The mighty downfall of Japan’s tech giants

Credit ratings for Sony and Panasonic were recently downgraded to ‘junk’ status, showing how far the firms have fallen.

Japanese electronics companies like Sony are slashing jobs and selling off assets to improve cash flow [AFP]

Tokyo, Japan – Once the titans of electronic gadgetry, Japanese brands Sony, Panasonic and Sharp, have seen their fortunes dramatically change in recent years as their once-dominant technological innovation has dried up, a bad sign for an economy struggling to shake two decades of recession.

Sony’s announcement this month that it is ending production of the Walkman, its iconic device first launched in 1979 and a testament to Japanese postwar ingenuity, symbolises the passing of an earlier era.

In this contemporary age of smartphones and tablets, the consumer electronics of Japan’s golden age of the 1980s look positively quaint, as no doubt the iPhone 5 will look to shoppers in the 2040s.

But one question that haunts people in this proud East Asian nation is whether a substantial portion of those future electronics giants will still be Japanese firms, or whether they will be largely supplanted by rivals in Asia and around the world.

“For 15 years they have had no growth … so it is very clear that their business model doesn’t work anymore.

– Gerhard Fasol, Eurotechnology Japan

The hard truth is that Japanese electronics companies have done nothing more than tread water for a decade and a half, as Gerhard Fasol, founder and CEO of Eurotechnology Japan, points out.

“If you just look at the sales, the top eight companies of the Japanese electrical sector have about $600bn in sales combined… but for 15 years they have had no growth… so it is very clear that their business model doesn’t work anymore.”

Economic stagnation

Public opinion polls say what Japanese voters most desire from their newly elected leaders of the Liberal Democratic Party is to revive the struggling national economy.

The most recent figures suggest that Japan has once again fallen into an economic recession in the second half of 2012, in spite of earlier projections that massive budgets for rebuilding the earthquake-and-tsunami-hit north would stimulate growth.

All of this comes on top of what the Japanese now routinely call the “two lost decades” of the 1990s and 2000s, in which their once world-beating technological prowess slipped into the middle of the pack as global firms such as Apple, based in the US, and Samsung of neighbouring South Korea now dominate the highest ranks of the electronics industry.

National champions such as Sony Corporation and the Panasonic Corporation recently suffered the indignity of having their credit ratings lowered to “junk status” by Fitch, a move that may be followed by other ratings agencies in the near future.

“People in Japan understand that the competitiveness of Japanese electronics companies has deteriorated, and this downgrade has strengthened that impression,” says Masamichi Adachi, executive director of economic research in Tokyo for JP Morgan.

Explaining its decision on Sony and Panasonic, Fitch analysts noted, “The future of both companies will depend on their ability to curb loss-making segments and re-discover the kind of technological leadership which historically enabled them to develop must-have products.”

Fasol is among the relative optimists, believing that Japanese electronics companies could recapture much of their former glory if they effectively restructure themselves, end their focus on the Japanese domestic market, and take better advantage of global scales of production.

As in so many other fields, Japan has defeated itself in the cutting-edge electronics sector through its habit of looking inward rather than embracing a genuine form of internationalisation. Fasol observes that “even today, many of these Japanese companies have a complete focus on Japan. All the board members are Japanese men in their 60s and 70s. All the core members are Japanese and anybody who is not Japanese is automatically a second-class citizen in these companies.”

Some analysts are now asking whether it may already be too late for Japanese electronics giants to make up the lost ground.

Cash-strapped Sharp Electronics Corporation is in the most desperate condition. This firm bet heavily on large-sized televisions and panels and has been losing billions as a result of sluggish sales in a highly competitive market.

On November 1, many were stunned when Sharp reported to the Tokyo Stock Exchange that there was “material doubt” about the company’s ability to survive over the next year. Since then, however, Sharp has recovered somewhat through the combination of a more favourable yen-US dollar exchange rate and help from foreign investors.

But even the more formidable companies like Sony and Panasonic are slashing jobs and selling off assets in order to improve their cash flow. Among the properties that Osaka-based Panasonic may let go of is its main building in the capital city of Tokyo.

Analysts agree that, in order to achieve a turnaround, Japanese electronics giants must develop next-generation products that enthrall consumers once again, rather than playing catch-up to companies like Apple and Samsung on already available technologies.

A major factor in Fitch’s decision to cut the credit ratings of Sony and Panasonic is a lack of faith that they still have the financial resources for research and development to match their larger rivals. As the Fitch analysts put it: “At the moment their weak financial performance does not enable them to invest in new technologies anywhere near the extent of their competitors.”

But Fasol believes that this analysis misses the most crucial point: The money is not as important as the people.

“People in Japan understand that the competitiveness of Japanese electronics companies has deteriorated, and this downgrade has strengthened that impression.

– Masamichi Adachi, JP Morgan

“They still think in terms of having big factories and having big friends in government,” he notes. “What they don’t realise is that the core is to have the best possible A-players around the globe [on your team], independently of whether they are Japanese or not.”

A related possibility suggested by Sandeep Tewari, the State Bank of India’s country head for Japan, is that Japanese companies may increasingly lend their highly recognisable brand names to lesser-known partners in other Asian nations, leading the Japanese giants to be “reborn in other countries”.

What these perspectives suggest is that Japanese electronics firms do indeed have a reasonable chance to become world-beaters again, but only if they can find the wisdom and courage to transform themselves into something less “Japanese” than they have been before.

In the end, that may prove too high a hurdle for the tradition-bound leaders of the last generation like Sony, Panasonic, and Sharp. But there may yet be hope for younger, emerging firms like Softbank, Rakuten, DeNA, Gree, and others whose names we have yet to hear.

Source: Al Jazeera