Wow! Japan's New Gadgets

A deluge of digital products could transform consumer electronics and change how the world works and plays

Every two seconds on average, Japan adds a new cellular-phone line. The number of subscribers soared past the 10 million mark in February and raced past 20 million in October--about one line for every six people. Walk into any store in Akihabara, Tokyo's electronics retailing bazaar, and you'll see dozens of different digital phones lining the walls--from handsets that page by vibration, to sets that replace the buttons with a touch-sensitive liquid-crystal display (LCD), to cutesy pink ones for teenage girls, to phones whose ring is a short rendition of the Carpenters' Top of the World.

A new horde of gadgets is descending on Japan's consumers. Not that the country that mass-produced the VCR and invented the Walkman hasn't fallen in love with its own gizmos before. But stroll through Akihabara this year, and you'll see a fundamental change. Stores are bristling with digital still cameras that don't use film. Conventional camcorders have mutated into smaller, far more powerful digital devices. On store shelves, Japanese PCs in every shape and size have replaced dull old televisions. In fact, what's left of conventional boxy TVs and computer monitors is quickly being replaced by sleek models with flat screens.

Many of these gadgets have world-class potential. Others are wonderfully goofy and will only make it in Japan. But they show a rich ferment of innovation: a handheld device for measuring body fat; tiny LCD televisions for car seats, to distract you in snarling traffic jams; an auto navigator that literally talks you through Tokyo's bewildering backstreet mazes. "Digital products are smaller and much higher quality--they're really amazing," said Shiho Yanagisawa, a confessed gadget freak who works at a securities company in Tokyo.

All these products have something in common--digital technology, the binary lingua franca of cyberspace and of all electronics in the 21st century. A few years ago, American pundits wrote off the Japanese as digital laggards because they could not sell PCs successfully, make microprocessors, or fathom the Internet. Now they are mounting a full-court press into digital consumer electronics. In a few years, the products that survive the Darwinian market economics of Akihabara will penetrate households around the world, transforming the way we work and play, and perhaps even challenging America's dominance in PCs.

Victory is not assured. Japan's gamble on digital audiotape recorders was, for example, a bust. Yet if this wave of digital products succeeds, it could bring billions in revenue--and maybe even profits to Japan's major electronics companies.

Japan needs to get back into the digital race. In the past two decades, spunky U.S. companies invented and reinvented PCs, staked out prime territory in cyberspace, and cocooned whole continents in high-speed data networks. All the while, Japan's titans remained masters of the fading analog world. They kept turning out perfectly made TVs and VCRs that inspired yawns from consumers and price-cutting from retailers. Meanwhile, competition from Asia turned wave after wave of Japan's bread-and-butter products into profitless commodities.

Japan, however, hasn't given up. For the foreseeable future, "the U.S. has a significant edge against Japan," says Toshiba President Taizo Nishimuro. "But the foreseeable future is one year," he adds, smiling. In recent months, Japan's digital strategy has taken shape. First, Toshiba, Sony, Sharp, and the rest will continue to milk profits from key electronic components that they dominate. These include LCDs, certain types of computer chips, and peripheral devices, such as CD-ROM drives and monitors. In each area, they are building far more powerful versions: capacious digital video disks (DVDs) to replace both CD-ROMs in PCs and VCRs in living rooms; more powerful chips; and giant plasma displays to unseat today's ponderous large-screen TVs.

CRITICAL GATEWAY. It looks like an abrupt comeback. But in fact, the Japanese were funneling research funds into digital technology long before Sony Corp. and its partner Philips Electronics launched audio compact disks--the first digital consumer product--in 1982. CDs became ubiquitous, but Japan lost the more important fight over the desktop. Now, thanks to the power and efficiency of new chips, the Japanese are cranking out dozens of new, personalized digital products in hopes that a handful--perhaps digital still cameras--will become megahits. The same gang of companies is expanding its wedge into the U.S. PC market, which Japanese executives say is a critical gateway to next-generation networked computing.

Can Japan pull off this latest thrust? There are some positive indicators. In September, 1995, Sony waltzed into the U.S. video-game market--and sold 1 million units of its PlayStation in the first six months. The PlayStation today has blossomed into a huge franchise for Sony, with yearly sales of about $1 billion. Sony barely breaks even on the hardware but enjoys lush profits on software titles, including this season's hit, Crash Bandicoot. Now, Nintendo Co. has piled in with its even more powerful platform, called N64, which lets characters such as Mario--the little Italian plumber--leap, swim, and fly around in dazzling 3-D. The video-game king unloaded a million sets in the first 10 weeks of sales in Japan and expects to top that by New Year's in the U.S.

The next victory could be DVD. This much-hyped format got off to a miserable start last week, when software glitches delayed the release of movie titles. But nobody doubts this will grow into an enormous market in the next four to five years (table).

Not since the consumer VCR came out in the 1970s has the Japanese electronics sector had a product with such potential. The most bullish companies expect more than 120 million DVD players will be sold over the next four years. Toshiba Corp. and Matsushita, Electric Industrial Co., maker of Panasonic equipment, both reckon their DVD businesses will be worth more than $6 billion annually by the year 2000.

THE RIGHT COMBO. DVD takes video into the digital era, delivering movies with picture quality that outshines laser disks. DVDs can be accessed randomly like audio CDs, which DVD machines can also play. Vast volumes of data can be crammed onto the disk--seven times as much as a CD-ROM. With DVD's huge storage capacity, PC games will grow more realistic, and educational software will incorporate more video. In the U.S., Toshiba's partner, Warner Bros. Inc., plans to release 50 titles, and others will follow. DVD, says Warren N. Lieberfarb, president of Warner Home Video, "will provide a much richer interactive experience."

