'Short Circuit' - Second In A Series
From the U.S. edition of The Wall Street Journal, August 16, 2012
By DAISUKE WAKABAYASHI
TOKYO—The first floor of the Bic Camera electronics store, a mammoth eight-story building covering an entire block here, is ground zero for Japan's electronics industry.
Japanese companies have beaten rivals to the market with hardware breakthroughs. But in each case, foreign rivals have cashed in by delivering faster improvements, integrating the products with easy-to-use software and online services, and delivering a smarter marketing message. Read More
Flat-panel television sets, most bearing Japanese brands, have long filled the north end of the sales floor, where the store's best-selling products reside.
These days, amid slumping sales, the rows of TVs are relegated to the store's cramped second-floor quarters to make room for hundreds of accessories for smartphones—specifically the distinctively non-Japanese iPhone from Apple Inc. AAPL +0.66%
The store's decision shows the what has befallen Japan's technology industry. Once-powerful electronics conglomerates, which bet it all on TVs and missed the smartphone wave, are on the outside looking in.
Smartphones are now playing center stage in the consumer-electronics world, not only delivering staggering sales growth, but also cannibalizing sales of digital cameras, portable game machines and other strongholds of Japanese electronics.
Today Apple and Samsung Electronics Co.'s 005930.SE 0.00% are enjoying record profits and are combining for some 54% of global smartphone shipments in the first quarter, according to research firm Strategy Analytics.
The combined share for Sony Corp., 6758.TO +3.93% Panasonic Corp., 6752.TO +5.52% Sharp Corp., 6753.TO +3.55% Fujitsu Ltd. 6702.TO +3.24% and other Japanese manufacturers: 8%.
In an effort to catch up, Japanese companies are redoubling their smartphone push with varying degrees of ambition.
Sony is making the most aggressive move among Japanese brands after failing to dent the market in the past decade through its troubled Sony Ericsson joint venture. No longer bound to that partnership, Sony Chief Executive Kazuo Hirai has pledged to make smartphones a pillar of its business.
Panasonic, Fujitsu and Sharp—the top three domestic handset manufacturers—are looking at a modest return to the global scene after all but backing out during the early age of so-called "feature phones."
But a full-fledged global push won't be easy, especially in such a cutthroat industry that requires constant innovation.
"Both at home and abroad, we are in a tough situation" with smartphones, says Panasonic Managing Director Hideaki Kawai, who oversees the company's finances.
People in and outside the industry cite a number of factors for why Japanese companies missed the trend: Too much focus on the domestic market; too slow and inflexible to adapt to dynamic conditions; a misread of consumer preferences and a dose of arrogance about hardware superiority.
Starting in the 1990s, Japanese cellphones were technological marvels packed with hardware breakthroughs. Sharp in 2000 was the world's first company to add a camera to a mobile phone.
By 2006, a year before Apple introduced the iPhone, Japanese consumers could watch broadcast TV on their phones.
Yet, for all the advances, Japanese manufacturers struggled to challenge Finland's Nokia Corp. NOK1V.HE +5.97% and U.S.-based Motorola Inc. abroad because the Japanese firms had churned out phones for the domestic market throughout the late 1990s and early 2000s based on a telecommunications standard used only in Japan. In order to sell phones abroad, the companies had to modify the handsets to work on foreign networks.
Late to the market, Japanese manufacturers struggled to gain a foothold with foreign carriers, unlike South Korea's Samsung, which forged relationships with network operators around the world and worked quickly to supply products tailored to overseas markets. Japan's electronics makers were making money in a protected home market, and overseas expansion was seen as risky.
The inward-looking mentality earned Japan's devices the moniker, "Galápagos" phones: a reference to the uniquely evolved creatures that Charles Darwin found on the Galápagos Islands that served as the foundation for his theory of evolution.
The most popular Japanese feature phones were often long, skinny versions of clamshell-type phones. They came with a host of features unique to the Japanese market such as digital money to make purchases, the ability to double as a monthly pass for trains and buses or a function to swap contact details with a push of a button.
The iPhone's debut in 2007 changed everything.
