TT-688 -- What Will Happen to Panasonic and Sony? Ebiz news from Japan.

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *

A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, Nov 25, 2012, Issue No. 688


- What's New -- What Will Happen to Panasonic and Sony?
- News -- Next fad is photo-realistic figurines
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- Bistro in Okayama, Tengu Kogen in Ehime
- Japan Business Q&A -- Consumption Tax Calculation
- News Credits

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Fitch and several other international credit rating
agencies sent shock waves through the Japanese share market
last week by cutting the ratings of Sony and Panasonic, two
of Japan's bedrock electronics manufacturing companies, to
junk grade. This comes after Fitch cut Sharp's rating to
junk earlier this month.

Now, while we've been getting used to seeing massive
amounts of red ink from all three companies over the last
couple of years, the junk grade ratings are a shocking
milestone, and one that clearly has investors and no doubt
the Japanese government in a state of great concern. As
Fitch said in its announcement concerning Panasonic:
"...meaningful recovery will be slow, given the company's
loss of technology leadership in key products, high
competition, weak economic conditions in developed markets
and the strong yen."

While Fitch is right in saying that the major challenges
for Panasonic and others are lack of innovation, low-cost
Chinese labor, and the slow international economy, we think
the real cause of decline isn't just the changing business
environment (which after all has been changing consistently
ever since the industrial revolution). Rather, we think that
Japanese senior management is unable to adapt to the
groundshifts going on in their international markets -- and
the buffer provided by domestic sales has disappeared since
the Lehman Shock. As a result, their more flexible
competitors are busy making hay. For example, Hon Hai,
Samsung, and Apple are all from home countries where the
costs are higher than in China, and yet they are making
record profits. Why? Because besides having mastered the
complexity of running a major corporation, these winners
have also adjusted their business models to fit new market
paradigms instead of expecting the markets to follow their
business preferences. Having to listen to the market is
something the Japanese used to be good at when they
were lean and hungry, but now the competition has
caught up technically, they practice listening a lot better.

[Continued below...]

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[...Article continues]

People Costs:
Hon Hai went to China early on, in 1988, and has kept
itself mean (if not lean) ever since in its relentless
pursuit of low costs. As an example, 5 years ago as China's
coastal salaries and labor discontent started to rise, Hon
Hai decided to spend US$3.5bn in opening factories further
inland, thus preserving its lowest cost manufacturer
status. The company now has 1,000,0000 employees, churning
out all manner of global-class products at low margins, but
which thanks to its sheer size and well-thought out
operational structure allows it to eke out a meaningful
JPY250bn on revenues of JPY10trn.

The "humans-as-cogs-in-a-manufacturing-collosus" business
model is a very familiar one for Japan's ailing giants,
because it's how they grew to dominance after the War. But
given Japan's now-high costs and confining labor laws,
Panasonic and the others have no option but to
significantly move off-shore and find another (probably
ex-China) workforce to brutalize in order to compete with
Hon Hai. In fact, Myanmar comes to mind, and there are not
a few Japanese manufacturers making early moves there.
However, for a meaningful reappearance on the global stage,
Panasonic would have to put billions of dollars at work in
that country, something that is probably beyond its current
capacity without making some really painful cuts in Japan

And it's those employees here at home which are the biggest
stumbling block. Yes, Panasonic and others are busy hiving
off various parts of their businesses to buy-out funds, or
simply firing thousands. But with 330,000 employees, most
of whom are in Japan, their current efforts are just a drop
in the bucket. Our guess is that to pursue this strategy,
Panasonic would have to "double down" and continue its
current losses for another 3 years, while at the same time
putting an additional JPY300bn a year into its off-shore
facilities. We just don't see the stock market being
willing to accept that kind of economics, quite apart from
the fact that Panasonic would also need a leader with an
iron fist AND the backing of the government as it shed its
tens of thousands.

