The Japanese Juggernaut That Isn'tJohn W. Verity
In the late 1980s, a tremor shook the U.S. computer industry. Japan's electronics giants, it seemed, were ready to take on computers. And if their track record in consumer electronics was any guide, Silicon Valley would soon resemble Detroit. In mainframes, Japanese suppliers and their U.S.-based affiliates had captured 20% of the world market for IBM-compatible systems. Japanese supercomputers were as fast as Crays. And Japanese suppliers were pushing into new markets such as personal computers and workstations.
The most ominous sign was Japan's enormous success in laptop PCs. While IBM, Apple Computer, and Compaq Computer struggled to get into that fast-growing market, Toshiba, NEC, and other Japanese suppliers quickly took the lead. By 1989, the Japanese had a 43% share of U.S. sales.
Most troubling was how they did it--by dominating critical technologies needed to make laptops. Having mastered memory chips and flat-panel displays, they seemed poised, as one popular metaphor had it, to "move up the technology food chain." As builders of these key parts, they'd be able to move faster, manufacture more cheaply and, pundits warned, hamstring Western competitors by delaying their access to similar parts. And, like Japanese business in general, computer makers enjoyed cheap capital and patient investors.
So, where's the Japanese juggernaut today? Has it gained any ground against Western suppliers? Surprisingly little, in fact. And the high-profile beachhead that Japanese laptops established has eroded badly (chart). Toshiba Corp., Japan's most visible success in the U.S., says it's only a temporary setback. The company's share of the U.S. laptop market has dropped to 14%, from 21% in 1991, but "we don't plan to go any lower," says Hisatsugu Nonaka, senior manager for overseas PC planning and marketing. His strategy: hold tight through a shakeout of poorly financed Asian clonemakers, then hit the market with laptops using leading-edge screen technology. Rival NEC Corp. is poised to renew its American efforts with an investment in Control Data Corp.
LEAN AND MEAN. Restarting Japan's U.S. computer surge may not be so simple. In the past few years, America's computer makers have become tougher competitors. Faced with economic recession and a fundamental transformation of the business fueled by accelerating advances in the speed of inexpensive microprocessors, they've eliminated thousands of jobs, suffered huge financial losses, and struggled to restructure themselves.
At least for now, newly strengthened U.S. suppliers are keeping the Japanese threat in check. In workstations, a critical and fast-growing market in the 1990s, U.S. companies continue to dominate, with a 90%-plus worldwide share. Meanwhile, Sony Corp. and Oki Electric Industry Co. Ltd., two Japanese suppliers that tried to sell workstations in the U.S., have quietly withdrawn.
In personal computers, too, the U.S. still rules. Intel, Microsoft, and Apple write virtually all of the important technical rules that manufacturers around the world now follow. Taiwanese and Korean PC makers have gained substantial market share with ultralow-priced IBM PC clones. But NEC, the leading Japanese PC brand, ranks only 14th in the U.S., with a mere 1.5% share. In laptops, Toshiba has been forced into the relatively small, high-priced segment of the U.S. market. NEC, a pioneer seller of notebooks in the U.S., has fallen behind. Instead, NEC is defending its lead in Japan's PC market. "If it were ever perfectly secure, we could think about America," says Takehiko Inoue, NEC's associate senior vice-president for computer systems. "But that's years away."
Japan has done only a little better at the market's upper end. Cray Research Inc. still leads, and Western manufacturers are ahead in the latest high-performance computer design, called parallel processing. And Japan remains virtually absent from the U.S. minicomputer arena. The one place where Japanese suppliers are still making gains is in mainframes. But combined, they have only a fraction of IBM's sales, and that market is barely growing.
Why this surprisingly poor showing by Japan? Western computer executives cite many reasons, involving strengths and weaknesses on both sides. The rising value of the yen, for example, has made it harder for Japanese suppliers to keep up with price cuts in the PC market, says James R. Berrett, chief operating executive at NEC Technologies Inc. in Boxborough, Mass. He adds that the plunge in Tokyo's stock market has raised capital costs. Meanwhile, the global recession and a sluggish home computer market are squeezing profits. Fujitsu Ltd., the No. 1 computer maker in Japan, just announced a 69% earnings drop.
But while the Japanese were feeling the pinch, competitors in other East Asian nations found abundant funding. "The Taiwanese capital market threw money at anyone who looked like they could put a computer together," says Daniel M. Crane, senior vice-president for sales and marketing at Librex Computer Systems Inc., a notebook computer maker in San Jose, Calif., that is funded by Japan's Nippon Steel Corp. New chips from U.S. manufacturers made it easy for any clonemaker to create a laptop. Suddenly, Toshiba lost a key advantage: It had been building such chips itself--and not selling them to others.
LITTLE LEVERAGE. Japanese computer makers have also been victims of their own conservatism. Toshiba's Nonaka hints that the company didn't want to appear too aggressive on pricing for fear of inflaming anti-Japanese sentiment. So, Toshiba took its pricing cues from Compaq and IBM. That left prices of Toshiba's laptop machines high in relation to Taiwanese imports.