While the rest of the world saw the iPhone for what it was—a game-changing product—some executives in Japan dismissed it, believing their phones were already smart enough.
In July 2008, a few weeks after Softbank Corp. 9984.TO -0.77% introduced the iPhone in Japan, Tadashi Onodera, chief executive of Japan's No. 2 carrier, KDDI Corp., 9433.TO -0.71% said the device couldn't "fully satisfy the needs of [Japanese] cellphone users." Three years later, KDDI, under new management, began to offer the iPhone and it became KDDI's best-selling smartphone.
"The Japanese firms misread the market," said Ryuji Ono, a Tokyo-based partner at consulting firm Roland Berger. "They weren't watching the rest of the world."
Smartphones now account for 56.6% of all new mobile phones shipped in Japan, according to Tokyo-based market research firm MM Research Institute. Apple and Samsung accounted for more than 20% of the Japanese market in the past fiscal year, compared with five years ago, when there were almost no foreign brands.
Apple was the top smartphone manufacturer in Japan in the past fiscal year. And Samsung cracked the top five in the domestic smartphone market.
By the time Japanese manufacturers jumped on the trend—the first Japanese smartphones running Google Inc.'s GOOG +0.50% Android operating system appeared in the domestic market in 2010—Samsung was already flooding the Europe and the U.S. with a wide range of models, including the high-end Galaxy S.
Backed into a corner in their own country, the leading handset makers have had no choice but to consolidate and re-enter foreign markets.
NEC Corp., Hitachi Ltd., 6501.TO +5.63% and Casio Computer Co. 6952.TO +1.08% in 2010 joined forces to form a cellphone joint venture majority owned by NEC. Later that year, Toshiba Corp. 6588.TO +1.25% sold its phone business to Fujitsu. In February, Sony bought out its joint-venture partner, Sweden's Telefon AB L.M. Ericsson, ERIC-B.SK +1.16% giving the Japanese company full control over its money-losing smartphone business.
But times remain tough. In the most-recent quarter, Fujitsu, NEC, Sharp, Sony and Panasonic all reported losses in their handset business segments.
What's more, Sony, Panasonic and Sharp are backing away from the TV business, unable to withstand another round of competition with already battered balance sheets.
"The golden age of TV is over, and TV will never be king again in the consumer-electronics space," Kunio Nakamura, a former president and chairman at Panasonic, said in an interview last month with the Nikkei newspaper.
Panasonic recently came to Europe with a new waterproof smartphone called the Eluga, selling it in Italy and Germany with a target to ship 1.5 million units in Europe this fiscal year.
NEC Casio, which sells shock-resistant G'zOne handsets through Verizon Wireless in the U.S., plans to ship about two million phones outside Japan this fiscal year, or about 40% of its total target of five million units.
Sharp is focusing on the Chinese market, though the company doesn't specify how many of its targeted 7.7 million handset shipments will go outside Japan. Fujitsu, meanwhile, aims to reach a deal with an overseas carrier later this year.
For Sony, the bulk of its phones are sold outside Japan. With a flurry of new models this fiscal year, Sony plans to ship 34 million smartphones world-wide, surpassing the targeted output of its four closest Japanese rivals combined. Sony plans to offer more unique models that take full advantage of Sony's entertainment assets such as videogames.
In a sign of the changing attitudes, NTT DoCoMo Inc. 9437.TO +0.08% President Kaoru Kato arrived at an interview with a reporter last month carrying a Samsung Galaxy phone.
It would have been unthinkable even three years ago for the president of Japan's largest carrier and the mobile arm of NTT Corp., 9432.TO +0.26% which is one-third owned by the Japanese government, to carry a Korean phone.
"The Galaxy is really selling well in Japan," Mr. Kato says. "It has quite a bit of appeal."
Mr. Kato says he uses the Galaxy because it was the first available summer smartphone model running on DoCoMo's 4G networks. He says he may switch to a Fujitsu or Sony model eventually.
"I'm not trying to be a pitch man for Samsung all of a sudden, but it has a nice, clear screen," Mr. Kato says. "Everything is really improved."
Write to Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com