Saturday, November 07, 2009

Rise & Fall of Technology Champions

Once upon a time, Japan dominated the microprocessor's market. And then, between 2002 and 2007, as Taiwanese and South Korean appeared in the market, Japan's marketshare crashed from 75% to 34%.

So, instead of fading into the sunset, the Japanese moved to higher-value products, focusing on substrates for microprocessor units (MPUs). The 3% of substrates for MPU applications shipped in 2007 accounted for 30% of the market’s value. And this is just one example of how a slew of medium sized companies have quickly changed tack and adapted to the winds of change.

According to the Minstry of Economy, Trade and Industry (METI), the chuken kigyo (strong, medium-sized firms) serve more than 70% of the worldwide market in at least 30 technology sectors worth more than $1 billion apiece. Their niche areas are mostly at the high-end of electronics, engineering and materials-science.

The common characteristics of Japan's technology champions were:
  • They invest handsomely in research and development (R&D).
  • Many have factories abroad for basic products but keep the high-end stuff at home—in a “black box”.
  • They often own their supply chains: chip companies that might use crystal components generally grow their own.
  • Some firms even make the very machines they use, in order to control costs, remain independent of suppliers and maintain a deep understanding of their technology.
  • Work closely with clients and solve common, thorny problems together.
  • Firms try to maintain lifetime-employment because knowledge of technology is tacit, not formal.

Just when everybody thought that it was dificult to replicate the strengths of the Japanese companies, a small Dutch company called ASML came up with a little shocker. Until 1990, Nikon and Canon dominated the the market for 'steppers' - the tools used to make computer chips. They had 65% and ASML, less than 10%. Today it is the other way around...Also along the way Japan's marketshare for solar panels dropped from 50% to 20% during the past four years.

What went wrong? Now the experts say that some the strengths were also fatal weaknesses:

  • Too many competitors, so margins are thin and there is not enough being spent for R&D. So Taiwanese,Chinese and Korean companies are catching up.
  • Tax laws actually discourage partnerships from forming.
  • The lack of shareholder pressure that lets companies focus on long-term projects removes the market discipline to boost performance and cull weak projects.
  • Vertical integration ensures supply and quality, but leads companies into non-core areas better done by others.
  • Lifetime employment keeps knowledge in-house, but firms lose flexibility, employees lose labour mobility and fresh ideas can be stifled.
  • The best technology is less prized in the fastest-growing markets—poor countries like China and India that want basic products. (Japanese makers of mobile phones have the world’s most sophisticated devices but their market share abroad is virtually nil)

Now it'll be interesting to find out how much these medium-sized companies contribute to Japan's GDP...

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Japanese Companies that Dominate Hitech Niche Areas -

  • Japan Steel Works, Hokkaido: Produces huge, solid-steel vessel to contain the radioactivity in nuclear reactors. JSW produces this from a single 600T steel ingot and sells it for $150million apiece. There are 40 nuclear plants unders construction around the world, designed bya dozen companies from USA, China, France, japan and Russia. All depend on this one company.
  • Shimano: Earns around $1.5 billion a year by supplying 60-70% of the world’s bicycle gears and brakes.
  • YKK: Zip fastners - 50% of world market
    MURATA: 40% of world capacitor market.They cost somewhere between a quarter of a cent and 20 cents each, but a mobile phone may need 100 of them and a PC 1,000.
  • Nitto Denko claims to have more than 20 market-leading products, mostly for making LCD displays.
  • Mitsubishi Chemicals (the odd one here - not an SME!) commands a near monopoly in red phosphorescent materials used to make natural-white LED light bulbs.
  • Shin-Etsu enjoys the top spot for certain silicon wafers for semiconductors. Also 50% of the market for the photomask substrate, used to place patterns on semiconductors. The remaining 50% is dominated by — Covalent, NSG, AGC and Tosoh—all from Japan.
  • Kyocera leads in several integrated-circuit components.
  • NIDEC: 75% of motors for hard-disk drives in computers
  • MABUCHI: 90% of micro-motors used to adjust the rear-view mirrors in cars.
  • TEL: 80% of the etchers used in making an LCD panel.
  • COVALENT: 60% of containers that hold silicon wafers as they are turned into computer-chips. 70% of the market for carbon brushes in electric motors

Japanese companies have a similar grip on, for example, bonding material for integrated circuit packages and the lithography machines (called steppers) to make LCD panels. The semiconductor business if practically owned by Japanese companies. The process of making computer chips illustrates Japan’s dominance. Among the many steps are four in which the Japanese are indispensable:

  1. Wafer processing: SHIN-ETSU (35% of world market)
  2. Thin-film formation: NIPPON MINING & METALS manufacturs (30%) 'sputtering target material' used in Thermal Imaging Equipment;
  3. Coating, lithography and developing: TOPPAN PRINTING (40%) of 'mask/rectile' and JSR (40%) of 'photoresist' used for making electron beam lithography system and coating machine/ developer respectively.
  4. Contact and packaging: SUMITOMO BAKELITE (35%) of 'encapsulates' used for making dicing machines.

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References:
Japan's technology champions - Invisible but indispensable - The Economist, Nov. 5th 2009

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