Strength in memory chips and other computer components has not given Japanese suppliers as much leverage in complete systems as had been expected, either. For starters, some of the leverage has disappeared. In memory chips, Japanese suppliers now face strong competition from Korean makers.
Besides, the chip divisions of Japan's electronics conglomerates generally need to sell their components to all comers to achieve manufacturing efficiencies. "You can't keep your advantage unless you refuse to sell crucial components, and that's not possible for long," says Gil Williamson, CEO of American Telephone & Telegraph Co.'s NCR computer unit. "Even if NEC refuses to sell, others will jump in. A cartel is not a practical idea in technology." Even Japan's virtual monopoly in flat-panel displays hasn't translated into dominance in laptops, the main market for such components. Screen makers can't afford to slight their largest customers--companies such as Compaq, Apple, and IBM.
Probably Japan's biggest problem in competing with the Americans has been speed--a lack of it. Over the years, Japanese gains have been strong in the IBM-compatible mainframe business. There, Big Blue set a steady, fairly predictable course, bringing out new generations of hardware every five to seven years--a slow-moving, high-profit target.
SHORT LIFE. The rules of the desktop and laptop markets, however, are much less forgiving. Product life cycles have diminished to as little as six months, and keeping up requires maintaining close touch with the market and with suppliers of key components, such as microprocessors and disk drives. Says Andrew S. Grove, CEO of Intel: "Unless you can roll out products three times a year, you're a has-been. The fashion industry doesn't move at the speed this one does." Indeed, personal computing has become a market where "winning is not losing," says one Fujitsu executive. No single company is able to pull far ahead of the others for long, and one bad move can lead to oblivion.
That leaves price as the basis of competition. But the price game is one that Japanese manufacturers are reluctant to play these days. Although low prices were a major weapon in consumer electronics, NEC's Inoue says Japanese companies won't buy their way into computer markets. "The whole thing becomes a battle over production costs, and Japan has no advantage in that," he says. "The age of cheap Japanese products is finished."
In short, U.S. PC suppliers have outgunned their Japanese rivals on most fronts. Apple has adapted its plants to build low-cost, low-margin machines, and Compaq is following suit. American suppliers have also maintained closer ties with distributors--a grapevine of market intelligence. The result, observes Kenneth S. Flamm, a senior fellow at the Brookings Institution, is that in Japan, "systems are six to nine months behind what we see in the U.S.--even though U.S. companies are using many Japanese components." Why? "There's more competition in the U.S. There are a lot of guys ready to slit your throat in order to beat you to the market."
U.S. computer executives are hardly ready to declare victory. "The Japanese are still formidable competitors," says NCR's Williamson. And they're laying the groundwork for new forays. NEC has signed up Control Data to market its supercomputers in the U.S. and Europe, and Control Data CEO James Ousley says he has signed a letter of intent for NEC to acquire a minority stake in CDC. Fujitsu has bought two European computer makers, ICL and Nokia, and has started selling supercomputers in the U.S., using its first direct-sales force. This fall, NEC will unveil a super it says outperforms Cray's best.
In the all-important microcomputer market, Japanese suppliers are not about to give up, either. "Toshiba is not one of the companies that's going to get shaken out" in the current price wars, says Toshiba's Nonaka. "We have brand recognition, and we have deep pockets."
FUTURE SHOT. What's more, Toshiba has forged links with IBM and Time Warner Inc. with an eye toward "multimedia" systems, which will merge television and computer technologies. Nonaka figures that should create new consumer markets for Toshiba.
Meanwhile, Toshiba hasn't abandoned the idea of using its strength in critical components to gain an edge in finished computers. A Toshiba-IBM joint venture called Display Technologies is building full-color flat-panel displays. Nonaka thinks those screens will soon be in great demand as buyers of notebook PCs switch to Microsoft Corp.'s Windows graphics software. Because IBM and Toshiba will use so many screens, Display Technologies may not need to share the technology to achieve economies of scale. "The problem of volume is solved," Nonaka says.
That still leaves the question ofleverage. Outside of Japan, Toshiba, Fujitsu, Hitachi, NEC, and the others have never set any important technical standards for computers. The companies that have done so comprise an all-American lineup: IBM, Intel, Microsoft, Apple, and AT&T, among others. "You canhave the greatest flat-panel display in the world," explains Mike Nevens of management consultant McKinsey & Co., "but if you don't control the architecture of the computer, so what?" Maybe you just settle for being the world's most successful supplier of computer parts.
A U.S. PROGRESS REPORT ON JAPAN'S COMPUTER COMPANIES FUJITSU Through its stake in Amdahl, gaining in mainframe market. Recently began selling supercomputers directly in U.S. In Europe, controls ICL, a British mainframe maker HITACHI Winning market share from IBM in mainframe disk drives and processors. Joint venture with Electronic Data Systems NEC Biggest Japanese supplier in desktop PCs, but has only 1.5% of U.S. market. Recently signed Control Data to sell supercomputers in U.S. Retains small stake in France's Groupe Bull SONY Quietly bowed out of U.S. workstation arena. Builds laptops for Apple Computer. Palmtop Bookman computer due out in September TOSHIBA Initial leader of the U.S. laptop PC market, Toshiba has lost ground to Compaq, Apple, and Asian rivals DATA: BW