What happened to Japan's electronic giants?

[Text below extracted largely from my comments on this Hacker News discussion about this BBC news item although there is slightly more there it needs the context of the thread which I can't pull into this blog post easily (or legally given copyright laws).]

There is some truth in this article but it misses some of the really key factors.

  1. Value of the Yen. The Yen is seen as a safe haven and has been at almost ridiculous levels (considering trade balances and government debt) at least since late 2008. This is crippling exports (and/or profitability) in these price sensitive markets (TV's, computers, phones) as even though much production is abroad they still have massive cost bases in Japan.
  2. Development of Korea. LG and especially Samsung took the place of the aggressive upstarts driving down prices and then building up the quality as Japan once did to the West in markets such as cars. It will be interesting to see what China's development does to Korea in 15-20 years. So far the aggressive pricing from Korea has kept Chinese TV brands from prominence but that may not last.
  3. As Japan prospered and incomes rose it became uneconomic to manufacture commodity items there. Outsourcing and offshoring production damages the feedback and development loop between production and design that enables efficient optimum design of products. Also they narrowed the parts of the supply chain that they supplied to focus on the high value ones that could still be profitable but that costs control and foresight into important developing areas. e.g. Samsung could develop LCD panels in exact form factors to fit their devices and to use them as structural elements in TVs getting a jump start on Sony. (Sharp had[has?] their own panels but the quality wasn't uniformly high and they were overly dependent on their home TV market anyway).
  4. There is very little profit in many electronics items. TVs especially are not a source of profits (maybe Samsung makes some but it is hard to tell from their annual reports). Aggressive and falling prices, unstable panel supplies and the fact egos and ecosystems are on the line means that the once stable profit source of CRT TVs has been replaced by an LCD bloodbath. Even in mobile phones only Apple and Samsung are really making money (along with a number of component suppliers getting their slices).
[In response to a comment about Sony having missed the boat on the idea of connected devices and the ecosystem that "Google and Apple have done so very well."]

[Sony have, movie studios, TV studios and record labels] however they lacked the internal structure and strategy to really deploy them effectively. Plus someone would have had to choose a suboptimal strategy for their division's financial results if they were to avoid selling some rights or exclusivity externally but to use it for joined up strategies. (Or the low profit hardware arm would have had to paid commercial rates.)

It also surprisingly gets harder in many ways to negotiate for other rights when you have your own studio/record label and who wants to only watch/listen to Sony content. Anti-trust law may be a factor in this (as a content owner Sony couldn't legally do an Apple and tell their competitors what pricing model to accept) but also it changes the tone of the negotiation and attitude of other parties when they are your competitor.

And finally just when the network technology and the products are getting to the point where a useful internet delivered content ecosystem can be established somebody high up the organisation decides to split the platform and bend over for Google in order for the honour of making the Google TV for US only under ridiculous contract terms based on Intel hardware costs and to be supported by a dreadful marketing campaign it still sows FUD amongst content partners.

geon > I don't see why being a competitor would make it impossible for Sony to build a media store. It worked for Valve...

Firstly I didn't say it would be impossible just potentially harder than if not a competitor.

I don't know the history of Steam that well but my understanding was that it started as an easy way to get their own games. Yes Sony Music could have done the same (maybe they did but I can't remember) but a store with a seemingly random selection of about 25% of pop music doesn't make a great hit in the era of Napster and when they are still pushing DRM (which Steam also uses).

I don't believe that as a company with about 25% of the music market could legally impose pricing conditions on it's competitors (Valve may allow flexible pricing but iTunes did not at least at the beginning and I don't believe was such a proportion of the market at the time).

Sony's decline

[Original Hacker News comment.]

I worked at Sony until about 18 months ago (European TV Product Planning and Business Development getting content onto the TV Internet platform).

This data makes it look like it could be going down quicker than I thought but it did have major problems and no clear route through them.

I think a lot of the engineering problem is that now the growth has gone there isn't large amounts of fresh recruits bringing new ideas. It also isn't THE place to work anymore which it once was in Japan (think Google 8 years ago levels of cool). The engineers are now mostly managers and outsourcing large amounts of development (particularly software to India). Manufacturing is outsourced so the benefits of having deep understanding of production and being able to optimise the products for that just isn't there. These combined outsourcings may be essential for short term survival but rob further from capability to differentiate and innovate.

Exchange rates are also killing Sony (and the other Japanese manufacturers). Massive proportions of their costs are in Japan and inflexible but their income is significantly in dollars and euros. They would be much better off if they spread their costs to regions where their income is.

The end of CRTs removed Sony's price premium in TV and Samsung at the high end and LG at the low end are brutal competitors in an industry where no-one is making money. However it is almost impossible to escape the TV industry as that would completely kill all the Sony franchise retailers (and with it a lot of other electronics sales) and any potential position as an entertainment platform/gateway company. It would also be a big admission of defeat and a lot of jobs would disappear.

A lack of real leadership has been a core problem but I'm not sure there is any way to fix it now.

Don't get me wrong many of the products are still really good and even competitively priced but that doesn't mean Sony is profiting on them. In TVs I think the processing on the mid-high models is better than most competitors and the internet services are pretty competitive but there is a lack of nimbleness and imagination to really take a lead in anything other than picture quality. The PS3 is a good value product these days.

Thinking about it some more I think the best chance of surviving into the medium term is some cataclysmic shift in exchange rates (maybe not so improbable given the Japanese Government debt). An effectively free drop of 20% in Japan based costs would give quite a massive boost that might give time to attack other problems but isn't enough on its own (assuming Sony's debts are in Yen as the value of many assets would also fall which could put them under before they could benefit from trading against the stronger currencies).

Japan printing itself out of debt might be quite a good move although clearly not without its costs amongst savers.

Anyway getting well out my expertise here.

elchief > Man, I had a Sony Wega CRT, and I seriously couldn't tell the difference between it and the first incarnation of 720 flatscreens.


Yes the first flatscreens were rubbish and for interlace SD video the best type of screen is a CRT (the screen, the encoding and the transmission technology were all built around each other to actually gain benefit from the weaknesses).

However the deinterlacing, upconversion and motion interpolation are massively different now to the first models. Plus content is available in HD (progressive) formats and you can get 1080P models.

A 40" LCD can be moved by one person and a 36"CRT would probably need two people to move it at all, was full of nasty chemicals, used more power and takes up more space in the room. If you still have a CRT that you use much it is probably worth replacing it, the phosphors will be substantially diminished in brightness so power consumption will need to be higher to achieve the same colours/brightness as before and HD video is truly here now.

Progress is amazing (even if there are the odd dips on the way). I joined Sony just as they were killing the non flat screen products.