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Japan Electronics Emulates Detroit Autos Before Bankruptcy: Tech

In 2004, Kameyama, a town of 50,000 people in central Japan, boomed when Sharp Corp. (6753) started making liquid-crystal-display panels there.

Sharp dominated the industry with a 22 percent market share in LCD TVs and poured $6.6 billion into Kameyama, putting up two state-of-the-art factories and creating 3,000 jobs. Farmland was turned into housing as workers in their 20s moved in from as far away as Brazil. Taxes from Sharp paid for the renovation of the train station and a new school with features like a castle.

Then Samsung Electronics Co. (005930) began driving down prices, forcing Sharp to keep pace. Prices for 40-inch LCD panels fell from about $2,700 in the beginning of 2004 to $1,300 in 2005 and kept dropping until they reached $250 at the start of this year. Samsung steadily gained market share, moving to 29 percent in 2012 from 10 percent in 2004.

Sharp, unable to compete, saw its share of the industry plunge to 5 percent. It slashed jobs and workers moved away, leaving the housing complexes in the town deserted. The company last month pledged the factories as collateral along with most of its properties, including company headquarters in Osaka, in return for 360 billion yen ($4.6 billion) in loans to stay afloat.

Japan’s electronics industry is in crisis. Sharp, Sony Corp. (6758) and Panasonic Corp. (6752) had combined losses of more than $20 billion last year and are cutting tens of thousands of jobs. Having the most-advanced technology -- once a key strength of Japanese manufacturers -- matters less as consumers increasingly pay attention to content, apps and user-friendliness rather than hardware specifications. The yen’s rise to record levels against the dollar in 2011 added to the companies’ misery.

Apple, Samsung

“Japan’s tech industry is just like the U.S. auto industry in the past,” said Makoto Kikuchi, chief executive officer at Myojo Asset Management Japan Co., a Tokyo-based hedge fund advisory firm. “They think people will buy their products, but they’re not focusing on what consumers really want, which is good enough quality at the best price.”

Sony, Sharp and Panasonic now have a combined market capitalization of about $29 billion, compared with Sony’s peak valuation of about $120 billion in 1999. Apple Inc. (AAPL)’s market capitalization is $601 billion and Samsung’s is $173 billion.

Sony slipped five places to 40th in this year’s ranking of the world’s most-valuable brands by Interbrand, which was topped by Coca-Cola Co. Apple rose to second place from eighth last year and Samsung to ninth from 17th. The highest-ranked Japanese electronics company was Canon Inc. in 30th place.

For decades before Sharp came to Kameyama, electronics makers played a central role in creating prosperity for Japan.

Detroit, Japan

Just as Detroit’s carmakers helped fuel U.S. post-World War II industrialization and the consumer economy, Sony, Panasonic and Sharp contributed to Japan’s postwar resurrection as an industrial and economic powerhouse. Konosuke Matsushita, who founded Panasonic in 1918, told workers the company’s mission was to eradicate poverty by mass-producing affordable quality goods that improved people’s lives.

In the U.S., motor vehicle-related jobs accounted for 9.8 percent of all U.S. employment, or 13.3 million jobs, between 1998 and 2001, according to the Center for Automotive Research in Ann Arbor, Michigan. In 2010, about 8 million private-sector jobs were still related to the industry, which has historically accounted for as much as 3.5 percent of U.S. gross domestic product, according to the center.

In Japan, makers of information and communication electronics equipment and electronic parts and devices accounted for more than 665,000 jobs, or 8.7 percent of all manufacturing employment, as of 2010, according to the nation’s statistics bureau. They contributed 10 percent of Japan’s manufacturing output, according to the statistics.

GM, Chrysler

The reasons for the companies’ decline mirror those that triggered the collapse of U.S. carmakers in 2009, when General Motors Corp. and Chrysler filed for bankruptcy and were bailed out by the federal government, said Arthur Alexander, a professor of Asian Studies at Georgetown University and former president of the Japan Economic Institute in Washington.

“Japanese companies have run into many of exactly the same problems that American companies do as new technologies, new competitors, new ways of doing things come into dominance and it just shows how hard it is to keep up,” Alexander said. “It’s the same story for General Motors. It took bankruptcy and bringing in a whole new management to try to overcome that.”

In both cases, success and a reliance on domestic-market dominance left companies complacent, eroding their innovativeness and leaving them unprepared as growth moved to new markets, consumer preferences changed and upstart competitors mounted challenges.

