Why did the wheel of innovation and creativity stop in Japan?

It has been a long time since Japan is behind China and South Korea in the electronics industry that used to dominate the world as a major industry in Japan. And the innovation (technological development) that Japan has gifted has been lowered. In this article, we asked questions about Japanese corporate issues to Mr. stated Miyazawa Kazumasa, who developed Vaio computers as a technician at Sony and launched the leading electronic money service Edy, and after his resignation he became the president and CEO of the Japanese company ” Soura Mitsuo”, which the ” Bakuon “currency system (Bakong)” is the world’s first digital currency issued by a central bank.

Sony is losing control

Apple co-founder Steve Jobs previously spoke about the background of the iPod portable digital music player:

“The reason for the existence of the iPod is that the Japanese companies that created the market for portable music players and had a monopoly on it could not develop their drivers.”

Apple, which took the iPhone to the iPod, became the market leader in portable digital music players and the smartphone market, and Japanese electronics manufacturers were crammed into the corners of the market. Currently, the market capitalization of Apple shares is about 326 trillion yen, and the market capitalization of Sony shares is about 14 trillion yen (as of 7/8/2022), since there is a large difference in both values. The interview with Mr. Miyazawa started from this point.

Why were innovative products such as iPods, smartphones and tablets not developed in Japan?

“I also think Sony should have made devices like iPods, iPhones and iPads. Sony also released the Memory Stick Walkman as a device for listening to music downloaded from the Internet, but it made some mistakes here. One of those mistakes is the development of a very strong copy protection method (copy prevention) called DRM. This made it possible to copy downloaded music only to a specific device (one device). She also paid a lot of attention to sound quality, developing and integrating her own ATRAC system.

However, it was not well received at all. Where music in MP3 format began to spread around the world. Some were illegal, so Sony, which owns the music company Sony Music, had no choice but to tighten its anti-copying policy. On the other hand, Apple used the MP3 format, and its anti-copying policy was loose (copied on multiple devices), prioritizing user convenience and ease of use. This is what later made the decisive difference.”

Does this mean that the business model chosen was different?

“Sony’s heyday was in the 1980s, when its flagship products such as Walkmans and 8mm camcorders were produced with vertical integration. For example, 8mm video requires very precise techniques, such as the recording head on the tape, and the drum that spins it, so Sony made everything themselves from the ground up. At the time, Japan was fascinated with such vertical integration. Both Toyota and Honda were also able to produce within the same company and its subsidiaries, and together with the kanban method (a method of providing only the necessary amount of necessary material when it is needed at each stage of the production process), this gave Japan’s became a strong point.

In the 1990s, there was a strong sense of crisis in the US government that it would lose to Japan if things continued as they were. Therefore, the United States believed that the Internet developed as a military technology would be the core of the next generation of technology, and introduced it as an open innovation, so that it could be used by the general public. This allowed many companies to enter the Internet world. There was the so-called horizontal division of labor.

For example, there is a horizontal division of labor in which Intel manufactures the central processing unit (CPU), another company manufactures the hard disk drive (HDD), and Microsoft develops the software. This was possible because the standards were standardized and open. Japan, which has turned into an isolated island, has completely lagged behind this trend.”

Japanese companies cannot adapt

Japanese companies had a “winning formula” based on product improvements that beat the competition in Japan and sell them in other countries.

“In the 1980s, Japan broke into the world through the high quality and ultra-miniaturization of products it mastered, with materials and devices backed by strong technological capabilities. However, after the world became interconnected through globalization, the horizontal division of labor advanced in full swing, and companies began to only design products, while manufacturing them in other countries (for example, China) without owning factories, as Apple does. It has become possible to provide cheap and large quantities of products. As a result, Japanese manufacturers lost the advantage they had gained through the quality production they did at the cottage industry level.

There is also the problem of de Facto (products and standards that have become de facto standards as a result of winning competition in the market. For example, Windows operating system for computers, VHS home video etc.), and de Jour (standards established by standardization organizations such as ISO. For example, size, material, type of each dry battery, etc.). And many American companies, like Windows, make things that have an overwhelming edge, sweeping the world with the de-facto standard. On the other hand, European companies enjoy market advantage by adopting the de jour standard through the creation of international standards such as ISO, standardization and partnership in many countries. Since the beginning of the era of horizontal division of labor, Japan has not been able to handle de Facto and de Jour well, and has lost its market dominance. And I think that is one of the main reasons for the failure.”

