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EPTE Newsletter from Japan: The Galapagos Syndrome

Charles Robert Darwin communicated his theory of evolution more than 150 years ago. He observed many unique zoological evolutions while visiting the Galapagos Islands in the Pacific Ocean during a global circumnavigation on the British research vessel, The Beagle. Darwin recognized that each isolated island experienced its own evolution; each species developed a unique trait specific to that island. Darwin’s Theory of Evolution grew from these observations.The Japanese media has jumped all over Darwin’s theory by comparing recent business trends for the electronics industry to the “Galapagos Syndrome.” Japanese manufacturers established dominance in the global consumer electronics market during the '80s and '90s. They exported many kinds of electronics products to all countries. Things began to change in the early 2000s due, in part, to cell phones. More than a dozen of the largest electronics companies in Japan were in a fierce competition to release better and faster phones two or three times a year. The manufacturers had several models of phones that were enhanced with new functions upon each release. Japanese customers loved the competition within the cell phone market because they had hundreds of new upgraded phones each year, and were willing to pay the increased cost to have the latest and greatest phone. Since the market was flooded with different styles and models, it was difficult for cell phone manufacturers to gain more than 10% market share. Even though the total population in Japan is about 120 million, the annual demand for cell phones is not more than 50 million units, and sales forecasts could not be greater than a half million units for any particular model. So, the next logical step is to increase market penetration through exporting. For those manufacturers that ventured into the export trade, they found that their phones were too specialized to the Japanese consumer and not very competitive in the global market. It’s important to note that foreign manufacturers such as Nokia and Motorola had the same problem with their exporting business to Japan. The Japanese consumer could not embrace their product lines because it was not specific to them. This problem was not limited to cell phones; other electronics products such as flat panel TVs and white appliances experienced the same push back at retail. The market did not grow very much, but Japanese manufacturers did enjoy a steady flow of business in their isolated market during the first 10 years of the twenty-first century.

The barriers around the castle are not impregnable and will eventually crumble with enough sustained force. For Japanese manufacturers, the tools used to gain entrance into the castle were the tablet PC and smart phones. When Apple released their iPad and iPhone in Japan, both customers and electronics companies were shocked.  Consumers were excited with the devices unique concept, and electronics companies were caught flat-footed since they had no product to compete against them. 

Since they were isolated on their own island, they did not fear any competition from the surrounding islands until it was too late--the consumer evolution now included products from other countries. A few of the larger electronics companies quickly developed new product lines that copied these products; however, they may look like an iPad, but the system and software pale in comparison. These Japanese companies could not gain any significant market share with their new products.  

The market situation continues to worsen. The isolation that Japanese manufacturers once enjoyed is gone and several electronics products from other countries have flooded their markets. Most of the major electronics companies such as Panasonic, Sharp, and Sony posted huge losses for the last fiscal year and were forced to announce restructuring plans. Sharp has solicited help from Hon Hai Precision, the largest EMS in Taiwan. This is probably the only way Sharp can stay afloat. 

Unfortunately, I have not seen any long-term strategic business plans from any of the Japanese electronics giants. I fear the worst for the electronics industry in Japan, even though they were flourishing just 10 years ago. Evolving from isolation does have its drawbacks. What happened soon after people brought animals to the Galapagos Islands? The giant tortoises almost became extinct…

Dominique K. NumakuraDKN Research, www.dknresearch.com

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Headlines of the Week1. Teijin DuPont Films (Film manufacturer in Japan) 8/27 The manufacturer has commercialized a new PEN film as a substrate material for flexible, organic EL devices. 2. Toray Dow (Major silicone resin supplier in Japan) 8/29 The supplier has commercialized a new heat-resistant transparent silicone resin series, “MS Moldable Silicones,” as an encapsulation material for LED lighting devices.3. Zeon (Major material supplier in Japan) 8/31 The supplier has developed a new transparent thermoplastic resin, “ZEONEX K26R,” as a lens material for micro cameras.4. Sumitomo Electric (Major cable manufacturer in Japan) 9/3The manufacturer will invest 8 billion yen to increase the manufacturing capacity of flexible circuits in its overseas plants, expecting 55% revenue growth in this year.5. Epson (Major electronics company in Japan) 9/3The company has rolled out a new high-speed color inkjet printer with 360 dpi resolution and 35 square meters per hour.6. Tokyo Electron (Major equipment supplier in Japan) 9/4The supplier will begin R&D projects to create new cultivation equipment for biochemical processes. 7. Kyocera (Major electronics company) 9/4The company has completed a second phase of construction for its solar generator plant in Softbank Kyoto. The total capacity became 4.2 MW.

8. Kaneka (Major material supplier in Japan) 9/4The supplier has developed a new photovoltaic cell module formed on home roofs.

9. Chademo Charge (Consortium of EV manufacturers in Japan) 9/3The manufacturer will begin a nationwide field test for a quick charging network service.10. Showa Denko (Major chemical company in Japan) 9/5The company has commercialized a large-scale decomposition machine for PFC gas produced from wet process of semiconductors.

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