U.S. FIRMS SEIZE MOMENTUM FROM JAPAN
U.S. FIRMS SEIZE MOMENTUM FROM JAPAN
2005-03-11 at 10:17:00 am #10804
In Electronics, U.S. Firms Seize Momentum From
JapanKodak, Apple Use Software,
Outsourcing to Gain Share As Sony Struggles to Grow(March 05) — For 40 years, Japan ruled the lucrative business of consumer
electronics. Its manufacturing wizards — Sony, Panasonic, Pioneer — designed
the world’s hottest televisions, stereos and cameras. In the U.S., once-proud
names such as Admiral, Magnavox and RCA were sold or went under.
Now the momentum has shifted, and it is American companies
that have some of the best-selling gadgets in the U.S. — among them Apple
Computer Inc.’s iPod digital-music player, Eastman Kodak Co.’s EasyShare digital
cameras and palmOne Inc.’s Treo mobile-phone and e-mail device.
The Americans’ edge comes from their skill at writing
software for new digital chips and from low manufacturing costs. While many
Japanese companies spent years debating the merits of outsourcing versus keeping
production in-house, U.S. companies have been quick to strike deals with
contract manufacturers in China and elsewhere.
The latest sign of the U.S. resurgence came Monday when
Sony Corp. named the head of its U.S. operations, Welsh-born American Howard
Stringer, as chief executive of the whole company. Mr. Stringer’s top priority
is to reverse Sony’s loss of market share to companies such as Apple, Kodak and
Microsoft Corp. Microsoft’s Xbox game machine saw sales rise 27% last year and
is stealing customers from the Sony PlayStation and Nintendo Co.’s GameCube.
What’s happening in consumer electronics is the same
phenomenon bringing upheaval to television, music and other media industries:
The long-awaited conversion of pictures and sound into digital data is
shattering old business models and opening the way for new competitors. In the
$125 billion consumer-electronics market, Japan’s companies are finding that
their longtime strength in manufacturing and engineering isn’t as crucial as it
Instead, as the industry adopts the ones and zeros of
computers, the skills required to make music players, video recorders and
cameras are more akin to computer design and programming — a field where the
U.S. still leads. American programmers are proving adept at writing software to
process sound as digital bits, eliminate the red-eye effect in cameras, or
smooth out jagged edges on a high-definition display.
“Software is an area where the U.S. has a strong advantage
going back two or three decades,” says David B. Yoffie, a Harvard Business
School professor and strategy expert. “It’s no surprise that most of the
interesting consumer-electronics products — the iPod, TiVo and Treo — are
coming out of Silicon Valley. It has to do with being close to leading-edge
Decades of brand building and technology development by
Japanese companies leave them with plenty of strengths. In revenue terms, Sony
and Matsush*ta Electric Industrial Co., maker of Panasonic products, still far
outweigh U.S. rivals. Sony has annual revenue of about $20 billion in the U.S.
alone — roughly twice Apple’s global sales in 2004.
Some Japanese companies have made big investments in
liquid-crystal display and plasma screens — a wise bet, since these flat-screen
TVs have turned into a hit. Osaka-based Sharp Corp., for example, has taken the
world-wide lead on LCD televisions. Its net profit rose 32% for the nine months
ended Dec. 31. In Japan, the second-largest market for gadgets, local brands
Still, the revival of U.S. brands is a remarkable
turnabout, and reflects U.S. companies’ ability to focus on areas where they
have an edge while farming out everything else. Kodak’s digital cameras use
off-the-shelf chips but marry them with proprietary software to simplify
picture-taking, manipulation and printing. The software can automatically
balance color, remove red-eye, and allow a photo to be cropped on a camera’s
screen. Kodak’s latest EasyShare model makes it possible to transfer and print a
cropped and color-optimized picture wirelessly at the touch of a button.
Such software “is where we will differentiate our products
in the future,” says Greg Westbrook, general manager of the Rochester, N.Y.,
company’s digital-camera business.
Kodak outsources key components and manufacturing — unlike
its top Japanese rivals. Sony’s Cyber-shot and Canon Inc.’s PowerShot cameras
use proprietary chips designed by the companies. Sony even has its own factory
to build the chips. Such vertical integration has long been a hallmark of
Japanese makers, allowing them to control the pace of new introductions. But in
the shift to digital, relying on in-house chip design and assembly plants can be
a costly albatross, Kodak believes. It saves money by using a standard Wireless
Fidelity, or WiFi, chip to control its wireless photo-transfer feature.
Both Sony and Canon do final assembly of their cameras in
company-owned factories. By contrast, Kodak moved its camera manufacturing to
China beginning in 1999. More than 70% of its cameras are built today by
low-cost contract manufacturers there. “Our competitors were later to get to
China. We have an advantage for being first and for being there in a big way,”
said Kodak’s Mr. Westbrook.
Last year, that paid off as Kodak’s lower costs allowed it
to meet demand by Wal-Mart Stores Inc. and other retailers for inexpensive but
powerful digital cameras, says Chris Chute, a camera analyst at market watcher
International Data Corp. Kodak has leapfrogged Tokyo-based Olympus Corp. and
Fuji Photo Film Co. in the past two years to take the No. 3 spot world-wide in
digital-camera sales, says Mr. Chute. Kodak still trails Sony and Canon.
