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The mighty, fallen

2011-03-08 13:44:18

Japanese electronics firms

Ex-world-beaters swallow their pride and do deals with foreign rivals

Mar 3rd 2011 | TOKYO | from the print edition

JAPAN S electronics companies once epitomised its national power and defined

late-20th-century consumer technology. Sony introduced the transistor radio and

the Walkman. Toshiba was first to mass-produce laptops. Sharp which got its

name from inventing the mechanical pencil in 1915 pioneered solar cells and LCD

screens. The companies earned their fortunes from running efficient operations

at home that shipped in huge quantities to the West.

But the world changed and Japanese technology firms did not keep up. They kept

too many low-value activities in high-cost Japan for too long. They focused on

satisfying domestic consumers with advanced features that didn t matter to

customers elsewhere. And they were tardy in entering emerging markets. Over the

past decade NEC and Hitachi posted returns on assets of around 2%. In an

extraordinary reversal, last year Japan became a net importer of televisions

and stereos (albeit often with a Japanese brand on the casing).

In recent months the electronics companies have begun to overhaul their

businesses by outsourcing operations and selling poorly performing units. And

as they do so, they are striking alliances with Asian rivals that they once

would have regarded as inferiors.

The biggest changes are taking place at NEC, which is also the most ailing. On

February 25th it agreed to sell 70% of its LCD-panel production business to

AVIC, a Chinese company. A few weeks earlier NEC had partially exited the

personal-computer business by creating a joint venture with Lenovo, a big

Chinese computer maker. The deal is an implicit admission of failure: NEC is

the top PC maker in Japan, with a 20% market share, but globally its share is

less than 1%. It comes six years after IBM sold its PC division to Lenovo, and

NEC s delay means it was stung with more losses and got less for the business.

Toshiba said in December that it would outsource production of some logic

chips. Samsung of South Korea will get some of the work. Toshiba s decision to

collaborate with a company with which it competes fiercely in flash memory,

among other things, is remarkable.

Taiwan s Hon Hai (also known as Foxconn), the world s biggest outsourced

manufacturer, is moving in. Last year Sony sold control of its television

factories in Mexico and Slovakia to Hon Hai and transferred production to it;

half of the televisions it sells are now assembled by other firms under its

asset-light strategy, compared with just 20% a year ago. Hon Hai is also said

to be talking to Sharp about outsourcing some LCD-panel production; and to

Hitachi Display, which makes small LCD screens for mobile phones, about buying

a controlling stake.

This flurry of deals shows how Taiwanese, South Korean and Chinese firms have

caught up with Japanese ones. It also shows how the Japanese have realised that

such foreign firms can be useful partners as well as deadly rivals. The deals

let the Japanese firms exit capital-intensive, low-margin businesses in which

scale is needed but the product is little differentiated. This frees them to

focus on becoming premium-brand marketers of products, and providers of

services allied to them, as well as on developing the next generation of

gadgets or that is their hope.

Japanese electronics firms remain powerhouses of innovation. Last month, as NEC

announced its foreign tie-ups, the company also trumpeted the world s thinnest

mobile phone (at 7.7 millimetres) and the first contactless fingerprint and

finger-vein reader for biometric authentication. NEC in particular still has a

long way to go in turning itself around, but the Japanese firms technological

strengths mean they should not be counted out yet.