Elpida and Japan Inc

Last week, the Japanese memory company Elpida filed for bankruptcy. There is worldwide overcapacity in DRAM and somebody had to go. Its strength and the weakness was that it was much more outward facing than most of the Japanese semiconductor and electronic industry. So it had to compete globally and wasn’t up to the task.

I think looking at the Japanese mobile phone industry is revealing. If you visit Japan you get some idea of the problem. Everything is too inward looking. All the mobile phones are great and seem in some ways to be ahead of what we have in the US, and they are all made by Japanese manufacturers. But that is the problem, they are made by manufacturers who have given up in the rest of the world.

Greg Hinckley, the COO of Mentor Graphics, once told me about interviewing a candidate for a finance position who came from American Airlines. Their focus, the candidate said, was to touch down 30 seconds ahead of United. It was as if Southwest and Jet Blue and all the rest didn’t even exist. Being the best airline just meant being the best legacy airline: beat United, Delta and the others.

The Japanese cell-phone companies are like that. They are so competitive for their share of the Japanese market that they have given up on the global market and what it takes to compete there. Of course, the Japanese cell-phone transmission standards are different which means that you have to decide whether to compete in Japan, overseas or both. Those different standards may have looked like a giving a good unfair advantage to the Japanese since Nokia, Ericsson or Samsung were unlikely to focus on the Japanese standard first even during the initial high-growth period. But on the other hand the Japanese manufacturers have no market share in the rest of the world, which is orders of magnitude bigger.

Last time I visited the usual Japanese semiconductor companies I got the feeling that they were all only competing with each other. By and large they were making chips to go into consumer electronics products for the Japanese market. There were obviously far more products and far more chips being done than could possibly make money, just like all those cell-phones and cell-phone chips couldn’t be making money (not to mention that the Japanese market is already saturated).

With too many companies, and too many uncompetitive semiconductor divisions, consolidation is to be expected. But Japanese politics is inward facing too and so they can only merge with each other and gradually move towards what I call Japan Inc in the semiconductor world (to be fair, this same issue is one that affects my American Airlines example; British Airways or Lufthansa is simply not allowed to buy a major stake, recapitalize them and clean them up because congress has laws preventing it).

I said a couple of years ago: “So it looks like gradually the semiconductor companies will consolidate into a memory company (Elpida) and a logic company and, based on past history, they won’t take the hard decisions necessary to be competitive globally rather than just in Japan.”

Well, it didn’t work out too well in memory, although presumably Elpida will re-emerge in some form.

On the logic side, NEC/Renasas(Hitachi/Mitsubishi), Fujutsu and Panasonic are rumored to be in discussions to merge. Toshiba is not on the list since it seems to be strong enough to go it alone, at least for now. But as fabs get bigger, and the cost of an individual design gets bigger, you can only make money addressing large global markets, not supplying a fragmented domestic market. Based on past form, merging Mitsubishi and Hitachi to form Renasas, and before they had finished getting that sorted out, adding them into NEC, and before that was done throwing in Fujitsu and Panasonic…let’s come back in a year or two and see how that’s working.

I guess I’ll stick with my statement from a couple of years ago. It’s still looking good.