Japan Is Feeling The Shock of Foreign Competition
Monday, August 20, 2007SUSIE GHARIB: America was once home to a number of major electronics companies until the 1980s, when an onslaught of cheaper and better Japanese products triggered a massive restructuring of the industry. Today Japanese companies find themselves at a similar crossroads, pressured by lower-cost Asian competitors. Lucy Craft looks at why that industry continues to resist dramatic consolidation.
LUCY CRAFT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Sony, Sharp, JVC, Japan's status as cutting-edge tech superpower is underscored by its veritable army of electronics manufacturers. From electric fans to tricked-out cell phones to semiconductors and nuclear reactors, manufacturers continue to churn out a boggling range of products. Japan supports not one or two, but close to a dozen major electronics companies and nearly as many smaller players. Bain & company's Jean-Philippe Biragnet says that means lots of" me-too" products, and far thinner margins than their western rivals.
JEAN-PHILIPPE BIRAGNET, PARTNER, BAIN & CO. TOKYO: The key challenge with the Japanese conglomerates is more that their profitability lags at least twice the profitability of other comparable technology conglomerates.
CRAFT: Best-selling critic Fumiaki Sato, an engineer who used to design video players for JVC, says the day of reckoning may not be far off. An overcrowded Japanese electronics industry, he says, risks short- circuiting its long-term future.
TRANSLATION OF: FUMIAKI SATO, AUTHOR, "SCENARIO FOR CONSOLIDATING JAPAN'S ELECTRONICS INDUSTRY": For example, while Japanese cell phones are the smallest and lightest in the world, they can't make inroads overseas. That's because engineering talent is dispersed across 10 companies and resources are spread too thin. If the global market has room for only five players, then each one has to be big enough to capture a 20 percent share. Japanese makers now each have about a 1 percent global share. That's why they need consolidation.
CRAFT: With passive shareholders giving way to activist investors demanding better returns on equity, Sato says the only answer is shock treatment, consolidating the industry down to just two mega-manufacturers.
SATO: Japanese electronics conglomerates now have so many subsidiaries it would take a decade to refocus them on their core competencies. That's too slow, so I propose consolidating all 10 companies into two groups under holding companies.
CRAFT: Fat chance of that happening, say analysts like Steve Myers of Lehman Brothers.
STEVEN MYERS, SR. ANALYST, LEHMAN BROTHERS JAPAN: There's a greater tolerance of what by purely western standards would be regarded as unacceptable profitability. This has been a country where there's a lot of technology and not so much in the way of financially driven management.
CRAFT: Despite their undervalued market caps and operating profits well under half the average for all Japanese manufacturers, Japan's electronics makers have always favored incremental restructuring, says Bain's Biragnet and that's unlikely to change, even now.
BIRAGNET: Historically, those firms have been developed based on -- the object was to grow revenues. So clearly that remains for many of these companies the key measure of success, which is to grow revenue, rather than increase profitability.
CRAFT: Asked about prospects for consolidation in the Japanese electronics industry, most of the major companies we spoke to said no comment. One of the few that was willing to speak out, Sharp, said they are not considering any mergers now, but they are taking a wait-and-see approach. Lucy Craft, NIGHTLY BUSINESS REPORT, Tokyo.
