Wall Street Journal: Why Japan's electronics industry turns bad

Almost every day now, the bad news of the Japanese electronics industry is heard. With a few exceptions including Canon, Japanese electronics giants will lose $17 billion in this fiscal year. Standard & Poor's has lowered the credit ratings of Sony and Sharp to BBB+, which is only two levels above the junk level. Electronic industry executives quickly began to blame the firm yen. But this is an untenable excuse, not a reason. The recent strong yen has not been the reason Sony has lost money in the television industry for eight years in a row – it also suffered a loss when the yen was weak. Nor is it the reason electronics companies that have introduced transistor radios, walkman, CDs, and video recorders have lost their inspiration.

The immediate cause of the current problem is a poor product strategy. Japanese companies and governments failed to listen to the two inspirations of Harvard professor Michael Porter. First, as countries mature, the source of their competitive advantage will change. At a certain moment, sufficient skilled labor and cheap capital and prices are the key to competitiveness. Next, the innovation of products and processes will become crucial. Second, product strategies include not only what products are offered, but also what products are not available.

Rejecting these two points, Japanese companies tried to compete with latecomers such as Samsung on the basis of cheap capital and manufacturing strength, rather than relying on product innovation. They constantly produce products that were once unmatched in the world but are now losing money year after year. In the output value of electronic products in Japan, consumer audio and video products and semiconductors still account for 40%.

In addition, when the company goes bankrupt and the product fails, Japan's practice is often a merger, sometimes with the help of government funds. Their theory is that because of economies of scale, three failed companies can be merged into one successful company. Elpida was the largest manufacturer of dynamic random access memory (DRAM) chips in Japan before filing for bankruptcy last month. It is a typical example of this idea. The company was formed by the merger of Hitachi, Nippon Electric, and later Mitsubishi's DRAM division.

Failure to withdraw from the market for commercial chips has reduced the market share of Japanese companies in the top 20 semiconductor manufacturers worldwide from 55% in 1990 to 24% in 2010. Japan usually attributed this to Samsung, but in fact, at the same time, because Intel and Texas Instruments and other abandoned commercial products, the US market share increased from 31% to 51%.

The skills and mentality that enabled Japan to create one revolutionary product in the audio and video era did not work in the digital era. Whether it is a personal computer, smart phone or software, Japanese companies are no longer in a leading position.

This is partly due to the nature of the Japanese company system. Daniel Kahneman, a psychologist who won the Nobel Prize in Economics, explained why some companies have been spending money on poor projects while new projects lack sufficient funds. Kahneman believes that in all countries, companies are often like gamblers who have lost money and will not leave the gaming table until they win back the lost money.

It is in this respect that the differences in the structure of the U.S. and Japanese companies have had a major impact. In the United States, emerging technologies are usually advocated by new companies that have no financial or emotional stake in the old technology. Most companies that took the lead in the TV or mid-size computer era no longer exist. Of the top 21 electronics manufacturers in the United States today, 8 did not exist in 1970. Just 10 years ago, there were 6 other companies that were too small to join the top 500 Forbes.

In contrast, in Japan, no new company has been a leader in the electronics manufacturing industry for more than 50 years. When new technologies emerge, Panasonic, Sony, Sharp, Fuji, or Nippon Electric will set up new departments. So these companies are hesitating between past and future, delaying the process of creative destruction. (Editor: Lecea)