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Sunday, Jan. 3, 2010

LOOMING CHALLENGES

Makers take local approach in global markets


Staff writer

Second in a series

Although Japanese electronics enjoy a widespread reputation for high quality and stylish design, electronics makers no longer seem able to maintain their presence in the global market by simply relying on these elements.

News photo
Local needs: Panasonic Corp. workers visit a household in Jakarta in July 2009 as part of the company's research into the refrigerator needs of local consumers. The electronics maker previously visited 32 households in 2005 and 37 homes in 2007. COURTESY OF PANASONIC CORP.

Until recently, many makers focused on targeting wealthy overseas consumers who were willing to pay for high quality and expensive Japanese products.

But given the shrinking domestic market and lackluster consumption in developed countries, they have begun switching their attention to middle-class consumers in emerging nations. Accordingly, they have started making efforts to produce simpler and more affordable products for middle-class workers in those countries.

Such consumers are often referred to as the "volume zone," and it is believed that about 1 billion people worldwide fall into this category.

While it won't be easy due to the fierce competition from other Asian electronics makers, analysts agree that winning a leading share of emerging markets is key to the growth of Japan Inc. in the coming years.

Take Panasonic Corp., whose sales revenues came equally from the domestic and overseas markets over the past 10 years, but is now aiming to raise overseas sales to 60 percent.

"When thinking about the potential for growth, it is not very good that 50 percent of our sales come from the domestic market, which won't grow bigger due to the falling birthrate," said Akira Kadota, manager of overseas media relations at Panasonic.

Until recently, the company's main overseas target was wealthy consumers.

"This has contributed to enhancing Panasonic's brand image, but the portion of the wealthy class is only about 5 percent to 7 percent of a country's population (on average), so it won't really boost our sales," said Kadota, adding that it is now essential to reach emerging nations' middle classes to increase overseas sales.

Panasonic plans to focus on the growing middle class in what are known as the BRIC countries — Brazil, Russia, India and China — as well as Mexico, Indonesia, Nigeria, Turkey and the Balkan states.

To win a bigger slice of the pie in these markets, products need to be simpler and more affordable. At the same time, they have to be closely connected to the lifestyle of the locals in the market, Kadota said.

To achieve this, Panasonic has been localizing the manufacturing procedure as much as possible, such as creating overseas research and development centers to analyze the needs of local consumers.

The company first targeted Indonesia, which has a population of 240 million and where about 70 percent of households spend less than $200 a month. About 30 percent of the population already own a refrigerator, and the demand is growing.

To test the waters for refrigerators in the volume zone, Panasonic in November 2009 began selling one-door versions in Indonesia, made based on the company's research of local needs.

According to the company, 70 percent of Indonesia's refrigerator owners use one-door models. Panasonic workers visited local households and found out that people were asking for a bigger space for bottles and vegetables.

"Reaching the volume zone is not just a shift of marketing policy. We think that we need to be committed as if we were changing the whole company's function," Kadota said.

Panasonic is not alone in pursuing a bigger share in overseas markets.

Sharp Corp., which enjoys the largest shares of the refrigerator and microwave markets in Indonesia, will be strengthening its marketing and sales efforts in countries like Vietnam, India and Thailand, where such efforts to date have been insufficient, according to the company.

Like Panasonic, Sharp also said it is important to analyze the demands of local markets and manufacture products that fit their needs, adding that the company aims to differentiate its products from rivals with energy-saving technology in some regions.

"(The volume zone) is a market that is expected to grow, so I think it is the right direction to target such a market," said Hiroshi Sakai, chief analyst at SMBC Friend Research Center.

But they are facing tough competition from other Asian makers, including Samsung Electronics Inc. and LG Electronics Inc.

Sakai said it is true that Japanese electronics makers are lagging South Korean makers in the field of general home appliances in emerging nations.

"South Korean makers have been making efforts in these markets (before Japanese makers), and I think their efforts are blooming now," he said.

