Economist: Why Japan lost the mobile-phone wars

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Why Japan lost the mobile-phone wars

Mar 7th 2008 | From The Economist online

JAPAN is probably the world’s most important source of technology equipment. Yes, America dominates the high-end chip market with Intel, AMD and Texas Instruments. It also dominates software with Microsoft, Oracle, IBM and a bevy of open-source code products. Taiwan is a powerhouse, China is obviously vital, and Europe boasts a few stars.

But the components that power the IT industry are developed in Japan. Crack open Apple’s iPod, for instance, and the two most expensive bits are the hard drive (from Toshiba, at around $70) and screen (by Toshiba-Matsushita, at $20).

AFPCorporate pride went before the fall

Japan is also the mobile society’s social pioneer. The country created the wireless-data business model with NTT DoCoMo’s iMode service in 2000. Back then, Europeans were preoccupied with wireless-license auctions, Americans lugged around mobiles the size of bricks and Africa was not yet on the grid.

Today, around 25% of Japanese access the internet only from their mobiles. Operators’ revenue tops $90 billion a year. Many customers upgrade their phone every year; last year almost 50m new mobiles were sold. The market is saturated, with 100m subscribers in a country of 130m.

Despite this apparent success, Japan is actually losing the global mobile-phone market. Among the top seven manufacturers, only one is Japanese—Sony Ericsson, at fourth place (and that’s a joint venture with a Swedish firm).

The market leader in Japan is Sharp, but it only ranks eighth in the world, with one-fortieth the sales of Nokia, the top company. In recent years, the Japanese have watched as its South Korean rivals, Samsung and LG, have crept up the league tables to second and fifth place.

How did companies with such a promising beginning fare so badly? Four reasons stand out.

First, too many Japanese companies make phones. All major electronics firms sell them, mainly as a matter of corporate pride: not to do so would be a sign of weakness. As a result, 11 different domestic makers compete, most of them at a loss.

Consolidation is starting to emerge—in December Sanyo Electric sold its mobile phone business to Kyocera, and just this week, Mitsubishi Electric said it was exiting the market. Still, a surplus of makers persists.

Second, Japanese manufacturers concentrated on the domestic market at the expense of global growth. Yet the national business model is unique: mobile operators design the features of the phone, and the manufacturers must comply.

So the makers do not have a good understanding of what users want—they only know what the operators demand. And the makers have little experience in selling to foreign operators. Some firms, such as Toshiba, Panasonic and NEC, tried to expand overseas. Kyocera tested the Chinese market. But all got beaten back.

Third, the manufacturers designed products around home-grown technical standards and special features that are not used elsewhere. (Most foreign visitors to Japan grumble upon discovering that their phones are incompatible with the country’s wireless networks.) So the Japanese makers can only build phones tailored to the overseas market at a high cost and lower margins, making it an unattractive business to enter.

Fourth, high-end customers who want sophisticated phones drive the Japanese market, but the main growth in the wireless industry overall is in emerging markets, which need cheap phones. The world’s top three makers—Nokia, Samsung and Motorola—focus on this segment.

This actually hurts Japanese makers in subtler way than just a missed market opportunity. In the tech-hardware business, competition over price is really a function of scale: firms with higher volume can make things more cheaply. So Japanese firms are caught in a vicious circle: because they are not selling to poor countries, their volume stays low, which keeps prices high, which makes selling to poor countries infeasible.

Japanese mobile makers face other difficulties as well. Their excellence in hardware is not matched in software and usability, areas in which North American firms excel (think of gadgets like Apple’s iPhone and RIM’s BlackBerry). And the West’s “smart phones” tend to have small keyboards, while Japanese kanji characters require just a numberpad. So for cultural reasons, Japanese makers are at a disadvantage when selling to Western markets.

Consequently, Japanese electronics manufacturers lost the ripest global technology-hardware market of the past decade, and perhaps the next decade as well. And now even their home market is less generous. Mobile-phone sales last year fell by around 15% and are expected to decline a further 20% in 2008. Operators are changing their billing plans, encouraging customers to pay more for phones and keep them longer, rather than subsidising the cost of frequent upgrades.

Moreover, foreign brands like Samsung have a healthy presence, and Apple’s iPhone is coming. So business is getting tougher at a time when much more R&D investment is required to be competitive.

But the biggest problem holding back Japanese firms are the companies themselves: their corporate pride. Until the electronics makers are willing to prune their businesses to concentrate on a few targeted areas rather than stock a bit of everything on their shelves, they will continue to flounder as the world passes them by.