How modularization felled Japan’s electronics titans

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TOKYO: Toshiba, Sharp, Sony, Hitachi and Panasonic – these companies were the pride of Japan for decades after their electronics took the world by storm.

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But much of that pride has been lost in recent years, with Sharp Corp.’s acquisition this month by Hon Hai Precision Industry Co., the Taiwanese assembler of Apple’s iPhones, making it the latest victim of complacency, mismanagement and fierce foreign competition.

Toshiba, reeling from a major accounting scandal, agreed Wednesday to sell much of its home appliance business to China’s Midea Group for Y53.7 billion.

Sony, Hitachi and Panasonic are meanwhile recovering from a plunge in international competitiveness only after drastically scaling down their digital electronics businesses and conducting major restructuring.

For example, Hitachi’s main business is now social infrastructure such as railways, not appliances, while legendary Sony’s most profitable sector is banking and insurance — a change that would have been unthinkable less than two decades ago.

Panasonic, meanwhile, was declared “a loser” in digital home electronics by its own president, Kazuhiro Tsuga, following huge losses in 2011 and 2012. The giant has since returned to profitability after scaling down its cellphone and TV operations and shifting resources to nonhome electronics fields, such as housing and automobile-related products.

Experts say a common enemy of the Japanese manufacturing titans was modularization, an approach that changed the landscape of the global home electronics industry.

Modularization refers to the packaging of multiple digital functions into a single electronic component equipped with standardized interfaces. Using standardized modules makes it easy to assemble them into products with little adjustment or customization. Products built this way now include TVs, computers, DVD players and low-end digital cameras.

“I don’t think Japanese companies can win when it comes to assembling module components,” said Yukihiko Nakata, a former top Sharp engineer who is now a professor at Ritsumeikan Asia Pacific University in Beppu, Oita Prefecture.

Unfortunately for Japan Inc., the modularization revolution, made possible by the 1990s digitization boom, has drastically lowered the cost of making home electronics, which means companies that can mass-produce parts using cheap labor anywhere in the world have a distinct advantage.

Notorious for its slow decision-making, Japan Inc. lost much of its hard-earned competitiveness by sticking to its traditional approach of integrating customized technologies from different fields – an approach that usually involved both analog and digital technologies.

According to Nakata, Sharp’s leadership made two critical strategic mistakes that eventually sealed its fate.

One was the excessive investment in the giant liquid-crystal display factory in Sakai, Osaka Prefecture, which led a string of unstoppable losses that heavily damaged Sharp’s financial health.

At the plant, Sharp tried to “vertically integrate” all the processes to produce LCD TV sets, based on an earlier, successful experience building and running a similar plant in Kameyama, Mie Prefecture, Nakata said.

But the move pushed up production costs and made it difficult for Sharp to stop operations at Sakai — even when the plant was losing money, Nakata said.

Another was its failure to adapt to the sudden modularization of cellphone architecture in 2007, Nakata said.

In that year, numerous Chinese firms began assembling cellphones based on an open architecture design released by MediaTek, a Taiwanese semiconductor company, Nakata said.

MediaTek publicized its “reference designs,” or cellphone blueprints, because it wanted to sell more semiconductor products.

“Such a move was unthinkable at the time because design was usually the top secret of secrets,” Nakata said.

By making use of open designs, a key semiconductor chip and free software from MediaTek, many companies became capable of making cell phones on the cheap.

This sparked competition among hundreds of new cell phone makers, Nakata said.

But it also destroyed Sharp’s business model, which was based on profiting from long-term relationships with a handful of cellphone makers who were dependent on customized designs and components, Nakata said.

The 1990s saw Japan’s top manufacturers hit hard by falling prices for home electronics, most notably television sets and DVD players, which became drastically easier to make thanks to modularization.

Now only automakers like Toyota Motor Corp. and manufacturers of high-end digital cameras such as Canon Inc. and Nikon Corp. remain globally competitive.

That is because the components for their products, which require sophisticated adjustments because they mix analog with digital, have not yet been modularized, experts say.

However, the more important lesson of Sharp’s failure for Japan Inc. may be greater than its failure to deal with digitization and modularization, Nakata said.

Sharp’s failure “marked a painful turning point for Japan in the process of globalization. That’s the point we should learn from,” he said.

Innovation Network Corporation of Japan, the state-sponsored turnaround firm that lost the rescue bid for Sharp, initially proposed combining the LCD units of Sharp and Japan Display Inc., the state-backed entity that earlier absorbed the LCD units of Sony, Toshiba and Hitachi.

But INCJ’s rescue proposal lacked a clear vision of how to reform Sharp, while its main aim actually appeared to be keeping a foreign company from acquiring Sharp’s technologies, Nakata said.

If a domestic player like INCJ acquired Sharp, it might have succeeded in that time. But it also would have stopped those technologies from evolving by keeping them isolated from global competition, Nakata said.

By comparison, Hon Hai’s proposal is far more financially generous than INCJ’s, and the two companies clearly complement each other, with Sharp providing a well-known brand and advanced research and development capability, and Hon Hai providing a powerful global production system and marketing system.

“Sharp and Hon Hai will make a good combination,” he said. TNS

TNS/BF

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