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 user 2005-03-11 at 10:17:00 am Views: 108
  • #10804

    In Electronics, U.S. Firms Seize Momentum From
    Kodak, 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
    once was.

    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 dominate.

    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
    Scientific-Atlanta Inc.

    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