Financial Journalist

Asian Business: January 1994
The soaring yen and the continuing recession at home threaten to lose Japan its pre-eminence in the global consumer electronics market. By Gerry O’Kane

Are Japan’s consumer electronics giants losing their dominance of Asian and even world markets? And if they are, who could take the lead? Those are the questions industry observers are asking after a year of turmoil in the industry. Certainly, the figures are not good for the Japanese. In October, Matsushita, the world’s biggest maker of household appliances, issued a half-yearly report that rocked the industry. It admitted that in the six months to September, pre-tax profits had plunged 43%. Sharp’s half-yearly report, issued soon after, was better, but still by no means good; it showed a fall of 23%. Sony’s report, in mid-November was the worst yet; it showed profits had slumped 53.2%.

These Japanese companies are caught in the same double squeeze as the rest of the country’s major corporations. First is the fall in domestic sales because of the continuing recession. Japan now imports 51% more TVs than last year and while many of these come from Japanese-owned firms in Southeast Asia, the figure shows how the consumer electronics industry is changing. And despite this rise in imported TVs, the domestic market has shrunk.

The second disaster has been plummeting export figures as the Yen continues to appreciate against most other currencies. Sony’s deputy president Tsunao Hashimoto illustrates the problem: The appreciation of the Yen, he says, has lopped V74 billion (US$692 million) off revenues. In the early 1980s Japan made 95% of all VCRs sold around the world. The figure now is down to around 65%. The Japanese manufacturers are also suffering from a third major problem: The lack of new hit products to capture buyers’ imagination in the way Sony’s Walkman did 15 years ago.

‘Generally speaking the whole electronics market is looking out for the next widget —over the past two years there has been no major product launch they’re all variations on a theme,’ explains Terry O’Connor, director of electrical purchases for Courts, Singapore’s largest chain of furniture and electrical goods stores.

In Western markets, which are pretty much saturated with TVs, VCRs and CD players, the Japanese desperately need that new widget.

They have been trying. Sony introduced its Mini Disc (MD) system and Matsushita replied with Digital Compact Cassette players but neither has seen much consumer response. Since November 1992, when the MD was launched, Sony has sold 300,000 systems worldwide and Matsushita just 35,500. Small numbers for the big companies.

In Asia, where there are vibrant, growing markets with demand for existing products, the strong Yen means consumers are giving Japanese products a miss and going for products from elsewhere, which have just as many functions but are cheaper.

The biggest of these competitors is just across the Sea of Japan: South Korea.

Through the roof
While Japanese sales have been falling through the floor, Korean figures have been going through the roof. All of South Korea’s three major electronics manufacturers expect to post record export figures for 1993. Samsung is predicting a rise of US$1.9 billion, Goldstar expects an increase of 16.7% and Daewoo a 29.6% increase.

The rising Yen has been a blessing for the Koreans. Samsung’s managing director for overseas strategy, Ko Chang-Li, says, ‘When the Yen climbs 10% against the dollar, our products gain a price edge over Japanese products of 3% to 4%.’

The Korean trio are now planning for greater successes. Daewoo, which has 80% of the Middle East colour TV market, has stated its aim to have 1 0% of the world market by 2000. It is planning to manufacture in Fiance and Poland, in addition to plants it already has in Mexico, Burma, Vietnam and Pakistan. The Koreans are also spending hugely on R&D. Samsung’s research chief Chung Moon-gun explains: ‘To strengthen our position in the world market, R&D will be our focus. We now spend 7% of turnover on R&D, much higher than the average 2% to 3% for Korean industries as a whole.’ That level of R&D spending is similar to the proportion the Japanese used to spend on new ideas before the current recession.

The Japanese, by contrast, have been forced to trim R&D spending —Fujitsu, for example, snipped 13%offitsresearchbudgetin 1992-atpreciselythe time when they can least afford to do so if they are to stave off Korean competition. The Koreans have also taken giant strides to shake off the low-quality image their products used to have. Samsung chairman Lee Kun-hee has been pursuing better quality relentlessly. In August he spelled out why: ‘How stupid it would be if 6,000 workers were working to fix what 30,000 workers produced. A defective product is like a cancer in an enterprise; it will eventually kill it.’

Daewoo, meanwhile, has been concentrating on making its products simple, but extremely robust.

Not unnaturally most manufacturers are concentrating on the one region of the world that is not going into or through recession: Asia. One of the hot favourites is China.

Clamp-down
But swift growth does not necessarily mean big opportunities. China already has a big electronics industry —17,000 firms employing 1.8 million, according to government figures-and it is growing 20% a year. It is also exporting. Overseas sales in 1992 brought in US$6.87 billion.

Many of the Chinese firms were producing goods before the relaxing of foreign investment rules, so when it comes to brand recognition they have a good head start on their foreign rivals.

New arrivals will find competition is fierce and that vice premier Zhu Rongji’s austerity drive has made heavy inroads into sales. Since the summer, prices in Beijing for foreign electrical appliances have fallen between 10% and 20%, according to the Xinhua news agency. Figures from the State Statistics Bureau showed that sales of colour TVs fell 37% between June and July alone. The Chinese government is already telling its own companies there are too many basic electronic goods being made. At the end of October the Ministry of Electronics Industry said the output for colour TVs, VCRS, video cameras and electronic telephone sets all exceeded market demand. ‘Therefore,’ the agency said, ‘no more construction projects in these fields should be ratified.’ Another target has been Vietnam, but even there the more affluent regions are awash with consumer electronics. In Ho Chi Minh City, for example, 90% of homes have a colour television and more than half have a VCR.

Another trend among Japanese consumer electronics companies is to go to new, cheaper sources for components and even complete products.

Pioneer, for example, is to begin importing small stereos from Malaysia, the first complete product line the company has brought into the Japanese marketplace from overseas.

But while this trend may initially help the companies and delight consumers, it will hurt workers, adding to unemployment figures down the line.

In any case, sourcing from countries with cheaper labour —assuming you can find one that also has the necessary skill of levels —is by no means without its draw backs.

Take Indonesia. At the moment it is distinctly at the low end of the technology scale, but the vocal technology and research industry minister B.J. Habibie is pushing the country to become a hi-tech home by the next century. Tariffs on the import of electronic components have been cut from 35% to 5% in a bid to attract

foreign manufacturers, and value-added consumer products like TVs, radios and VCRs make up more than half of the country’s electronics exports -worth over US$800 million in 1992.

But manufacturing in Indonesia can be tricky. Unreliable power supplies can be a severe problem, as can bureaucracy. Sony, which manufactures in Indonesia for export, recently had to close its plant temporarily when customs held up incoming components. Not the way the Japanese like to do business.

Strategy change
Some analysts are forecasting that the Japanese giants will be back in the money by next year, but they concede that this will be at the expense of jobs at home. Manufacture of components and assembly will increasingly move to cheaper countries —assuming the authorities there help rather than hinder.

John McKie, the director in charge of Sony’s display device factory in Singapore believes in any case that major manufacturers must set up production close to their markets. ‘I don’t think the strategy of shipping goods around the world will continue. More, and more, if you want to sell in the US you’ll have to make in the US.’ And to succeed in Asia, he says, you have to have ‘the right product at the right time and at the right price’.

These days the Japanese can’t do that. The Koreans can. While they are by no means counting the Japanese out, they do see a real possibility of their own country becoming the force in consumer electronics.

In a Tokyo conference in March last year Samsung president Lee said: ‘The next three or four years will be a crucial test for [Samsung] to become a top-class global power or just to fall backward.’ So far Samsung and its Korean counterparts look like passing that test with flying colours.

Japan’s consumer electronics giants