Domestic Focus

At its height in the 1950s, GM controlled more than half the U.S. car market, then the world’s largest. Last fiscal year, the domestic share of revenue was 53 percent at Panasonic, 48 percent at Sharp and 32 percent at Sony, according to data compiled by Bloomberg.

In contrast, Samsung counted on South Korea for 17 percent of sales in 2010 and Seoul-based LG Electronics Inc. (066570) got 17 percent of revenue in its home market in 2011, according to data compiled by Bloomberg.

Companies “have been able to grow in Japan alone, as it is a giant consumer market, so they have been slow to internationalize development, production and sales, to say nothing of management,” Kota Ezawa and Tsubasa Sasaki, Tokyo- based analysts at Citigroup Inc., wrote in a report last month.

Declining Population

Even as Japan remains the world’s third-largest economy, depending on the domestic market for growth is no longer possible as its population, which peaked at 127.8 million in 2008, is projected by the government to decline to about 101 million by 2050.

The nation’s nominal GDP contracted in eight of the last 16 years, according to the World Bank. Retail sales in Japan fell to 136.8 trillion yen in 2011 from 146.3 trillion yen in 1996, according to government figures.

The financial crisis not only slowed consumer spending in developed markets, it also sent the yen surging as investors sought the safety of the Japanese currency, in turn eroding exporters’ overseas earnings. The yen has strengthened 50 percent against the dollar during the last five years. In contrast, the Korean won fell 18 percent in the same period.

Developed Markets

Japan’s electronics makers focused too much on developed markets, where demand for new consumer goods has slowed, said Steve Durose, a senior director and head of technology for the Asia-Pacific region at Fitch Ratings. South Korean companies have been better at targeting emerging markets, where growth is stronger, he said.

Sony, Sharp and Panasonic each got more than 70 percent of last fiscal year’s revenue from Japan, the Americas and Europe combined, according to data compiled by Bloomberg.

Samsung got 52 percent of revenue from the Americas and Europe in 2010, while North America and Europe accounted for 35 percent of sales at LG in 2011, the data show.

Japan’s consumer-electronics makers need to move more production and research-and-development to cheaper locations and focus more on the emerging markets that will drive future growth, said Peter Kenevan, a Tokyo-based director at McKinsey.

China

China, the world’s second-largest economy, made up 7.6 percent of sales at Sony last fiscal year and 13 percent at Panasonic, compared with 16 percent at Samsung in 2010, according to data compiled by Bloomberg. Sharp got 20 percent of sales from China last fiscal year, although the company’s total revenue from the nation declined 6.5 percent, the data shows.

“They have been very slow in moving their production offshore and cutting their costs,” said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo which manages about $300 million in assets. “And they were too overconfident that they could produce at a good price in Japan.”

The domestic focus also saddled the Japanese with high fixed costs. Like Detroit’s carmakers, they’ve been unable to quickly cut spending, leading to losses as their sales and market share declined.

Union contracts at GM, Ford Motor Co. (F) and Chrysler locked in high labor and pension costs, and production targets that obligated them to make a certain number of vehicles regardless of demand, said Alec Gutierrez, a senior market analyst at Kelley Blue Book in Irvine, California.

Burdened with manufacturing overcapacity and too many brands chasing too few customers, GM had to kill off Oldsmobile, Saturn and Pontiac to help return to health. Ford got rid of the Mercury brand to focus on Lincoln.

Too Many TVs

What the extraneous car brands were for Detroit, TVs are for the Japanese tech companies.

Industrywide TV demand fell 8 percent from a year earlier in the second quarter of this year, according to DisplaySearch, led by a 77 percent plunge in shipments in Japan.

Sony lost 692 billion yen on TVs during the past eight years and forecasts another 80 billion-yen loss from the unit this fiscal year, compared with its current market capitalization of 933 billion yen.

Losses from TVs at Panasonic, which doesn’t disclose the figures, totaled 349 billion yen in the past four fiscal years, according to an estimate by Yuji Fujimori, an analyst at Barclays Plc in Tokyo.

Sharp, which also doesn’t disclose the numbers, lost money on TVs in fiscal years 2011, 2009 and 2008, said Miyuki Nakayama, a company spokeswoman. All three companies have seen their credit ratings cut since April.

