Japan's Business Model Is No Longer Working

The keiretsu like Sony, Panasonic, and Sharp are among the major Japanese companies that have posted losses for more then five straight years. The virus that has overtaken Japan’s electronics giants in recent years is a vivid demonstration of an uncomfortable fact: the Japanese business model has served as well as it can and it time for a complete overhaul.

On April 15, Sony announced that it will record a ¥140 billion loss for the fiscal year, far exceeding initial predictions of a net loss of ¥90 billion after tax. This marks the sixth consecutive year the company has been in the red. A grand total of ¥560 billion.  The culprit is Sony’s television business, which has now been unprofitable for eight years running.

Sony used to be famous for its high-quality televisions. These were crafted with the company’s proprietary Trinitron method of building cathode ray tubes, developed as an alternative to the “shadow mask” technique pioneered by RCA and subsequently adopted by most other manufacturers. The high quality of Sony’s televisions allowed them to sell well, even though they were priced higher than competitors’ products.

This ability to command higher prices made Japanese corporations globally competitive. Japanese companies relied on sales of high-quality products to middle-class consumers in rich, industrialized countries, especially after the yen started to appreciate rapidly following the 1985 Plaza Accord.

For years, Japanese corporations were said to derive their strength from frontline operations. Toyota’s constant improvements to its factories were essential to its ability to keep on producing high-quality vehicles efficiently, while Sony product development was crucial to the company’s ability to come up with a long succession of ground-breaking new devices.

But it has been apparent for some time now that this frontline strength is on the wane. Sony has not come up with a new hit for years.

An even more serious problem is that the business model that sustained these companies for so long, based on using frontline prowess to create high-quality products, seems to have hit a wall.

When sales of flat-screen digital televisions first took off around 2004 or 2005, the televisions were priced at around ¥10,000 per screen inch. Today, there are products with a per-inch price as low as ¥1,000. Swept along by the wave of digitalization, prices have plummeted far faster than they ever did in the analog era.

On top of this, it is harder for companies to improve quality by tweaking the production process. This can be inferred from the opposite approach taken by Apple, whose popular music players and smart phones incorporate parts made by numerous suppliers.

Japanese corporations are unable to cope with falling prices and have no clue how to take advantage of their own strengths. Struggling to compete in overseas markets with nimbler rivals like South Korea’s Samsung, their business results have collapsed.

With markets stagnant in the leading industrialized economies, the main areas of growth are the newly emerging markets of China and India, with their burgeoning middle-classes. As yet, however, consumers in these new markets do not enjoy anything like the same purchasing power as their counterparts in the more developed economies. For electronics manufacturers and other Japanese corporations that have built their success on producing high-quality goods that sold well despite their higher prices, this situation demands an urgent rethink.

Back in April 2003, the Nikkei average plunged to around 7,600. This collapse, dubbed the “Sony Shock” because it was sparked by the downward revision in Sony’s anticipated business results, coincided with the first stirrings of digitalization and the growth of emerging markets. Today, almost nine years later, Japanese corporations are still struggling to deal with the implications of this seismic shift.

By Kenichi Maruyama

Kenichi Maruyama is an economist with Oyodo Investments and also a professor of economics at Tokyo University.