline the challenges to sustaining it.
1. Three devices lead turnaround. The products cited most often in Japan's consumer electronics rebirth are digital cameras, high-definition TVs and DVD players.
2. Rivals from China to Wal-Mart. Contract manufacturers in China and Taiwan allow newcomers to offer their own electronics brands, including Sears, Westinghouse and Best Buy.
3. Next battle in camera phones. Japanese companies occupy the top five spots in sales of digital cameras, accounting for 86 percent of sales, but competition from Korean camera phones and cheaper silicon will erode the advantage.
4. $900 million for nanotechnology. Like their counterparts in the United States and Europe, Japanese manufacturers are hoping to grow their businesses by investing heavily in emerging technologies such as nanotubes.
5. Toyota, others tap alternative energy. Toyota plans to increase the production of hybrid cars by 50 percent next year because of soaring demand. Meanwhile, Panasonic and Mitsubishi are coming out with hydrogen and solar products for homes.
Copy editor: Leslie Katz
Design: Ellen Ng
Production: Mike Markovich
Tech industry banks on the 'cool factor'
By Michael Kanellos
Staff Writer, CNET News.com
December 6, 2004 4:00 AM PST
TOKYO--More than a decade after plunging into one of the steepest financial declines in modern history, Japan is turning increasingly back to its roots in an industry that made the country a postwar economic powerhouse: consumer electronics.
In the 1960s, transistor radios and solid-state TV sets propelled the country's phenomenal economic growth. Today, it's the demand for sleek digital products--combined with corporate reforms and governmental actions initiated over the last decade--that is breathing life and confidence back into Japan's battered technology sector, which is key to the country's overall economic recovery.
"In digital electronics, Japan is playing the leader," Sony President Kunitake Ando said in a recent speech. "The champion of the narrowband was the U.S., and it was mostly on the PC. Now it is a vessel of communications and entertainment, and that is the strength of the Japanese."
The trend can be seen in the recent financial results of many of the country's largest conglomerates. In late October, Toshiba announced a net profit of $79.1 million (8.38 billion yen) on sales of $25 billion for the first half of 2004, compared with a 32.2 billion-yen loss for the same time last year. Hitachi's first-half net profit grew to $371 million (41.2 billion yen), a 763 percent increase from the same period a year ago.
In the near term, that means Japanese companies and policymakers are counting on this holiday shopping season to accelerate their momentum in these markets. So far, it's a mixed bag. While TV sales are up overall, Sony admitted that it underestimated demand and is having trouble filling all its orders. But in the long run, these areas will be important testing grounds for broader changes in the evolution of Japanese business and culture, including the keiretsu heritage of interlocking relationships that has endured for generations.
Having witnessed some false starts in recent years, economists remain cautious in their projections. In August, the government said the gross domestic product only grew 1.7 percent, below expectations and an abrupt change from strong job and GDP numbers of the previous 15 months. In addition, the recent rise in oil prices has led some to reduce projections or caution about future sales.
In the technology industry, these uncertainties translate to a mixed bag of assessments that vary from company to company. For many, success will depend on finding a winning formula of higher-than-average prices, high-end design, novel technology and brand awareness, along with crucial cost-cutting techniques such as outsourcing and standardized components.
"Panasonic is a company that actually gets it," said Van Baker, an analyst at research company Gartner. "I still have some doubts about Sony."
Three devices lead turnaround
The products cited most often in Japan's consumer electronics rebirth are the successors to the film cameras, analog television sets and video recorders the nation has cranked out for decades. These include digital cameras, high-definition TVs and DVD players, along with the components that go in them.
In these devices and others, domestic manufacturers have continued to hone an edge in turning aluminum, plastic and little cartoon characters into art. The "emotional" aspect of product design--a largely foreign concept in the computer industry--is discussed often by Japanese executives and cited as part of the success of things like the Nintendo's game devices, Hello Kitty and mobile phones.
"What I thought while developing iMode is that Japan is very strong in developing products for middle-class people," said Kei-ichi Enoki, executive vice president and managing director of products and services at NTT DoCoMo. "We initially targeted young people because they are the most sensitive to new products."
The fundamental changes in Japanese business philosophy have been necessary to address revolutionary developments in the global marketplace. Manufacturers from other parts of the world, such as Samsung and Apple Computer, have figured out how to design--and more importantly, sell--consumer electronics products.
Rivals from China to Wal-Mart
Moreover, contract manufacturers in China and Taiwan have allowed newcomers to enter the market. Wal-Mart Stores, Sears, Roebuck and Co., Westinghouse and Best Buy now sell CE products under their own brand name.
To remain competitive, Japanese companies have adopted such practices as offshore outsourcing and entered into mergers and alliances with foreigners, such as joint ventures crafted by Samsung with Sony and Toshiba. In one particularly close arrangement, Fujitsu is designing servers with Sun Microsystems and Intel while stationing engineers in the labs of Linux maker Red Hat.
New alliances are replacing longtime rivalries in areas such as processor and memory chip production to cut costs and help finance factory construction. Such changes have led Japan to become one of the more active markets for expanding semiconductor facilities in the last year alone.
"Most of them had to give up doing it themselves," said Douglas Sparks, a consultant at DSK Associates. "They understand there is no going back."
Top sellers in flat-screen TVs
So far, many of the changes seem to be paying off. In LCD and plasma TVs, Japanese manufacturers occupy most of the top five spots in sales. Sharp Electronics and Matsushita Electric Industrial lead the production of the flat glass screens featured in such sets, with Matsushita surpassing Samsung in the second quarter for the first time, according to market researcher DisplaySearch.
But Japan's technology industry might face one of its most serious tests in another market in which it has enjoyed much success: digital photography. Japanese companies are the dominant fact of life in the digital-camera market, according to research firm iSuppli, and shipments are expected to rise from 46 million units in 2003 to between 58 million and 62 million units this year. The top five manufacturers are Sony (23 percent), Canon (22 percent), Fuji Photo Film (15 percent), Olympus (15 percent) and Nikon (11 percent). They comprise 86 percent of the market.
Copy editor: Leslie Katz
Design: Ellen Ng
Production: Mike Markovich
"The digital camera was invented in Japan," said Shyam Nagrani, an analyst at iSuppli. "They jumped on it early."
Japan also has a dominant position in manufacturing chips and other parts for these cameras. Sony makes roughly 40 percent of the CCD, or charge-coupled device, sensors for capturing images, followed by Matsushita, Toshiba and Sharp. The flash memory cards that go into these devices run on NAND technologies. Toshiba is the second-largest NAND producer, but as the inventor of NAND, also gets royalties from other manufacturers.
Next battle in camera phones
Competition, however, is intensifying. Camera cell phones--which already come with telescopic zoom lenses in Korea--are hollowing out the low end of the market, and silicon sensors made in the United States and elsewhere are growing in power and popularity. Although digital-camera revenue rose from $10 billion in 2002 and will likely peak at more than $14 billion this year, iSuppli predicts that sales will then sink to about $12 billion in 2006.
Sony, which has proved to be one of the more successful companies at selling camera phones, has responded by producing silicon sensors of its own. Common standards for new 3G models will also let Japanese manufacturers sell phones outside its country.
Similar dynamics have already run their course in the market for DVD players, which were commoditized early on by companies such as Apex. Japanese manufacturers have tried to trump competitors with more sophisticated DVD recorders, including those that can play Blu-ray discs, an emerging disc technology that holds far more data. But sales have been relatively small.
"The question is going to be, how long do you have to ride the price down?" said Stephen Baker, an analyst at The NPD Group.
Even if companies are successful, life won't necessarily be easy. Consider Matsushita, the parent company of Panasonic and JVC.
The company began major changes in 2001, consolidating divisions, spinning off companies and streamlining product development and logistics. A net loss of $187 million in fiscal 2003, which ended in March 2003, turned into a $405 million profit in fiscal 2004, and profits have continued to rise. Overall revenue, however, has barely budged, growing only 1 percent to $71.9 billion in fiscal 2004, well below the $87 billion revenue goal set in 2001 for that year.
Compare that to IBM, one of the few U.S. high-tech companies with similar revenues and numbers of employees--between 200,000 and 300,000. Big Blue saw revenues of $89.1 billion and a net income of $7.9 billion in 2003. Put another way, IBM's net profits were more than 18 times higher off a similar revenue base in the same basic period.
$900 million for nanotechnology
If the country's economic turnaround lasts, many Japanese companies hope to grow revenues in a different direction--specifically, in emerging technologies. For instance, Japan's government will invest roughly $900 million in nanotechnology research this year, as much as all of Europe and nearly as much as the United States, according to the National Science Foundation, though the economies (and populations) of the United States and Europe are substantially larger.
"We want to be on the front end of the commercialization of nanotechnology," said Jun'ichi Sone, general manager of NEC's Fundamental and Environmental Research Laboratories. NEC invented the breakthrough single-walled carbon nanotube and has begun to seek licensing revenues for its patents from companies that want to make or sell products based on them. Sumitomo has already signed a deal.
A history of energy conservation, prodded in part by tax breaks, is also paving the way for gains in the growing alternative-energy market.
Toyota, others tap alternative energy
Toyota and Honda jumped ahead of North American manufacturers in promoting hybrid cars and have reaped the benefits. In September, Toyota said it would double the U.S. allocation of Prius hybrids in 2005 to 100,000 units and increase monthly worldwide production next year from 10,000 units a month to 15,000. California Gov. Arnold Schwarzenegger is trying to woo Toyota to build a hybrid factory in his state.
Elsewhere on the environmental front, Panasonic will begin to sell hydrogen systems for heating homes. "Toyota, Canon, Panasonic...the companies that stuck to the importance of technology and the technology of making things are still strong," said Akira Yamanaka, corporate vice president of Fujitsu's server group.
What remains unknown is how far that strength will go in the economic turbulence of the new millennium. "The general trend line is pretty good. There is kind of a 'two steps forward, one step back' phenomenon," Thomas Lifson of consulting firm Lifson and Associates said.
Like many others, however, he finishes his thoughts with a poignant observation on a country obsessed with tradition: "Nobody talks like they have a job for life anymore."
Copy editor: Leslie Katz
Design: Ellen Ng
Production: Mike Markovich
5 facts about Japan's economic recovery
Nothing is ever certain in the technology industry, but Japan is counting on continuing demand for consumer electronics to help the country out of an economic crisis that has lasted more than a decade. Below are five important facts that support an outlook for recovery and outline the challenges to sustaining it.
1. Three devices lead turnaround. The products cited most often in Japan's consumer electronics rebirth are digital cameras, high-definition TVs and DVD players.
2. Rivals from China to Wal-Mart. Contract manufacturers in China and Taiwan allow newcomers to offer their own electronics brands, including Sears, Westinghouse and Best Buy.
3. Next battle in camera phones. Japanese companies occupy the top five spots in sales of digital cameras, accounting for 86 percent of sales, but competition from Korean camera phones and cheaper silicon will erode the advantage.
4. $900 million for nanotechnology. Like their counterparts in the United States and Europe, Japanese manufacturers are hoping to grow their businesses by investing heavily in emerging technologies such as nanotubes.
5. Toyota, others tap alternative energy. Toyota plans to increase the production of hybrid cars by 50 percent next year because of soaring demand. Meanwhile, Panasonic and Mitsubishi are coming out with hydrogen and solar products for homes.
Copy editor: Leslie Katz
Design: Ellen Ng
Production: Mike Markovich