Mr. Miyazawa also points out that the problem of the investment environment and the tax system have also contributed to the decline in innovation and vitality of Japanese companies.

“Many large companies cling to successful experiments and find it difficult to force big changes on themselves. The United States is a very competitive society, and even large companies will go bankrupt, lose market share, or have to change businesses if they cannot adapt to the changing times. But it leads to the replacement of the old with the new, and encourages the birth of startups (startups that grow rapidly in a short period of time).

Originally, both Google and Facebook were venture capital funded startups (an investment company that invests in unlisted companies with a high growth rate). Both companies have achieved rapid growth thanks to venture capital, attracting investment and people and creating an environment that promotes technological development. In contrast, startups were included in the four growth strategies under Prime Minister Kishida’s government, but it appears that this finally happened thirty years after the bubble economy collapsed.”

The amount of venture capital investment in startups is now around 70 trillion yen worldwide. The US share of this amount is about 40 trillion yen, or almost 60% of total global investment. Japan’s share is about 800 billion yen, which is only about 1% of the total global investment. Even the SoftBank Vision investment fund (based in the United Kingdom and owned by Japan’s SoftBank), which is said to have more than 10 billion yen in working capital, has so far invested in hundreds of start-ups in the United States, China, India and others, He has invested in only three Japanese companies, however, including a biotech startup in which he invested in October 2021.

“There is also the problem of the tax system. For example, taxes on virtual currencies in Japan are very high. When a company issues virtual currency, the stock is valued as property, and it will be required to pay taxes on that property. For example, if you issue virtual currency worth 1 billion yen, you will be required to pay 300 million yen, which is 30% of the total amount in taxes, before it is converted into real money. Beginners don’t have that much money, so they have to sell cryptocurrency. But when you sell a large amount in a short period of time, a strange phenomenon will occur, which is the depreciation of the value of virtual currencies worth 1 billion yen to 100 million yen. As a result, what is happening is that most of the companies issuing virtual currencies in Japan have moved their headquarters to foreign countries such as Singapore, Switzerland, etc., and there is a brain drain in the Japanese blockchain sector.”

Revival of Japanese companies

So how can Japanese companies be revived?

“First, it is necessary to build a system to support new projects that lead to innovation by the state. For example, create something like an “innovation grant”, or provide support to easily obtain patents as well. It is also necessary to provide tax incentives. In terms of financing, government support should be strengthened, which includes the Japan Finance Corporation and others.

At the private sector level, collaboration between large companies and start-ups is also important. Where large companies find it difficult to create new innovation. Conversely, if startups can’t get funding, development won’t move forward, and people won’t be attracted. And not only investment capital, but it is necessary to collect investments from large companies, and work to provide support with funds and human resources necessary for startups.

And innovation will not happen if the private sector is fragmented. It is important to clearly distinguish between “cooperative domains” and “competitive domains”, and to effectively standardize and invest in public infrastructure in public-private cooperative areas.

The leadership character of the top management is also very important. Bold investment in research and development funds and human resources is indispensable for innovation. It will be difficult to achieve this if there is no strong will from the senior management.”

What points should you focus on in particular?

“Right now, digitalization is the weak point for Japan, and it will become even more important in the future. Japan has very little investment in information technology and the Internet compared to other countries. Society as a whole must work on digital transformation.

I’m not a nationalist, but I do have a fear that Japanese companies will become more and more hollow in the future. Given what I mentioned earlier about leading IT startups now moving more and more overseas, there is a chance that only the old, traditional manufacturing companies will remain in Japan.

In some sense, I think Japan is now in a state of devastation after World War II. And in order to survive from now on, we are in a situation where we have to work hard. With that in mind, I think it’s time for public finance officials to think seriously about what to do.”

(Original text in Japanese, header photo: Compact portable music players, Sony’s Walkman (left) and Apple’s iPod as competition heats up for sales at electronics retailers 11/19/2010), Jiji Press)

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