For decades, consumers worldwide looked to Japanese companies such as Sony (SNE), Sanyo (SANYY), and Matsushita (MC) for consumer-tech hits like VCRs, portable cassette- and CD-players, camcorders, and DVD players. But in recent years, nimble Asian upstarts have challenged Japan's dominance by dipping into a common pool of electronic components to assemble those gizmos at prices the Japanese can't match. Interlopers such as Samsung, LG, Legend (LGHLY), and Acer built regional and even global brands as Japan's stalwarts struggled to maintain their lead.
Are Japan's days as a consumer-electronics power numbered? Not if 2003 is any indication. Thanks to a surge in demand for the latest array of digital products, sales and operating profits are climbing at Matsushita, Sharp, Sanyo, and even troubled Sony. While the Japanese have largely left the low end to China, Korea, and Taiwan, they're battling to retain control of the market for top-of-the-line gear that requires precision manufacturing and offers beefier margins. At the same time, some companies are outsourcing manufacturing to upstarts in China and elsewhere, and even selling screens, chips, and other parts to rivals who make and sell the products under their own brands.
Consumers certainly can't seem to get enough of Japan's high-end stuff. At the bustling Bic Camera consumer-electronics bazaar in the Ginza, Makoto Itabashi walked away with a 50-inch Panasonic Viera plasma TV. The price tag: $7,400. But the splurge is worth it. Watching the TV feels "like I'm in a movie theater," he grins. He's not the only one who likes the big screens: Sales of plasma TVs jumped by 125% last year, according to the Japan Electronics & Information Technology Industries Assn.
Other gadgets are even hotter. Domestic shipments of Japanese DVD recorders -- which are much pricier than simple players -- nearly quadrupled, to 2 million units last year, the trade group says. And sales of liquid-crystal display TVs jumped nearly threefold, to 1.2 million units.
Those gains have fallen right to the bottom line. Japan's electronics giants are announcing better-than-expected earnings for the quarter ended Dec. 31. Operating profits at Matsushita Electric Industrial Co. -- which makes Panasonic products -- rose 50% in the quarter to $672 million, Merrill Lynch Japan (MER) estimates. At Sanyo Electric Co., the world's largest manufacturer of digital cameras (most of them sold under other brand names), profits for the quarter were expected to surge 90%, to $311 million. Both LCD-TV leader Sharp Corp. (SHCAY) and Pioneer Corp. (PIO) (which sells car stereos, DVD recorders, and plasma TVs) will see profits jump by 35%, Merrill says. Sony on Jan. 28 said its profits fell 20%, to $1.8 billion for the quarter, but after excluding restructuring costs, operating income at the consumer-electronics division increased by 6%. "In digital cameras, camcorders, and other products, we have gained ground," says Takao Yuhara, Sony's chief financial officer.
The growing demand for Japanese goods is boosting the fortunes of companies far down the tech food chain. A recent survey of 46 leading Japanese electronics companies, chipmakers, and other component suppliers showed that 90% are expanding production to meet rising orders. And 40% of them have increased their planned capital investment for this year, a December survey by the Nikkei Sangyo Shimbun newspaper said.
But a good quarter -- or even a good year -- doesn't ensure the industry's prosperity. One big risk: the yen's relentless rise against the U.S. dollar. If it continues climbing -- despite massive intervention by the Bank of Japan -- that will take a big toll on the profits of Japan's consumer-electronics companies, which rely on exports for anywhere from 30% to 70% of their revenue. "Japanese brands remain very strong," says Merrill analyst Hitoshi Kuriyama. "But their future is far from certain."
Then there are those pesky rivals. In recent years they've grown increasingly adept at seizing the initiative from Japan. Although the Japanese were the first to develop the market for LCDs and other flat-panel displays, for instance, South Korea's Samsung Electronics and LG Electronics are now tops in those products. And two years ago, Japanese companies such as Matsushita and Toshiba Corp. raced to China to sell components needed to make DVD players. In the rush, they shared their technology, allowing little-known Chinese manufacturers to flood stores with ultracheap machines. "We've learned our lesson," says Yukio Shotoku, Matsushita's executive vice-president in charge of international operations. "We're putting our technology in a black box, and we're careful about whom we sell to and when."
The Japanese have also been streamlining their operations to get themselves into shape for the battle ahead. Matsushita is in the throes of a three-year restructuring drive that has seen a 30% reduction in inventory and helped boost cash flow by 56% last fiscal year, to $2.8 billion. Sharp has shifted its focus to high-end LCD panels for cell phones and for TVs thin enough to hang on a wall. And last fall, Sony announced it will eliminate 20,000 jobs, or 13% of its global workforce, and beef up its product development by 2006. It will also winnow its supplier base to 1,000 from 4,700 and plans to stop Japanese production of traditional TVs. All told, Sony aims to reduce fixed costs by $3.1 billion.
With their finances under better control, many of Japan's tech giants are starting to look ahead to the next big thing. Sony is investing billions of dollars to develop a superfast processor that will form the guts of its next-generation PlayStation console and other gadgets starting in 2005 or 2006. Ken Kutaragi, the PlayStation creator who now oversees Sony's network business, believes companies like Sony need proprietary technology that no one can copy. "The chip is the nucleus of digital electronics, so that's where we have to add value," he says. Matsushita, too, is investing in new chip development. Over the next two years, it will spend $1.2 billion to create customized chips for its digital TVs, DVD recorders, cell phones, and other products. "By developing our own chips, we'll be able to more quickly bring to market our own unique products," says Matsushita President Kunio Nakamura.
If he and his countrymen succeed, they just might stay a step ahead of their regional rivals. But with a dozen companies working tirelessly to undercut them, Japan's giants are in a battle that's sure to last for many years. By Irene M. Kunii and Hiroko Tashiro in Tokyo