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Japanese Electronics Makers' Ways to Outshine during a Crisis

Japanese Electronics Makers' Ways to Outshine during a Crisis

LEE Won-Hee

Oct. 24, 2012

Transcript

Welcome to our video program. I'm Won-Hee Lee from the Industry and Strategy Department I.

Japanese electronics makers have continued to show lackluster performance since the global financial crisis. In 2011, Japan’s eight largest electronics makers recorded huge losses of 1.1 trillion yen, with global companies like Sony, Sharp and Panasonic restructuring their businesses. Japanese firms are undergoing difficult times.

There are exceptions however. These include Hitachi, Toshiba and Mitsubishi Electric, the three general electronics firms. Hitachi’s current account surplus last year was 347 billion yen, up 45% year-on-year, showing record performance for two consecutive years while Toshiba and Mitsubishi Electric are nearing the levels of their best performance before the crisis. How is this possible?

The three companies did more than simple cost cutting through restructuring. They have actively pursued strategic transformation for successful results. In this installment, the efforts of these firms for transformation will be covered.

First they changed their business structures. They boldly reduced their presence in home appliances, where they had failed to develop sophisticated technologies and lost competitiveness. At the same time, they expanded their presence in “smart” infrastructure which combines IT and infrastructure. Hitachi and Toshiba pulled out of the mobile phone business in 2010, which had been the main cause for their losses. Mitsubishi Electric abandoned its washing machine business in 2008 after the business lost profitability, even though it had the highest share of the washing machine market in Japan at the time. Instead, these firms turned their eyes to social infrastructure and industrial equipment. These are profitable sectors compared to their gross sales.

The graph in the picture shows shares of sales and sales revenue by business. For Toshiba, social infrastructure accounts for 36% of sales, but 71% of operating profits. Since Hitachi, the leader among the three, announced that social innovation would be its main business in 2009, Toshiba and Mitsubishi Electric have also focused on smart infrastructure. Hitachi defines social innovation as a business for social contribution by providing social infrastructure enhanced by IT.

Second, the three electronics makers have diversified their markets. Japanese companies have tended to focus too much on the Japanese market and have not made much effort to enter emerging markets. After aggressive moves into foreign markets based on their advanced technology and know-how, Hitachi and Toshiba lowered their dependency on the Japanese domestic market by 10 percentage points. This stands in contrast to home electronics companies like Sony which have either maintained or raised dependency on the domestic market.

Above all, they pursued localization in emerging economies like Southeast Asia and China. Hitachi appointed a CEO from the Asia-Pacific region while increasing their share of foreign employees. They have also strengthened cooperation with local companies through acquisition and partnership, a good lesson for their rivals.

They have also adjusted the strategies of the past by raising the share they produce in local countries, instead of manufacturing products in Japan. They can enhance price competitiveness by producing more goods locally and saving on costs. Toshiba plans to raise the share of local production from 64% in 2010 to 70% by 2013.

Lastly, they revamped their business practices toward total solutions instead of single devices. These solutions integrate devices, systems and services through IT, and encompass various fields of infrastructure, including the environment, transportation and energy. Convergence of various technologies is essential for this type of business and it is difficult for one company to cover all sectors. This is why cooperation with other companies is critical.

They have thus pursued cooperation and pushed forward with total solutions. A good example is the industrial complex in Dahej, India. Japan won the contract in 2012, with Hitachi taking charge of water treatment and desalination, Kyocera handling photovoltaic power generation, Kansai Electric Power handling operation and management and Itochu overseeing development. They are maximizing cooperation under the concept of “Corporate Japan.”

The Japanese government was also not sparing in support. It financed a total of 1 trillion yen in funds for exports of social infrastructure like “smart communities” to emerging economies. Furthermore, Japan has organized a government-led body for public-private sector cooperation, the “Japan Smart Community Alliance” which has 287 companies as members, to expand to the US, Europe and China, in addition to Japan.

The dictionary defines the word “potential” as latent force. Only those with latent force can outshine others during a crisis. Japan’s three general electronics makers are truly potential companies. They raised their potential through radical change in their business structure, diversification of their markets and revamping of their business practices.

This is the reason why Korean electronics companies should not content themselves with being at the top of the industry. Risk factors like the emergence of Chinese companies and global recession are still serious threats. In particular, consumer electronics is a field where players from emerging economies like China are providing intensified competition. Now is the time to turn to smart infrastructure, a growth engine for the next generation. Companies cannot seize the opportunity to become robust companies if they hesitate.

Thank you for watching. I'm Won-Hee Lee.

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