Online Extra: How Sharp Keeps Its Edge

President and CEO Katsuhiko Machida explains why innovation and being different are the keys to higher profits

It's not just because he eschews a necktie -— a rarity among Japan's executive class -— that Katsuhiko Machida, president and CEO of Sharp, looks relaxed. Since becoming CEO in 1998, the 62-year-old has transformed the Osaka-based consumer-electronics company into the world's leading producer of flat-screen LCD TVs.

The results have been dramatic. Since 1999, Sharp's sales have increased by 45%, to $23 billion, while operating margins have almost tripled, to 5.9%, compared to 1.6% at Sony (SNE ). But with competition growing, how can Sharp keep that kind of momentum going?

Machida recently addressed that and other questions in an interview with BusinessWeek Tokyo correspondent Ian Rowley. Edited excerpts of their conversation follow:

Q: Sharp's profits and sales are at record levels. How can the company keep growing?


By being different. We shouldn't do the same things that others do, but [we should] create products that don't already exist. We've realized we have to predict the mainstream products of the future.

Q: What does that mean in practice?


We've been working hard at this "one-of-a-kind" strategy, and it has helped us stabilize the company. It's why we've settled and shown so much improvement. One example of this is our LCD-TV business, where we've commercialized the world's largest LCD TVs.

Another is mobile-phone handsets [where Sharp is Japan's No. 3 handset producer]. At first we weren't so strong in this sector -- indeed, we were the last company in Japan to enter the handset business -- but we made the decision to incorporate a camera into a handset before anyone else.

Q: Why did you make LCD TVs central to Sharp's strategy?


If we'd continued in the CRT [cathode ray tube TV] business, we wouldn't be in the position we are today. To have a strong brand in the field of consumer electronics, TV is important. It's the face of industry.

Of course, it's very difficult to predict what will be a major success, and we have to take some risks. We wouldn't have had this future, but we have pursued the development of the LCD display and [we're now starting to see] the potential of this technology.

Q: Did you ever have any doubts?


In 1998, when I said I'd like to replace all CRT TVs in the Japanese domestic market with LCD TVs, it sounded very sudden, but the engineers told me it was possible. There was some panic at first, but the engineers committed.

Q: How do you view competition from plasma display panel (PDP) TVs?


In some respects, the competition has helped. The existence of the plasma-display panel TV as a competitor accelerated the challenge [faced by] our engineers.

Up until recently people believed it was not possible for the LCD panel to go beyond 30 inches. People said that larger sizes are only for PDP, but the engineers made the displays. We've already announced a 65-inch screen.

Q: Competition is increasing among LCD-TV producers. What is Sharp's strategy to maintain its market-leading position?


Our plan is to stay ahead. That's why we're building the world's largest substrate factory in Kameyama. Building bigger panels will help us cut costs. And because we need to reduce the costs of materials, we're also working with suppliers on new innovations.

The other thing is our black box, or proprietary, technology. As long as we have our secret recipe, even if competitors [otherwise] have the same equipment, the outcome will be different.

Q: But are you concerned competitors will mimic Sharp's technology?


We have to block any outflows of the technology to other companies. So far, we've done this quite effectively.

Q: How can Sharp maintain profitability in its LCD business?


The important thing is that we're not just making off-the-shelf LCDs. Other companies can do that. We want to make customers one-off kinds of displays.

That's why we enjoy high profits. If we were just making screens for PCs, we would be competing directly with the Koreans and Taiwanese. That would mean lots of price competition. That's why we've shifted to large-size LCD-TV panels which are more profitable. That's why we've shown constant profits, even when competitors' LCD businesses have suffered losses.

Q: Which products will drive earnings in future? A: We believe the LCD-TV and solar-panel businesses will show good growth. The solar business is already worth $1.1 billion in sales, but we think it could become a $4.5 billion business by 2010, as more countries ratify the Kyoto Protocol.

The other example is the electrical-appliance business. People say it's a mature industry, but that's not true at all. For example, we've developed a healthy oven which cooks using superheated steam. There is always more room for innovation and more room for growth.

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