Japan and the PC Revolution

The personal computer revolution appeared to offer a tremendous opportunity for Japan.

Combining their strengths in electronic components with their growing capabilities in computer technology, the Japanese computer makers appeared likely to become major competitors in the global PC industry. In fact, some in the United States expected that Japanese companies would eventually use their control over upstream components and technologies to dominate the industry. Former U.S. Trade Representative Clyde Prestowitz, predicted that the Japanese would run away with the world computer market.⁵⁸ Intel’s Andrew Grove predicted that Japan would overtake the United States as the dominant world supplier of computer systems by 1992.⁵⁹ What few suspected was that the PC revolution would so change the nature of the com-puter industry that many of the presumed strengths of the Japanese companies would turn out to be liabilities in the PC industry.

Japanese companies did succeed in controlling the market for many PC components and peripherals, including DRAMs, flat-panel displays, and floppy disk drives, as well as many key

subcomponents and materials. But for the most part they failed to build on those strengths to compete in the PC systems market. They were also unable to use their strength in DRAMs and other semiconductors as a base for challenging Intel’s dominance in microprocessors and were locked almost entirely out of the PC software market. While Japan’s computer hardware production grew rapidly, its companies were largely relegated to the decreasing returns segments of the industry.

Japanese companies are still world leaders in many components and peripherals, but aggressive competitors elsewhere in Asia have challenged their leadership. In 1996, a decade after driving Intel and other U.S. companies out of the DRAM business, Japan was passed by Korea as the leading producer of DRAMs. Korea’s electronics companies were also gearing up for a challenge in flat-panel displays, another Japanese stronghold. Meanwhile, Taiwan had become so adept at producing PCs and components that Japan’s computer makers were outsourcing production to Taiwanese OEMs to cut costs and get products to market more quickly. Japan’s problems were reflected in a steep decline in computer production in the early 1990s, reversing a decade of rapid growth. Total output declined by 20% from 1991 to 1993, before rebounding slowly from 1994 to 1996. Most dramatic was the decline in mainframe production, as the shift from mainframes to PCs finally hit the Japanese market. Much of the short-term decline in production can be attributed to the stagnation of the Japanese economy in the aftermath of the “bubble” economy of the late 1980s. Economic growth hovered around 1 % per year from 1992 to 1995, and the Japanese computer industry, heavily dependent on the do-mestic market, was especially hard hit. The dodo-mestic downturn also forced Japanese

components manufacturers to reduce investment just as they were facing increased competition from U.S. and Asian competitors.

The problems of the computer industry went far beyond the temporary drop in domestic demand, however. The deeper problems involved Japan’s industry structure and managerial

culture, the fragmented development of its domestic PC market, and its weaknesses in software and associated “soft” skills. There was also a matter of strategic focus. Japanese computer makers remained obsessed with beating IBM, even as Microsoft, Intel, and Compaq were pummeling IBM. Ironically, IBM was equally worried about the Japanese challenge, having seen U.S. leaders in other industries humbled by Japanese competitors.⁶⁰ While the Japanese chased IBM, and IBM gazed in the rear view mirror at the Japanese, they both drove off the same cliff when the mainframe market collapsed, with each side suffering billions of dollars in losses (table 3-1).

While the corporate losses of the Japanese vendors did not match those of IBM, the impacts were greater than the numbers would suggest. For example, Fujitsu showed a corporate profit of US$300 million in 1994, yet McKinsey & Company estimate that it lost US$583 million in the computer business that year. The decline in revenues and profits at Fujitsu’s U.S. mainframe subsidiary, Amdahl, was another warning sign to Fujitsu. Equally troubling for IBM and the big Japanese mainframe companies was the stagnation in revenues that occurred from 1991 to 1995, at a time when the computer industry as a whole was recording double-digit growth rates.

While mainframe and minicomputer companies around the world were victims of the PC revolution, in the United States their decline was compensated for by the rapid ascent of new PC-oriented companies such as Apple, Compaq, Dell, Microsoft, Novell, and Lotus. The problem for Japan was that its decline in computers was systemic. The handful of large companies that control most of Japan’s computer industry all faced serious downturns in the 1990s, and there were few newcomers to take up the slack. And while IBM was able to reverse its fortunes through a painful restructuring and by shifting focus to emphasize its service and network businesses, the Japanese giants were hamstrung in their efforts to shift course by practices such as lifetime employment and seniority-based promotion. These practices-along with

Japan’s egalitarian educational system and emphasis on incremental improvement-were well suited to stable, decreasing returns manufacturing businesses, but they were liabilities in the unpredictable, rapidly changing increasing returns world of the PC industry.