Tech industry banks on the 'cool factor'

By Michael Kanellos
Staff Writer, CNET News.com
December 6, 2004 4:00 AM PST

TOKYO--More than a decade after plunging into one of the steepest financial declines in modern history, Japan is turning increasingly back to its roots in an industry that made the country a postwar economic powerhouse: consumer electronics.

In the 1960s, transistor radios and solid-state TV sets propelled the country's phenomenal economic growth. Today, it's the demand for sleek digital products--combined with corporate reforms and governmental actions initiated over the last decade--that is breathing life and confidence back into Japan's battered technology sector, which is key to the country's overall economic recovery.

Despite the country's economic problems, Japanese engineers have continued to make significant advances in important areas. Among them:

Networking by light. In a process known as "visible light networking," professors at Keio University have come up with a way to let light-emitting diodes transmit data. In the future, this could enable lightbulbs or car headlights to carry Internet information.

Handheld games. Nintendo initially predicted that 1 million units would cover the first rush of orders for its DS handheld. But the company had to double its production level to keep up with demand.

Alternative energy. Engineers are developing fuel cells as small as a person's little finger that can run an MP3 player for 20 hours.

Digital movies. Sony, in conjunction with Silicon Light Machines of Sunnyvale, Calif., is developing chip-based systems that can project crisp movies at 60 images a second with a resolution of 1,920 pixels by 1,080 pixels. Already, Sony digital cameras helped trim $2 million off the production costs of "Star Wars: Episode 2."

Fingerprint identification. Unlike most technologies of its kind, NEC's SecureFinger system does not require that a print be pressed onto a sensor. Instead, light is projected onto a finger, and the resulting image is checked against a database.

"In digital electronics, Japan is playing the leader," Sony President Kunitake Ando said in a recent speech. "The champion of the narrowband was the U.S., and it was mostly on the PC. Now it is a vessel of communications and entertainment, and that is the strength of the Japanese."

The trend can be seen in the recent financial results of many of the country's largest conglomerates. In late October, Toshiba announced a net profit of $79.1 million (8.38 billion yen) on sales of $25 billion for the first half of 2004, compared with a 32.2 billion-yen loss for the same time last year. Hitachi's first-half net profit grew to $371 million (41.2 billion yen), a 763 percent increase from the same period a year ago.

In the near term, that means Japanese companies and policymakers are counting on this holiday shopping season to accelerate their momentum in these markets. So far, it's a mixed bag. While TV sales are up overall, Sony admitted that it underestimated demand and is having trouble filling all its orders. But in the long run, these areas will be important testing grounds for broader changes in the evolution of Japanese business and culture, including the keiretsu heritage of interlocking relationships that has endured for generations.

Having witnessed some false starts in recent years, economists remain cautious in their projections. In August, the government said the gross domestic product only grew 1.7 percent, below expectations and an abrupt change from strong job and GDP numbers of the previous 15 months. In addition, the recent rise in oil prices has led some to reduce projections or caution about future sales.

In the technology industry, these uncertainties translate to a mixed bag of assessments that vary from company to company. For many, success will depend on finding a winning formula of higher-than-average prices, high-end design, novel technology and brand awareness, along with crucial cost-cutting techniques such as outsourcing and standardized components.

"Panasonic is a company that actually gets it," said Van Baker, an analyst at research company Gartner. "I still have some doubts about Sony."

Three devices lead turnaround
The products cited most often in Japan's consumer electronics rebirth are the successors to the film cameras, analog television sets and video recorders the nation has cranked out for decades. These include digital cameras, high-definition TVs and DVD players, along with the components that go in them.

In these devices and others, domestic manufacturers have continued to hone an edge in turning aluminum, plastic and little cartoon characters into art. The "emotional" aspect of product design--a largely foreign concept in the computer industry--is discussed often by Japanese executives and cited as part of the success of things like the Nintendo's game devices, Hello Kitty and mobile phones.

"What I thought while developing iMode is that Japan is very strong in developing products for middle-class people," said Kei-ichi Enoki, executive vice president and managing director of products and services at NTT DoCoMo. "We initially targeted young people because they are the most sensitive to new products."

The fundamental changes in Japanese business philosophy have been necessary to address revolutionary developments in the global marketplace. Manufacturers from other parts of the world, such as Samsung and Apple Computer, have figured out how to design--and more importantly, sell--consumer electronics products.

Rivals from China to Wal-Mart
Moreover, contract manufacturers in China and Taiwan have allowed newcomers to enter the market. Wal-Mart Stores, Sears, Roebuck and Co., Westinghouse and Best Buy now sell CE products under their own brand name.

To remain competitive, Japanese companies have adopted such practices as offshore outsourcing and entered into mergers and alliances with foreigners, such as joint ventures crafted by Samsung with Sony and Toshiba. In one particularly close arrangement, Fujitsu is designing servers with Sun Microsystems and Intel while stationing engineers in the labs of Linux maker Red Hat.

New alliances are replacing longtime rivalries in areas such as processor and memory chip production to cut costs and help finance factory construction. Such changes have led Japan to become one of the more active markets for expanding semiconductor facilities in the last year alone.

"Most of them had to give up doing it themselves," said Douglas Sparks, a consultant at DSK Associates. "They understand there is no going back."

Top sellers in flat-screen TVs
So far, many of the changes seem to be paying off. In LCD and plasma TVs, Japanese manufacturers occupy most of the top five spots in sales. Sharp Electronics and Matsushita Electric Industrial lead the production of the flat glass screens featured in such sets, with Matsushita surpassing Samsung in the second quarter for the first time, according to market researcher DisplaySearch.

But Japan's technology industry might face one of its most serious tests in another market in which it has enjoyed much success: digital photography. Japanese companies are the dominant fact of life in the digital-camera market, according to research firm iSuppli, and shipments are expected to rise from 46 million units in 2003 to between 58 million and 62 million units this year. The top five manufacturers are Sony (23 percent), Canon (22 percent), Fuji Photo Film (15 percent), Olympus (15 percent) and Nikon (11 percent). They comprise 86 percent of the market.

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