According to U.S. market research firm DisplaySearch, Samsung was No. 1 by revenue share of worldwide TV brands with 21.9 percent, while LG ranked second with 12.9 percent, in the 2009 third quarter.

Another U.S. technology market researcher, ABI Research, found that Samsung was ranked second and LG third in the worldwide cell phone market in 2008.

In the computer-related market, Taiwan makers' presence grew rapidly worldwide during the 1990s, when U.S. computer makers created a production structure under which products are designed in the U.S. but manufactured in Taiwan.

In October, IT advisory firm Gartner Inc. announced that Acer moved up to second place for the first time with a 15.4 percent share of the global market in the third quarter of 2009.

While Toshiba Corp. had the world's No. 1 laptop share in the 1990s, its presence has weakened as mainstream computers shifted from desktop to laptop models and more companies started focusing on laptops.

Masahiko Fukakushi, president and CEO of Toshiba's Personal Computer and Network Company, conceded that the firm was slow to make a move in emerging countries, having focused on the U.S. and European markets for a long time.

But the company is now set to expand shares in emerging nations with simpler and more affordable laptops.

According to Toshiba's business plan announced in August, the company aims to increase its share of China's computer market from 4 percent in fiscal 2008 to 7 percent in fiscal 2010 in terms of unit sales. Fukakushi also said the company will be making greater efforts in countries within the Association of Southeast Asian Nations zone with laptop computers that will cost less than $599.

"Our company has not really been able to manufacture products that are closely connected to local needs," said Fukakushi, adding that the company would like to regain the title of the world's top laptop maker.

Kanae Maita, principal analyst at Gartner Japan, said Toshiba's aim to expand shares in emerging nations will take a serious commitment that may require drastic changes in its business operation, which had previously targeted consumers in developed nations with high-quality products.

Maita pointed out that the laptop market has greatly changed compared to the time when Toshiba was the leading maker. One contributing factor is the rise of Taiwan's computer makers, such as Acer and AsusTek Computer Inc.

The strength of Taiwan's makers is even penetrating Japan's domestic computer market, where makers such as NEC Corp., Fujitsu Ltd. and Toshiba had enjoyed dominant positions because users demand high specification and multiple functions to simple products.

According to Tokyo-based MM Research Institute, Acer Japan was ranked sixth in the domestic computer market for the first half of fiscal 2009, even though the company had been outside the top 10 as recently as two years ago.

"We think Japanese laptops are too expensive," said Kazunobu Seto, manager of the marketing division of Acer Japan.

Seto explained that when comparing almost identical specifications of two laptops, and one is domestic and the other from Taiwan, the difference in price is up to about ¥70,000, indicating "Japan brand" products come at a premium.

The price difference appears to arise from the size of shipments.

Gartner's data shows Toshiba shipped about 13.5 million units in fiscal 2008. But Seto said Acer ships about 30 million worldwide, which enables the firm to sell its products at lower prices.

A similar phenomenon has been seen in other products, including automobiles. Japan's carmakers are also now competing to provide affordable products for locals in emerging markets, such as India.

Nissan Motor Co. announced last November that it plans to sell a model in India whose price will compete with Indian automaker Tata Motors' model priced at around ¥210,000. Suzuki Motor Corp. and Volkswagen AG also shocked market watchers by announcing a capital alliance to better equip themselves for the battles that lie ahead in the Indian market.

To compete with their rivals in Asia, analysts and industry insiders agree that Japanese manufacturers should not simply engage in a price war.

"(Targeting the volume zone) won't mean that we will be simply manufacturing low-priced products," Panasonic's Kadota said, adding that the products and marketing have to be closely connected to the lifestyle of locals in the market.

Sakai of SMBC Friend Research Center said simply offering cheaper products will also hurt the high-quality image of their products, and Japanese companies can still utilize the advanced technology they developed in the postwar years.

"So, it would be effective to manufacture products that enable them to use such technology to cater for local consumers' needs," Sakai said.



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