Japan: Heading Downhill but not for long

By Akira Minamikawa -- Movers & Shakers, 6/22/2006

In 2005, the personal computer and cell phone markets in Japan were better than initially expected, since the global economy has remained strong since 2004. The global economy usually affects the Japanese economy due to its large export business. In 2006, the Japanese economy is expected to experience a recession, according to Tokyo research firm, Digital Garage. This will mirror a recession in the overall Asian economy due to higher oil prices, a decrease in PC sales in advanced countries and reduced housing prices in the United States, all factors that point to a global slowdown. Digital Garage expects the recovery to emerge in the second half of 2007.

In the Japanese PC sector, aggressive personal consumption will continue, while corporate consumption in Japan will decrease in the second half of 2006. Digital Garage estimates personal consumption will show 9 percent growth in unit shipments and 2 percent growth in sales revenues. Total PC consumption in 2006 is expected to slow down somewhat and low-priced notebook PC sales will be stable due to exports to the Brazil, Russia, India and China (BRIC) countries. DRAM chips will not grow in memory capacity base in a single PC due to lower priced PCs, leading to excess supply in the second half of 2006.

In the Japanese cellular phone sector, unit shipments will grow 9 percent and revenues will grow 1 percent in 2006, according to Digital Garage. The average unit selling price will be down due to the rise in $50 phones available on the market. Supply of mobile RAM will be tight due to an increase in cellular phones with DRAM and NAND flash memories.

In the flat-panel TV sector, U.S. sales will be down slightly, but total worldwide sales will increase 43 percent in unit shipments and 33 percent in revenues in 2006, according to Data Garage. Because flat-panel TVs will be required to feature digital TV tuners in 2006, replacement demand will be boosted. Also, the reduction in TV prices will help drive growth. Chinese manufacturers' planned mass production of flat panel TVs may further drive down prices. These manufacturers will procure the second-ranked flat panel from Taiwan and Korea and produce TV sets priced at half those made in the Japanese market.

In the music player sector, NAND flash memory demand rose rapidly in 2005 due to growth in sales of MP3 players. MP3 players compete to some degree with cell phones, but will be compatible with each other because of the battery life of mobile phones. NAND demand will increase because hard-disk-drive (HDD)-less or hybrid PCs will be marketed at the end of 2006.

The three-month Data Garage average ratio shows a peak in book-to-bill ratio, suggesting a future downturn. The DG ratio is a three-month advanced index of semiconductors and components. According to the DG ratio, the semiconductor and component markets will trend downward in the third quarter this year.

In the semiconductor sector for PCs, the first quarter of 2006 showed positive growth compared to the previous year, according to Data Garage, and a slight reduction for the month of February compared to the same period last year. That is due to the seasonal downturn and excess inventory of motherboard manufacturers. The situation will move upward again.

The market for chips for HDD drives will stay strong in 2.5-inch drives. The market for chips for printers will gradually continue to recover. In the market for cellular phone chips, sales in the first quarter were up compared to the previous year and will turn upward in February compared to the same month the previous year.

In the worldwide consumer electronics sector, chip sales will grow by over 10 percent in 2005 compared to the previous year. Globally, there is strong demand for chips to go in LCD TV and plasma TV sets. Demand for digital cameras is likely to grow as well, according to Digital Garage, but at a lower rate. The inventory of DVD recorders seems excessive. Portable music players are now in an adjustment stage, but their growth rate is higher than last year. For the automotive market, demand for chips continues to grow compared to the previous year. Demand for air conditioner chips is also strong.

Akira Minamikawa is an analyst for Data Garage, based in Tokyo.

One Japanese View: "Never Outsource"

By Margery Conner

Ask Takeo Suzuki, president of Densei-Lamda, a Tokyo manufacturer of power supplies, about how to compete with the Chinese, and he'll tell you simply, "Don't outsource. Never outsource." This blunt contradiction of what is accepted wisdom in the United States comes from years at the helm of the No. 4-ranked global power supply manufacturer, competing with lower priced manufacturers, both in China and Taiwan.

"The U.S. has been pursuing outsourcing for the past generation, and look what has happened to its competitive advantage in manufacturing -- it's disappeared. You can't keep your manufacturing know-how if you lose the actual manufacturing," says Suzuki.

Because the Japanese power-supply market has the highest standard for quality, Lambda has focused on high-quality design and manufacturing. That means Lambda can't compete in consumer markets, which won't pay a premium for quality. Instead, Lambda goes after markets that will pony up, such as the industrial/medical market, with customers like Ford and Siemens Medical. Lambda's parent company, TDK, focuses on telecomm applications, with customers like Nortel and Nokia. Contrast these markets with low-end segments serviced by Taiwanese power supply powerhouse Delta, such as AC adapter/chargers, which will not justify Lambda's premium. Even within China, Lambda is a prime supplier of industrial power supplies.

True, Lambda does take advantage of China and Taiwan's lower manufacturing costs, but only when Lambda owns the factory outright. Suzuki says, "We hear of our competitors being cut out by their contract manufacturers when a higher volume customer comes along. Because we own our factories overseas, that's not a problem for us."TDK's purchase of Lambda last October is an indicator of its management's commitment to vertical integration. "Before TDK bought us we were competitors," says Hiroyuki Yashiro, chief technology officer for Densei-Lambda. "We could not get details on their newest ferrite cores, an important element of new power supply designs. Now that we are part of TDK, we have access to their ferrite developments a year in advance."

Looking at other general manufacturing companies within Japan, Suzuki points to companies like Toyota, Canon and Fuji Film, which have tried outsourcing and are pulling their manufacturing back inside Japan. "As the economy heats up and excess manufacturing supply disappears, companies find they must control their own manufacturing sources." He points to automation as the key. "Our factory costs can be competitive. The Chinese might have 20 workers doing what we have one do."

Before you dismiss Suzuki's anti-outsourcing, pro-verticalization philosophy as hopelessly old-fashioned, consider TDK's recent announcement of its new DC-DC converter for hybrid cars, used both in the Honda Civic and Ford Escape hybrid models. The converter relies on a new ferrite core-based transformer that TDK's ferrite group developed based on requirements from its power supply group. TDK's ability to develop the ferrite core with characteristics that remain constant over the extreme temperature range required by automobiles: -70 degrees C to +140 degrees C. This technical innovation coupled with manufacturing and packaging capability put TDK in the unique position of being able to combine power supply design, magnetic components technology and manufacturing ability. Just try that level of innovation when you outsource your engineering, manufacturing and R&D. In the words of Lambda's Suzuki: "You must own your factories and own your technology know-how."

Margery Conner is a technical editor at EDN.

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