No Premium

“There was a time when a Sharp, a Panasonic or a Sony TV, for example, could attract a price premium over a Korean product,” Durose said. “That’s no longer the case.”

As Sharp’s market share plummeted, it announced in June 2011 it would convert its first Kameyama plant to make smartphone panels instead of TV panels. The second plant was converted in fiscal 2011, said Toyodo Uemura, a company spokesman in Osaka.

While Japanese electronics makers have traditionally been thought of as industry giants, there are too many of them, diluting their individual strength, said Chang Sea Jin, provost’s chair in business policy at the National University of Singapore and author of the book “Sony vs. Samsung.”

Japan has nine TV makers, 10 mobile-phone makers and 10 personal-computer makers, according to the Japan Electronics and Information Technology Industries Association.

“In Korea, we have only two -- Samsung and LG,” Chang said.

Innovation

If a company can’t compete on costs, it needs to offer consumers something unique, said Peter Cohan of Peter S. Cohan & Associates, a Marlborough, Massachusetts-based management consulting firm, whose past clients include AT&T Inc. and Eastman Kodak Co.

Yet even in terms of innovation, Japanese manufacturers like Sony, which invented the concept of mobile music, are losing out to Apple and Samsung.

Powered by software, a single device now performs many of the functions that previously required separate pieces of hardware with moving mechanical parts -- from playing music or games to taking pictures, watching movies and recording video.

“Japanese companies innovated primarily on hardware and the device and they were fantastic at that,” Kenevan said. “The problem is, the key engine of innovation in the world has shifted from hardware to software, to systems, to solutions.”

Apple became the world’s most-valuable corporation by integrating hardware with software and entertainment content into seamless, user-friendly systems centered around the iPhone and iPad, Chang said.

Hirai’s Strategy

Sony is still struggling to integrate its hardware, software and entertainment contents. The streaming service Music Unlimited only became available in its home market this year, seven years after iTunes was introduced in Japan.

Kazuo Hirai, who took over from Howard Stringer as Sony’s chief executive officer in April, identified hardware, including imaging devices and mobile gadgets, as key elements in the company’s revival strategy.

At a Sony press conference last month, hardware specifications were front and center as Masashi Imamura, head of the company’s TV business, introduced its latest model. The 84- inch set will feature a 4K display offering higher resolution than current standard models and packing 10 speakers on each side, Imamura said.

OLED TVs

Sony will “never” view TVs as an interchangeable commodity, he said. “What customers expect from Sony is to create something unique.”

Samsung and LG both said they plan to introduce TVs this year using organic light-emitting diode displays, or OLED, which can be as thin as 4 millimeters (0.16 inches) and produce images 200 times sharper than current LCD models. That’s sooner than Sony and Panasonic, which announced a partnership in June to develop OLED models and introduce them next year.

For Sharp, superior hardware was supposed to help turn around the plants in Kameyama. The second factory, built at an initial cost of about 350 billion yen, began producing advanced panels for tablet PCs in March of this year, using a new semiconductor technology known as IGZO.

IGZO Panels

Although Sharp says its IGZO panels offer higher resolution and consume less battery power than current LCD panels, it has struggled to find buyers, leaving the plant underutilized. An industry conversion to the new technology isn’t happening as quickly as Sharp had expected, the company said last month.

Technical challenges in making the panels are leading to low production yields, making them too expensive, Jeff Loff, an analyst in Tokyo at Macquarie Group Ltd., said in a Sept. 3 report. Annual operating losses related to the panels may be about 100 billion yen, he estimated.

The number of workers at both Kameyama plants fell to about 2,000 in March from 3,000 three years earlier, according to Sharp. The city’s population is declining, and last year’s tax revenue was down 24 percent from a peak in 2008.

Near the factories, the Sky Heights apartment complex, built to house workers who moved to the town, is empty. Windows are shuttered, the grounds are overgrown and cobwebs hang from railings. No-smoking signs and placards warning of video surveillance, written in Portuguese, serve as reminders of the Brazilian immigrant workers.

“No one lives there anymore,” said Takeyoshi Yamauchi, an 81-year-old retiree who lives next door. “Just last year, they were fully occupied. Kameyama’s best days are over.”

To contact the reporters on this story: Terje Langeland in Tokyo at tlangeland1@bloomberg.net; Masatsugu Horie in Osaka at mhorie3@bloomberg.net; Mariko Yasu in Tokyo at myasu@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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