Japan: lost in introspection

There has been a lot of speculation about what will happen to the Japanese electronics companies, and in particular their semiconductor divisions, all of which are bleeding money.

If you visit Japan you get some idea of the problem. Everything is too inward looking. All the mobile phones are great and seem in some ways to be ahead of what we have in the US, and they are all made by Japanese manufacturers. But that is the problem, they are made by manufacturers who have given up in the rest of the world.

Greg Hinckley, the COO of Mentor Graphics, once told me about interviewing a candidate for a finance position who came from American Airlines. Their focus, the candidate said, was to touch down 30 seconds ahead of United. It was as if Southwest and Jet Blue and all the rest didn’t even exist. Being the best airline just meant being the best legacy airline: beat United, Delta and the others.

The Japanese cell-phone companies are like that. They are so competitive for their share of the Japanese market that they have given up on the global market and what it takes to compete there. Of course, the Japanese cell-phone transmission standards are different which means that you have to decide whether to compete in Japan, overseas or both. Those different standards may have looked like a giving a good unfair advantage to the Japanese since Nokia, Ericsson or Samsung were unlikely to focus on the Japanese standard first even during the initial high-growth period. Even today, Nokia, the world’s biggest cell-phone manufacturer has less than 1% market share in Japan. But on the other hand the Japanese manufacturers have no market share in the rest of the world, which is orders of magnitude bigger. Sony is an exception (Sony is almost always an exception) but perhaps only because it has a joint venture with Ericsson rather than going it alone.

Motorola had the same problem in the digital transition away from analog phones, where it was the biggest manufacturer in the world. The rest of the world went digital with GSM (which back then stood for Groupe Spécial Mobile before it got renamed as Global System for Mobile communications). The US initially decided to simply make the voice channels of their analog system AMPS into digital channels to form D-AMPS, which was what AT&T wanted. So Motorola had to focus on making handsets and base stations for that American-only standard (I think it was used in Israel too) and largely missed the transition in the rest of the world by focusing inward. Much later, AT&T gave up on IS-136 that D-AMPS had morphed into and switched to GSM (although the current AT&T uses GSM mainly because SBC and PacBell Wireles went with GSM from the start and ended up acquiring the old AT&T). When you look where it came from, it is amazing that Motorola’s wireless division looks unlikely to survive.

I was in Japan most recently last summer when I was CEO of Envis. On a completely off-topic note I finally did something I’ve wanted to do for a long time: I got up at 5 in the morning and visited the Tsukiji fish-market. I recommend making the effort, and with jet-lag you’ll probably be awake at 5 in the morning in any case. Nothing like unagi (eel) and green-tea for an early breakfast.

Visiting Japan really is captured well in the movie “Lost in Translation.” Being awake in the middle of the night with jetlag, the weird stuff on TV, the atmosphere of the bars in the international hotels, Shinjuku in the rush-hour. Unfortunately I’ve never had the Scarlett Johansen lying on my bed bit.

Visiting the usual semiconductor companies I got the feeling that they were all only competing with each other. By and large they were making chips to go into consumer electronics products for the Japanese market. There were obviously far more products and far more chips being done than could possibly make money, just like all those cell-phones and cell-phone chips couldn’t be making money (not to mention that the Japanese market is already saturated).

With too many companies, and too many uncompetitive semiconductor divisions, consolidation is to be expected. But Japanese politics is inward facing too and so they can only merge with each other and gradually move towards what I call Japan Inc in the semiconductor world (to be fair, this same issue is one that affects my American Airlines example; British Airways or Lufthansa is simply not allowed to buy a major stake, recapitalize them and clean them up because congress has laws preventing it). So it looks like gradually the semiconductor companies will consolidate into a memory company (Elpida) and a logic company and, based on past history, they won’t take the hard decisions necessary to be competitive globally rather than just in Japan.