Canon and Sony officials say they still see advantages to
keeping a large part of camera-making in-house. Proprietary technology such as
lenses and imaging sensors “is what distinguishes Canon’s cameras from our
competitors’ cameras,” says Richard Berger, a spokesman at Canon headquarters in
Tokyo. “We are managing to increase market share in the global market. So
whatever we’re doing, we’re doing something right.”
A Sony spokesman in Tokyo, Gerald Cavanagh, says producing
components in-house helps engineers design better products because they can get
parts made to the exact specifications they want. “That’s the key to our success
in the business,” says Mr. Cavanagh, adding that Sony “will certainly outsource
where we think there isn’t any…added value.”
Kodak’s strategy of combining off-the-shelf chips,
proprietary software and outsourced manufacturing is being replicated elsewhere.
The newest version of Apple’s iPod digital-music player, the iPod Shuffle,
combines a digital-audio chip from SigmaTel Inc. of Austin, Texas, and Apple’s
own music-management software. It is assembled in Taiwan by Asustek Computer
The iPod beat Sony’s Network Walkman to market and has won
raves for its ease of use, giving it a 70% market share. Apple also offers
iTunes, an Internet-based music-downloading service that works with iPod’s
software so music can be easily transferred and arranged on the player.
Sony long tried to push the MiniDisc, a silvery disk player
that was little more than a shrunken CD player. When it did finally switch to
the same hard-disk technology used in the iPod, it initially refused to include
the widely used MP3 music format in favor of a proprietary Sony format. Although
Sony, unlike Apple, owns its own music division, its music-downloading service
hasn’t caught on.
Elsewhere Sony’s insistence on in-house technology has
caused it trouble. Its digital cameras, cellphones, computers and printers use a
proprietary storage card called Memory Stick. Most other camera makers use
industry standard Secure Digital cards. Sony has spent eight years developing
its preferred technology for the chip at the heart of digital televisions and
continues to push it long after Philips Electronics NV and Intel Corp. dropped
the technology as too costly. More than a dozen companies, including LG
Electronics and Samsung Group of Korea, have embraced a different kind of chip
made by Texas Instruments Inc. as the centerpiece of their digital TV sets.
Some of the hottest products in television aren’t TV sets
but digital video recorders that store dozens of hours of programs and allow
people to watch their favorite shows when they feel like it. The field was
pioneered by TiVo Inc. of Alviso, Calif. Although TiVo has struggled to find a
successful business model, its software remains a standard for ease of use. Many
Americans are now using digital video recorders supplied by their cable-TV
companies, which in turn buy them mostly from Motorola Inc. and
As the success stories multiply, more American companies
are getting the confidence to get back into consumer electronics. RadioShack
Corp. was a consumer-electronics pioneer in the 1960s and 1970s and made the
first laptop computer, the TRS-80. In recent years, however, it turned into a
reseller of Asian-made goods and cellphones.
Now the Fort Worth, Texas, company has embraced the new
business model used by Apple and Kodak. This month it is bringing a home-grown
product to RadioShack shelves: the Cinego home-theater projector. The
phonebook-sized device includes a built-in DVD player and can project a sharp,
100-inch image on a screen. It costs about $1,300 and is designed to compete
with plasma-screen TVs, which are usually around 42 inches diagonally and cost
$3,000 or more.
“As we move from analog to digital, it’s our turn to
shine,” says RadioShack President David J. Edmondson, who will also become the
company’s chief executive in May.
The Cinego’s software ensures that the data from the disk
in the DVD player stays in digital form until a processor converts the zeros and
ones into light projected on a screen. The result is a device that requires
fewer components to produce a sharper image.
The device uses a Texas Instruments digital-TV chip.
RadioShack is outsourcing assembly to Taiwan’s Lite-On Group, which builds
notebook PCs, cellphones and digital projectors. “China will have a low-cost
manufacturing advantage, in my view, for the next 400 years,” says Mr.
RadioShack got the Cinego’s technology by acquiring
Ignition Inc., a small Dallas design house. Ignition came up with the idea of an
all-in-one portable home theater after seeing people cart business projectors
home on the weekend so they could hook them up to DVD players for a cheap
big-screen experience. Ignition and Texas Instruments shopped the idea to
Japanese manufacturers but found little interest. The prototype was a bulky 15
pounds and companies were skeptical that the home-theater market could expand
beyond a few technology enthusiasts.
RadioShack was convinced it could shrink the size and cost
of the device. In the first half of 2004, engineers from RadioShack, Ignition
and TI pared the machine’s size and weight by nearly half, in part by using
digital audio chips and a digital amplifier. At first the machine’s 200-watt
light bulb melted the plastic case after an hour of use, but engineers from
RadioShack and Lite-On figured out a way of redesigning the fans to keep the
temperature under control.
Getting the product to market required a final maneuver to
outfox Japanese competitors. RadioShack discovered in August that 200-watt bulbs
were in tight supply because of their popularity in projection televisions and
Japanese-branded business projectors. With help from Texas Instruments Chairman
Thomas J. Engibous, RadioShack persuaded German bulb maker Osram GmbH to free up
a supply of bulbs destined for other customers. Mr. Engibous pointed out that
consumers are more likely to use their projectors frequently and need
replacement bulbs, creating long-term demand