So if cutting people costs is not the major strategy, what
about simply returning to being the very best in certain

Technology Refocusing:
Samsung's strategy has been to attack the Japanese position
of technical superiority in certain sectors, chipping away
over a 20-year period in such disciplines as DRAM memory
and LCD displays while also taking advantage of the lower
won. In addition, the Koreans do seem to be better
international traders than the Japanese at this stage in
their development cycle, happy to do loss-leader sales in
order to break into major international accounts or
otherwise flood the market. This is in high contrast to the
Japanese, who take a much more fiscally conservative view,
wanting to extract at least some profit from every deal and
preferring not to make a sale if it means losing money over

From the face of it, the Japanese way is the correct way to
do business, but when you have a fierce competitor who has
products of almost the same quality, and whose mission is
to undercut you at every turn, there isn't much you can do
except to join the spiral of price cuts until one side or
the other bleeds to death. Ironically, this is what the
Japanese did to their American and European counterparts
back in the 70's and 80's, and the lesson to be learned
from such competitions is that it is invariably fatal to
the party having higher costs and/or inferior marketing.

As the Nikkei noted in an editorial a short time ago,
having conceded the DRAM, CPU, and LCD markets to the
Koreans, the Japanese majors either have to come up with
better technologies that are harder to replicate, or they
need to switch to sectors that are less competitive. It is
true that those Japanese electronics majors making
non-entertainment consumer electronics products are doing
much better than Panasonic and Sony. The Nikkei points out
that the air conditioner market, for example, is worth more
globally than the TV market, and so maybe Panasonic and Sony
should switch gravy trains. Then there is all the emerging
economies' demand for white goods such as refrigerators,
microwaves, etc. However, while we agree with the Nikkei
that another market segment would be a good idea, the white
goods space already has a Chinese dominant player, Haier,
which is likely to become another Samsung in coming

Instead, we'd recommend diversifying into more technical
areas, such as medicine and the military -- both of which
are proving lifesavers for firms such as Fujifilm and

Global Eco-system:
It's probably unfair to say that Sony should have invented
the iPhone instead of Apple. While it is true that Sony had
the wherewithall and experience to make such an advanced
and workable gadget, it was Steve Jobs' personal brilliant
insight (and Apple's desperation to let him pursue it) that
while the hardware matters, the way to beat Japanese
technical superiority is through software. When the iPhone
came out without a keyboard, it was the first time that a
mobile device had broken with Japan's traditionally
superior PC-making skills, and suddenly any manufacturing
nation, not just the Japanese, could provide Apple with the
components. Yes, the Japanese did and still do make lots of
components for Apple, but now they do it on Apple's terms,
not the other way around.

Another amazing Jobs insight was when he realized with the
initial high-volume orders of his new gadget that he could
turn it into a platform for third-party software engineers
to build a massive user-entertainment ecosystem. The idea
of sharing one's product with outside developers, such
that they could make money out of the platform and do it
outside the strict control of your engineers, was and still
is so alien to Japanese top-down managers that it would
never happen here. Case in point was when a American fan
wrote software to make the Aibo robotic dog dance, and
Sony's immediate reaction was to sue the fellow -- a public
relations disaster and a good example of the inflexible
thinking that is crippling Japanese electronics companies.

So is there any hope for Panasonic, Sony, and others of
their ilk?

Our take is that these companies will take the slow grind
approach to turning around their operations, and hope that
while they are reducing costs that their engineers will
come up with some hit products to turn things around. Oh,
and maybe Israel will attack Iran and precipitate another
oil crisis, or North Korea will attack the south and put
Samsung out of business... OK, more likely, the government
will arrange for the DBJ or some other entity to jump in
and invest a significant sum, semi-nationalizing the firms
involved. This isn't so far fetched, given the huge number
of jobs at stake: Panasonic and Sony alone employ 1% of all
Japanese workers. We think the grind will be a long
drawn-out affair and if things go well, both companies may
emerge a lot smaller and leaner in 3-5 years time. However,
the biggest danger is that in the meantime they will become
takeover targets by competitors and investment funds who
will be drooling over both companies' break up value as
well as their copious volume of patents and comprehensive
global distribution networks.