Key to a successful launch of these new digital gizmos is the ability of Japanese companies to force prices down, so the products become attractive. Consumer electronics has moved from devices relying on complex mechanisms and high-quality tape to miniature computers that store images and sounds on optical disks or in semiconductor memory. That means smaller and lighter devices that will sell for only a small premium over analog machines and eventually for less. Japanese companies win by being first to market with the new gadgets. And unlike in the earlier, analog era, American partners play an important role by supplying ever-denser microchips and improved compression techniques. Silicon Graphics Inc. and chipmaker LSI Logic Corp., for example, designed the brains of the latest hit video games from Nintendo and Sony.

FIRST TO MARKET. Nowhere has the credo of lighter and smaller had a more striking impact than in cameras and camcorders. In Japan, there are no fewer than a dozen different models of digital camcorders on sale. They fit in the palm of your hand, they capture images more crisply than 8mm camcorders, and image quality won't be degraded by copying. JVC's Pocket Digital Movie model, which sells for less than $2,000, is the world's smallest camcorder--it weighs just 450 grams and slides easily into a coat pocket. These gadgets already account for 40% of all camcorder sales in Akihabara, while they are nearly unknown in the U.S., the world's digital pioneer. In anything related to capturing and displaying images, "the Japanese will be there," says Xerox Corp. Vice-President Colin J. O'Brien. "This technology is basic to Japan."

Sometimes it takes a few tries to get the right combination of features and cost. Digital still cameras have been around for 15 years, but prices were astronomical. Thanks to advances in chips, last year Casio launched its QV series of filmless cameras, which now sell for about $300. Quality still doesn't approach that of film, but a user can zip a digital snapshot of her cat right onto her Web page. More than a dozen Japanese companies have jumped into the market. Global sales will jump sixfold this year, to some 1.4 million units, with volume swelling to 11 million units by 2000, according to IDC Japan.

By pulling together their audiovisual and design knowhow, Japanese electronics companies are taking the lead in redefining PCs as home-entertainment centers. The top model of Toshiba's Infinia PC series includes TV, radio, CD player, answering machine, a high-contrast 17-inch monitor, and hi-fi-quality speakers. Today, less than 15% of Japanese homes have PCs. By 2000, however, that figure should reach 44%. Higher volumes at home mean the Japanese can hold down prices on their U.S.-bound PCs. Japan's inroads into the U.S. PC market have so far been limited to portables. But as computers go multimedia and merge with televisions, Japanese companies could have a leg up.

It's a sensitive point with Japan's rivals. Compaq Computer Corp., for one, declined to discuss Japan's latest challenge. France's Thomson, which soon may be purchased by Daewoo, and LG Group's Zenith Electronics Corp. have both made stabs at digital convergence. Neither has the financial or technical muscle of the Japanese.

But even the Japanese wonder what sort of payoff they can expect on billions in cumulative research, development, and marketing of these products. At LAOX department store in Akihabara, for example, there are 90 models of portable phones, including personal communications systems--a stripped-down digital phone format that is just taking root in the U.S. Some are made by Motorola Inc. or Nokia, but the majority are Japanese. There are at least 18 different car navigation sets on display. Maintaining this outpouring, says NEC Senior Executive Vice-President Hajime Sasaki, entails "huge development costs, both for technology and design."

DVD, digital still cameras, and other products offer scant profit potential on their own. There are simply too many companies that can supply them--especially rivals in Southeast Asia that do not all carry out costly research in chips and other components, as do the Japanese. "No matter how good a product is, we won't be able to stop the downward trend" in prices, says Itsuro Hatao, multimedia general manager at Victor Co. of Japan, JVC's parent.

After years of struggling with this dilemma, Japanese execs have identified a few ways to capture extra profits. One is to unleash so many products that a few are bound to set new standards. If a product does take hold, says NEC's Sasaki, the first to market almost always fares better than those that follow. Toshiba's Nishimuro also notes the benefits of being able to internally source key components for a new product. Next year, Toshiba will build its own DVD drives into its desktop computers for the U.S. market. These also will incorporate Toshiba-built monitors, DRAM chips, and other components. "We can offer better reliability and a better price," says Nishimuro.

Such vertical integration gives a manufacturer the raw materials to innovate and assemble smart new products. Case in point: Toshiba will soon unveil in the U.S. a tiny, full-featured notebook PC with a high-resolution, color LCD. The entire thing, except the American-made microprocessor, was designed and crafted in Toshiba factories. It weighs just 840 grams and already is a hit in Japan, where it is known as the Libretto.

Not every Japanese company will be a winner. Second-tier players such as Pioneer Electronic and Kenwood are already hurting. They will have to diversify further out of consumer electronics or, like Akai Electric and Sansui Electric, risk falling into foreign hands. "There are too many consumer-electronics companies in Japan," says Joseph Osha, an analyst at Merrill Lynch Japan Inc.

Japan's top tier, however, can rely on decades of experience in packaging, marketing, and maintaining electronic gizmos at home and abroad. "To be profitable, companies need to have key components and technologies," says Masami Fujino, senior analyst at Jardine Fleming Securities in Tokyo. "But the winners also need something else--design, price, timing, new features, or superior advertising." Can anyone doubt that the best Japanese companies have a knack for all this? The Japanese simply refuse to give up when they target a market--and they have targeted digital products with a vengeance. Profitable or not, the digital race is picking up speed.

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