From Chaos to Competition

Japan's PC industry in transformation

Several previous articles have served up tantalizing tidbits about the development of the Japanese PC industry, but we've never assembled the ingredients for a full-course meal. This month, John Boyd does so with a historical PC market and industry overview.
by John Boyd

When kentaroh kikuchi, a secretariat official of the Open Architecture Developers' Group, speaks about OADG to the computer industry, he opens his talk with a particular overhead transparency. The transparency depicts the Japanese PC market as it was at the beginning of this decade, before OADG entered the scene with its DOS/V operating system and the industry-standard architecture it promotes.

Kikuchi's transparency is complex. If you were searching for a word to sum up the listings of manufacturers backing various proprietary technologies shown in his diagram, "perplexing" might leap to mind. Here is market leader NEC and its lone clone companion Epson alongside the PC9801 platform, the architecture that had dominated the industry since its introduction in 1982. And over there is Apple Japan, with its localized Macintosh. Fujitsu is also prominent, supporting its own FMR business PC line-up plus a separate architecture for its FM Towns multimedia computer.

Toshiba has a spot in the diagram, too, with its proprietary laptop platform. And don't forget IBM Japan - OADG founder - with its proprietary PS/55 series, not to mention its little-known PC/AT offering that actually gave rise to DOS/V, the operating system that finally brought Japan into the mainstream of global computing.

There's more. The diagram also shows second-tier PC manufacturers Mitsubishi Electric, Sharp, Hitachi, Oki Electric, Sony, Sanyo, and Canon. These were supporting the AX architecture, an abortive effort to rally the industry around a cobbled-together standard.

Shoot out at the PC corral
Such was life in the Far Wild East, circa 1990. While the rest of the computing world was building a global standard around Microsoft's MS-DOS and IBM's PC/AT architecture (and, to a lesser degree, Apple's Macintosh), Japanese PC manufacturers were dissipating their energy and resources on their home turf by creating and maintaining proprietary, and mutually incompatible, technologies.

The result was an inward-looking industry, one dominated for the longest time and to an extraordinary degree by NEC. It was NEC that set the tone and timing for industry pricing, as well as the introduction of new software and hardware. Year after year, NEC gobbled up a 50%-plus market share, leaving the remainder for the other dozen competitors to fight over.

The lack of compatibility stunted PC market growth in Japan and kept prices inflated long after they had dramatically fallen in the US and Europe. Japan's parochial vendors (with Toshiba being a notable exception) also missed the chance to position themselves in the burgeoning global PC market.

These same Japanese integrated electronics companies were prominent global players. But they made their mark as device and component suppliers, being major producers of memory chips, floppy disk drives, CD-ROM drives, monitors, and liquid crystal displays - not on the systems side of the business with assembled PCs.

Though corporate pride fed a myopic desire to promote proprietary technologies, the origin of Japan's fragmented PC industry can be traced back to the Japanese language. The need to handle Japan's thousands of kanji characters forced domestic manufacturers to bypass the single-byte operating systems (OSes) that the Western world adopted and instead develop double-byte OSes that could run Japanese-language software.

NEC, for instance, witnessed the huge success of the IBM PC, launched in the US in 1981, which ran on a new 16-bit disk operating system (DOS) from Microsoft. The only serious competitor to DOS was an untried 16-bit version of CP/M, an operating system from Digital Research that had achieved a wide following in the 8-bit era of computing. NEC opted for MS-DOS, thus becoming the first company to adopt it for the Japanese market.

Yukio Mizuno, executive advisor and general manager of NEC's corporate technology strategies, headed the company's PC group back in those early days. "I went to Seattle to talk with [Microsoft chairman] Bill Gates about writing a Japanese-language operating system for us," Mizuno recalls. "But he was too busy with the US market."

Mizuno didn't go away empty handed, however. "I came back with the nucleus of MS-DOS, and we independently developed our own platform, modifying it for kanji." Adds Kaoru Tosaka, associate senior vice president of NEC, "We had to create a Japanese character set for the (PC98) platform, so the operating system had to be different."

Other PC manufacturers followed NEC's lead, and Microsoft got more involved helping them as new upgrades of DOS were
released. "Each major manufacturer ended up having its own adapted MS-DOS," observes Shigeki Miyo, a veteran in Microsoft Japan's OEM sales division. "We had to adapt the OS for each manufacturer. We had many people working on adaptations."

Miyo also points out that a lot of work was required to adapt application software for these various OSes. To broaden their sales base, ISVs (independent software vendors) like Justsystem, creator of Japan's best-selling Ichitaro word processor software, and Lotus Japan, with its Lotus 1-2-3 spreadsheet, were forced to develop six or seven versions of their hit products for the various systems.

NEC takes the lead
Nor was the OS the only thing that needed to be changed for the Japanese market. In order to display the more complex kanji characters clearly, a high-quality monitor was required from the beginning. NEC's display screen provided a standard resolution of 640x400 pixels while, by contrast, the early IBM PC's standard CGA (Color Graphics Array) 320x200 resolution was sufficient to display the English alphabet.