It's a sobering thought that as of last Friday, with a
market valuation of just JPY998bn, Panasonic is worth
roughly the same as Motorola Mobility was when Google
bought it last year for US$12.5bn. A Google senior manager
has since said that they made the acquisition primarily for
Motorola's 24,500 awarded and pending patents portfolio.
Given that Panasonic for the 8th year running has
registered the most patents, 6,881 this year alone, in
Japan, it probably has an overall portfolio of more than
100,000 patents. So does that make Panasonic undervalued by
this single measure alone?

Food for thought...

...The information janitors/


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+++ NEWS

- Bureacrats lose their low-cost nests
- Chinese paper imports hurt local paper firms
- Record number of bullying cases at schools
- Next fad is photo-realistic figurines
- First Japanese female bouldering champ

=> Bureacrats lose their low-cost nests

One small piece of commonsense news, the government has
announced that it will cut the number of low-cost
(subsidized) government employee housing units by around
56,000 units, or about 25% of the overall number of 218,000
units. Initially the cuts, which come from the Ministry of
Finance, called for about 16,000 units to be cut, but
political pressure has increased the target significantly.
***Ed: Downtown apartments with rents of just
JPY15,000/month -- the bureaucrats have done well looking
after their own.** (Source: TT commentary from, Nov 24, 2012)

=> Chinese paper imports hurt local paper firms

Yet another industry is getting "rationalized" by cheaper
Chinese imports, this time the paper industry. A Nikkei
report says that the September monthly import of coated
paper used for flyers and brochures increased by 28.9% to
66,000 tons over the same period two years ago. The imports
have driven down paper prices by about 5.2%, causing Nippon
Paper Group to reduce output by 15% and Mitsubishi Paper by
7.5%. ***Ed: Good news for the printing industry and
consumers of paper, though, as prices shot up by more than
10% after the paper supplier shakeout of the last 18 months
post-3/11, and has now come down again.** (Source: TT
commentary from, Nov 23, 2012)

=> Record number of bullying cases at schools

The education ministry has said that a record number of
140,000 cases of bullying were reported by schools all over
Japan in the first 6 months of this fiscal year (Apr-Sep),
with the number of reports increasing by more than 100%.
About 80,000 cases were reported at primary schools, 43,000
at junior high schools, and 13,000 at senior high schools.
Kagoshima had the highest reporting rate, with one case for
every 6 kids in school. Of the overall national total,
about 278 cases were judged bad enough to endanger the
lives or physical well-being of the victims. ***Ed: Several
high-profile bullying-induced suicides by school kids have
awoken the nation (and particularly the teachers) to the
curse of bullying.** (Source: TT commentary from, Nov 22, 2012)

=> Next fad is photo-realistic figurines

The world's first 3D photo studio has opened in Jingumae,
Shibuya-ku, called Omote 3D Shashin Kan. The new studio
takes scans of your body shape and texture, and converts
the results into a plastic replica figurine about 10cm-20cm
high. The figurines cost about JPY20,000 and a sitting
takes around 15 minutes. Initial reactions to the figurines
have been overwhelmingly positive and apparently the studio
is fully booked up until the end of January 2013. ***Ed:
The designer running the studio quipped that the figurines
are so realistic he decided to lose 5 kilos of weight after
seeing what he really looks like to others...!** (Source:
TT commentary from, Nov 25, 2012)

=> First Japanese female bouldering champ

Interesting story in the Asahi about 23-year old Akiyo
Noguchi, who was the first Japanese woman to win the
Bouldering World Cup -- "bouldering" being outdoor rock
climbing without a tether. The story says that there are
now 240 bouldering gyms in Japan, a 500% increase in the
last 10 years, and that the sport is expected to be adopted
in the 2020 Olympics. Noguchi is currently the World Number
Two in the sport and competes all over the world. ***Ed:
Definitely worth a read, to see how someone raised on a
dairy farm in Ibaraki became one of the world's top
climbers.** (Source: TT commentary from, Nov 25,

NOTE: Broken links
Some online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.


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In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to

=> No comments this week.



=> Le Mani Italian Bistro and Brewery, Okayama
Follow the yellow brick road to Bizen

Do you know how to get to Yoshinaga, Bizen City? Well here
is the easy way. Go to Hinase, turn left and go straight
for a few minutes. