Which way Ja­panese tech com­pa­nies?

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Elec­tron­ics com­pa­nies anies in Ja­pan are start­ing to turn them­selves around, but they are a shadow of their for­mer selves

FOR Sony it was a bit­ter­sweet mo­ment. On July 1st the firm bid a fi­nal farewell to its Vaio per­sonal com­put­ers, a global brand which won such a de­voted fol­low­ing af­ter its launch in 1996 that the late Steve Jobs, a fan of Sony in its glory days, once asked to equip it with his Ap­ple Mac op­er­at­ing sys­tem. Cut off from its par­ent, Vaio is floun­der­ing. Since Sony an­nounced its sale to a Ja­panese pri­vate-eq­uity fund, in Fe­bru­ary, it has suf­fered a slump in its mar­ket share in Ja­pan to just 2%, down from 10% at the start of 2014.

The ver­tig­i­nous drop will have dis­mayed Sony, which had kept a tiny stake in the busi­ness. How­ever, in­vestors have put Sony’s bosses un­der pres­sure to do some­thing about the com­pany’s chron­i­cally poor per­for­mance. It has lost money in five of the past six years and is fore­cast­ing a fur­ther loss in the year to March 2015.

Vaio is the most sig­nif­i­cant busi­ness Sony has quit in re­cent times. Cut­ting it adrift may be the start of a far-reach­ing re­or­gan­i­sa­tion. On the same day the firm shifted its loss-mak­ing tele­vi­sions arm, once the core of its prof­its and brand im­age, into a sep­a­rate le­gal en­tity. For now, Sony’s chief ex­ec­u­tive, Kazuo Hi­rai, rules out an out­right sale, and many peo­ple crit­i­cise him for not act­ing more dras­ti­cally dras­ti­cally. Yet the firm ad­mits that an al­liance with an­other tele­vi­sion-maker could be an op­tion.

Af­ter years of de­nial that surgery was needed, op­ti­mism is ris­ing that Ja­pan’s con­sumer-elec­tron­ics firms are fac­ing up to their steady loss of global mar­ket share (see chart 1). In 1982 we pub­lished a briefing on how “The gi­ants in Ja­panese elec­tron­ics” were set to keep con­quer­ing the world with all man­ner of ex­cit­ing new gad­gets: Video cam­eras! Fax ma­chines! CD play­ers! And they did, for a while. But now they all strug­gle to com­pete in the most im­por­tant cat­e­gories of con­sumer elec­tron­ics against ri­vals such as Sam­sung of South Korea and es­pe­cially Ap­ple of the United States.

Even at home in Ja­pan’s thriv­ing con­sumer-elec­tron­ics mar­ket—only Amer­i­cans have more de­vices per per­son than the tech-ob­sessed Ja­panese—for­mer cham­pi­ons, in­clud­ing Hi­tachi, Pana­sonic and Sharp as well as Sony, have lost much ground. Lo­cal firms have largely ceded the PC mar­ket, and they are los­ing out quickly in mo­bile phones. They never re­ally made their mark in smart­phones, to­day’s most-de­sired gad­gets. Sony’s Trini­tron TVs and Walk­mans once helped build a fear­somely large Ja­panese trade sur­plus, but nowa­days the coun­try suf­fers a deficit, and for­eign smart­phones ac­count for about a fifth of f it it.

One con­so­la­tion is that con­sumer elec­tron­ics is an im­pos­si­ble busi­ness for nearly all firms, says Ei­ichi Katayama of Bank of Amer­ica Mer­rill Lynch in Tokyo, so com­pet­i­tive has it be­come. A strong brand is no longer enough to jus­tify a sharply higher price. This week Sam­sung said its op­er­at­ing prof­its were down, for a third quar­ter in a row, in the three months to June, as it was pressed from be­low by cut-price ri­vals like

Xiaomi, a three­year-old up­start from China, and squeezed from above by Ap­ple.

That said, the Ja­panese firms have blun­dered for the past decade. They con­tin­ued to ob­sess about fancy hard­ware, ne­glect­ing fast-grow­ing soft­ware and ser­vices (such as Ap­ple’s iTunes) and fail­ing to spot con­sumers’ chang­ing tastes. They were slow to recog­nise the de­vel­op­ing world as a fast-grow­ing mar­ket and not just a low­cost manufacturing base, says Peter Kenevan, a con­sul­tant at McKin­sey in Tokyo.

The Ja­panese firms now have some hard de­ci­sions to make, about which ex­ist­ing prod­ucts they should give up on and which new ones to pur­sue. Sony’s

bosses are re­port­edly study­ing re­forms made by Philips, a Dutch firm which has quit a num­ber of poorly per­form­ing busi­nesses. Last year it got out of mak­ing tele­vi­sions, and a chunk of its light­ing di­vi­sion is next out of the door (see ar­ti­cle).

Pana­sonic is al­ready mak­ing an abrupt change of di­rec­tion. Un­der Kazuhiro Tsuga, its newish chief ex­ec­u­tive, it is ex­it­ing both plasma tele­vi­sions and con­sumer smart­phones. Its new fo­cus is on mak­ing equip­ment for en­ergy-ef­fi­cient homes. Car parts, in­clud­ing bat­tery cells for elec­tric and hy­brid ve­hi­cles, are an­other strong area of growth. Mr Tsuga is also seek­ing ways to serve emerg­ing Asian mar­kets bet­ter. He re­cently shocked his fel­low man­agers by say­ing Pana­sonic would set up a prod­uct-devel­op­ment head­quar­ters in In­dia, staffed chiefly by lo­cals.

Other firms, such as Toshiba and Hi­tachi, which were al­ready less re­liant on con­sumer elec­tron­ics, are pay­ing new at­ten­tion to their heavy in­dus­trial busi­nesses. All th­ese moves should help solve a com­mon struc­tural prob­lem in Ja­panese in­dus­try, which is that too many firms all make sim­i­lar prod­ucts. Some elec­tron­ics gi­ants are mov­ing into a sur­pris­ing new field: high-tech farm­ing. Fu­jitsu, Hi­tachi, Pana­sonic and Sharp are con­vert­ing dis­used fac­tory space and open­ing high-tech green­houses to grow veg­eta­bles, which are ex­pen­sive in Ja­pan.

The fi­nan­cial re­sults of the changes have started to emerge. Aided also by a re­cent fall in the value of the yen, Fu­jitsu, Pana­sonic and Sharp all re­turned to profit in 2013. The other big elec­tron­ics firms all im­proved their bot­tom lines, with the ex­cep­tions of Sony and NEC. Sony prom­ises that 2015-16 will be the year in which it re­turns to profit. Its smart­phones and tablets are at last gain­ing some trac­tion, with the help of one sim­ple, cus­tomer-cen­tred in­no­va­tion—mak­ing them wa­ter­proof. It will take lit­tle short of a mir­a­cle for it to make up the ground lost to Ap­ple (see chart 2) but such hints that the worst may soon be over have helped Sony, so far, to fend off calls by Daniel Loeb, an Amer­i­can ac­tivist in­vestor, for a rad­i­cal break-up of the com­pany.

Seek­ing a path to growth

For the fore­see­able future, Pana­sonic, Sharp and Sony will con­tinue to rely on con­sumer elec­tron­ics for much of their sales and prof­its. Al­though Mr Tsuga has done a lot of re­struc­tur­ing and re­di­rect­ion at Pana­sonic, say ex­ec­u­tives in the in­dus­try, he has not yet found a re­li­able path to­wards growth. Films, mu­sic, tele­vi­sion and fi­nan­cial ser­vices are solid busi­nesses for Sony, but con­sumer elec­tron­ics still ac­counts for 60% of its rev­enues.

If their chief ex­ec­u­tives were vi­sion­ary lead­ers will­ing to take risks, Ja­panese elec­tron­ics firms could do much to re­gain their lost lus­tre, says Rod­er­ick Lap­pin, who heads the Ja­panese op­er­a­tions of China’s fast-ris­ing Len­ovo. Their un­ri­valled en­gi­neer­ing, though of­ten in ex­cess of cus­tomers’ needs, is still an ad­van­tage, he says. They sit on a trove of in­tel­lec­tual prop­erty in the form of patents. Much of this could prove in­valu­able in the field of “wear­able” tech­nol­ogy or in the much-hyped “in­ter­net of things”, in which ap­pli­ances, equip­ment and even pets may in future be wire­lessly we­b­con­nected.

How­ever, the Ja­panese firms will find them­selves hin­dered by their old­fash­ioned cor­po­rate cul­tures. With a few ex­cep­tions such as Mr Tsuga, Ja­panese bosses, with an av­er­age age of 60, are ex­tremely cau­tious. Years of losses and re­struc­tur­ing make it still harder for them to place bold bets on future tech­nolo­gies.

In par­tic­u­lar, they are still too at­tached to Ja­pan’s cul­ture of life­time em­ploy­ment. At most large Ja­panese firms, around a third of per­ma­nent staff are sur­plus to re­quire­ments, yet can­not be fired due to the coun­try’s un­clear labour rules.

There is some hope that Shinzo Abe’s re­form­ing gov­ern­ment may take steps to make the labour mar­ket more flex­i­ble, which would help elec­tron­ics more than any other in­dus­try. Had lay-offs been eas­ier, Pana­sonic, Sony and oth­ers would have had far greater fi­nan­cial flex­i­bil­ity to cope with chang­ing mar­ket con­di­tions. In­stead, their limited vol­un­tary sev­er­ance pack­ages, typ­i­cally of­fer­ing two to three years’ pay, are crip­plingly ex­pen­sive. Those who ac­cept them are of­ten the most talented.

Since the firms are no longer run by their high-pow­ered founders but by em­ploy­ees who rose through the same life­time sys­tem, says Hidemi Moue, boss of Ja­pan In­dus­trial Part­ners, the pri­va­tee­quity buyer of Vaio, there is too lit­tle will­ing­ness to tackle th­ese prob­lems. In all, it will take a lot more than a few whizzy new gad­gets to fix the Ja­panese elec­tron­ics firms

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