"Just a couple of years later, we jumped to 1120x780 resolution," says NEC's Tosaka. "Japanese characters require more than 20 by 20 dots; otherwise, you cannot deploy all the characters." CGA, in contrast, provided only 8 x 8 dots per character.

Even before NEC decided to adapt MS-DOS, it had gained a good feel for the market with its successful BASIC-based 8-bit PC, the 8001 series. Able to handle the syllabic kana script, NEC's PC8001 soon took market share away from Apple, Commodore, and Tandy, which had dominated the nascent Japanese PC market despite their English-only software.

But unlike domestic PC pioneers Hitachi and Sharp, NEC lacked easy access to the numerous "mom-and-pop" consumer retail outlets that dot Japan. As a result, NEC established Japan's first chain of computer showrooms, named Bit Inns. NEC located its Bit Inns in the electronics districts of large cities, including Tokyo's Akihabara.

These showrooms became NEC's monitor on the market. Computer enthusiasts flocked to them to get advice and try out the latest products - something less likely to be available at the mom-and-pop stores. NEC, in turn, learned much about consumer interests.

At the top of users' lists of wants, NEC quickly found, were compatibility and software. The more software titles that run on a platform, the more attractive it becomes to end users. And as the user base grows, the platform grows more attractive for independent software vendors (ISVs), who will write first for the biggest potential market. "We set up an intensive program to help ISVs," says NEC's Tosaka. "We lent them hardware, and gave them technical information and other help."

NEC also took the important step of moving the PC business from its semiconductor division into the information technology group. Originally, it was the semiconductor group that really got NEC's PC business rolling back in the late 1970s, with the introduction of the 8001 series. The motivation then, according to Tosaka, was to create a market for NEC's chips! But as sales of the PC 9801 took off in the 1980s, NEC gave the personal computer its own starring role.

NEC's competitors
Fujitsu - overall, Japan's largest computer manufacturer - saw some early success in the business desktop market, selling its proprietary FMR PCs to corporate users of Fujitsu's high-end computers. IBM Japan, which had also devised a proprietary PC platform to handle kanji, followed the same strategy. With mainframes selling well during the 1980s' bubble economy, though, top executives in Fujitsu, IBM Japan, and Hitachi were slow to grasp the importance of the PC.

Fujitsu finally moved to break NEC's stranglehold in 1989, when it launched the FM Towns multimedia PC, the world's first PC to incorporate a CD-ROM drive. Yet, astonishingly, Fujitsu chose to base the FM Towns on yet another proprietary MS-DOS adaptation.

Fujitsu faced enormous obstacles in launching itself into a new industry using a new proprietary platform - especially in an environment dominated by NEC. Despite heavy marketing, FM Towns never sold well enough to reach critical mass. Towns also had to contend with Apple Japan's Macintosh, to which it bore a striking resemblance. And the Mac grew in popularity the more it was localized.

In 1990, Apple Japan released KanjiTalk 6, an updated version of its Japanese OS. In the same year, it simultaneously launched 6.0.7 when the English version of the OS of the same designation went on sale. Sales of the Macintosh skyrocketed, and by 1992, Apple Japan was ranked a comfortable number three in market share. In 1993, it reached the number two spot, behind NEC, though it has since dropped to fourth.

Toshiba's success
Not all attempts at PC innovation failed among Japan's domestic manufacturers. Toshiba stands out at home and overseas as a clever exploiter of users' desires for mobile computing.

Back in 1978, Toshiba launched a dedicated word processor, and Toshiba was the first manufacturer to unveil a desktop computer able to deal with the Japanese language. Curiously, though, Toshiba was slow to follow through in the desktop personal computer arena, and eventually found itself crowded out of the market.

What Toshiba failed to achieve on the PC desktop, however, it has more than made up for on the laptop. In the mid-1980s, it launched its T-1100 portable computer, which shipped first in Europe, then followed up with the stand-out 3100 series that incorporated a distinctive gas plasma display. Toshiba confirmed its regal reputation as the king of portables in 1989 with the debut of its Dynabook, Japan's first notebook (A4-sized) computer.

More recently, Toshiba was first to introduce a notebook computer with Intel's Pentium chip. And last year, Toshiba shipped its Libretto, a mini-subnotebook that runs Windows 95J. Toshiba is today's world leader in portables, taking more than 20% of the global market.

While sales of portables are growing, however, they are unlikely to take much more than a third of the overall market in the foreseeable future. This has prompted Toshiba to climb back onto the desktop with the recent release of its consumer-oriented Brezza series. These innovative PCs incorporate Intel's MMX (multimedia extension) technology, DVD-ROM, and a small LCD plus a series of one-touch buttons that enable users to instantly choose between FM radio, telephony, TV, and DVD modes.

