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EPTE Newsletter: The Fall of the Giants

Zaibatsu is a Japanese term that refers to diversified family businesses in Japan whose influence and size allowed control over parts of the Japanese economy until the end of World War II. A few of these powerful families who controlled businesses that rose to power before World War II include Furukawa, Mitsubishi, Mitsui, Sumitomo and Yasuda. After the war, these monopolies were broken up through the General Headquarters of the Allied Powers (GHQ). Once they were disbanded, they reorganized again quickly due to expansion of the Japan economy. Zaibatsu by definition means “wealthy clique.”

In 1946, authorities ordered the Zaibatsu dissolved. Individual companies from the Zaibatsu empires were freed from the controls of their parent company. Many companies evolved into enterprise groups and included Fuji Electric (Fujitsu), Hitachi, Mitsubishi Electric, Nippon Electric (NEC), Matsushita Electric (Panasonic), Sanyo, Sharp and Toshiba. These companies were like trade associations with a similar business approach and product lines. They started from manufacturing home appliances, such as washing machines and refrigerators, and expanded to electronics and entertainment equipment. When one company rolled out a new product, the other companies commercialized similar products within a couple of years. Their product lines included TVs, tape recorders, semiconductors, VCRs, CD players, Japanese word processors, personal computers, cellular phones, digital cameras, flat panel TVs and more. Sony and Canon were two new companies that formed during this time, and they were quickly competing in the Japanese market.

They were all fat and happy during the second half of the 20^th century. Japanese companies maintained their leadership role on the technological scorecard, along with the lion’s share of the global market. This came to a grinding halt at the turn of the century. Korean (Samsung Electronics) and Taiwanese companies entered the global market and raced to the top of the list as OEM and EMS manufacturers. Some produced their own products and branded them with their own names. China was the third country to grab business from Japan during 2008 by offering lower prices. Unfortunately, Japanese electronics companies could not survive with the razor-thin margins needed to compete. Their market share has dwindled in a short amount of time. They have not diversified, and now face serious financial difficulties.

Sanyo Electric was the first victim in the industry. They were about to file bankruptcy, but were sold to Panasonic a few years ago. The brand name “Sanyo” was sold to a Chinese company, so products with a Sanyo label can be found online and in stores.

Sharp Corporation is on the verge of bankruptcy. Several reports say that Hon Hai Precision, the largest EMS Company in Taiwan, agreed to acquire Sharp for $7 billion. Hon Hai Precision Industry Co. Chairman Terry Gou was quoted in The Japan Times as saying “We are 90% there; the remaining 10% are legal matters and not a big deal.”

Toshiba Corporation is in the middle of a $1.9 billion accounting scandal. Their profits over the last few years were positive, but auditors found some accounting irregularities (downright fraud) and found close to $1.9 billion in profit overstatements over seven years. Toshiba’s stock dropped on this news, regulators hit them with a record fine ($60 million). Can they survive lawsuits from shareholders as well as the fierce competition from Taiwan, Korea and Japan? We don’t know.

Three members of the club have not renewed their memberships— Sanyo, Sharp, and possibly Toshiba. Industry analysts are wondering who is next. Most of the electronic companies are reporting profits due to a weak yen against the U.S. dollar. But this may be a Band-Aid; only time will tell.

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