DOS/V and Windows 95J
Toshiba's new desktops and portables, as with new offerings from Fujitsu, IBM Japan, Epson, and other manufacturers - even NEC's PC98 series - are all Windows 95J compatible. This represents a remarkable transformation compared to the chaotic market of just a few years ago.

It's a change that has weakened NEC's grip on the market, given that Windows software runs equally well on all DOS-based PCs. At the same time, the Windows launch, and Windows 95 in particular, has helped Microsoft leap ahead of domestic ISVs in the application area. Today, Microsoft titles like Word and Excel sit proudly at the top of the software hit parade.

Of course, the industry transformation got underway some time before Windows 95J roared onto the scene in November 1995. In 1990, IBM Japan focused its efforts on developing a solution for handling kanji input and display through software rather than hardware. The result was a bilingual PC-DOS, which it dubbed DOS/V because it supported the VGA display standard.

With DOS/V, IBM simply took advantage of the more powerful microprocessors coming from Intel and added kanji-handling software extensions to its PC-DOS. No hardware modification to the global IBM/AT-compatible standard was necessary (although use of a Japanese keyboard made kanji input easier).

As a way to compete seriously with NEC, IBM opened up DOS/V to the industry so as to garner support. In 1991, it established OADG and gradually won over the second-tier manufacturers that had tried and failed to do the same with AX. Today, OADG has as members 21 PC manufacturers and about 220 peripheral makers and ISVs.

Toshiba was won over when IBM Japan showed its willingness to work with Microsoft Japan on making DOS/V compatible with MS-DOS. This move allayed industry fears that IBM Japan was really out to control the market through a new OS. Microsoft released a DOS/
V-compatible version (6.2/V) of its MS-DOS in 1993.

Another market-shaking event occurred around this time. Compaq rattled the industry to its foundations in 1992 by launching a series of low-priced PCs; this became known in the press as the "Compaq Shock."Compaq, which had led the price wars in the US and Europe, was now out to do the same in Japan with the help of Microsoft, which supplied it with a DOS/V-compatible OS.

IBM quickly followed Compaq with its own line of inexpensive PCs, and the rest of the industry saw no choice but to follow suit. Early in 1993, NEC responded to the competition with lower cost PC98s. And before 1993 was out, Fujitsu ditched its go-it-alone pride by belatedly joining OADG and launching a series of DOS/V PCs.

This essentially transformed Japan's market into a three-horse race between NEC, the DOS/V group, and Apple Japan - a race that hotly continues today. According to Dataquest Japan figures for 1996, NEC is still very much in the lead, but its market share has shrunk to 32%. Fujitsu has jumped to second place, with 22%, followed by IBM Japan and Apple Japan at about 11% each.

And what of the future?
Now that Japanese manufacturers have entered the PC mainstream, they can be counted on to establish a global presence. Already, Hitachi and Fujitsu have established PC operations in the US, where they are initially targeting the portable market that Toshiba already leads with a 25% market share.

NEC may be losing market share at home, but with its acquisition of Packard Bell, the new Packard Bell-NEC now stands second only to Compaq in US market share. Even at home, NEC's PC98 is drawing closer each year to the world standard. In fact, NEC now holds top Japan market share in PC/AT servers, outselling even world leader Compaq.

Meanwhile, manufacturers like Matsushita, Toshiba, and Fujitsu are using their consumer electronics superiority to take the lead in incorporating such technologies as DVD into their PCs before US competitors. After transforming their home market, Japanese manufacturers are now out to do the same with world markets.

A distribution success story
Top computer reseller Computerland licensed franchises to various Japanese companies in the 1980s, and the first Computerland store opened its doors in Tokyo's Shinjuku at the end of 1982. It was not an overnight success.
"We only sold only one computer in the first month of business," recalls Yoshitsugu Komiya, who opened the store. Komiya now heads Catena Corporation, one of Japan's largest software distributors. "I realized waiting for customers to come to the store wasn't going to work, so I started a direct mailing program."
The program worked. Given that Computerland was the only company authorized to sell IBM PCs in Japan, Komiya saw orders start pouring in from multinational companies that wanted PC compatibility with their headquarters back home. At the peak, says Komiya, his Catena group ran 15 of the approximately 30 Computerland stores throughout Japan.
"We sold about 70% of all the IBM PCs in Japan back then," says Komiya. We were selling as much as JPY20 million worth a month." The stores also dealt in domestic PCs, Compaq clones, and then the Apple Macintosh.
As Macintosh sales increased, Komiya bought out Nihon System Soft, a software company that had been localizing software for Apple's application software spin-off, Claris Corp. This move took Catena into the localization business, and led to it becoming the sole agent for Adobe and Quark, the leading desktop publishing software companies for the Macintosh.
Today, Catena competes with other major distributors, like Softbank, dealing with some 5,000 outlets. It also produces its own translation software applications for Windows PCs and the Macintosh.

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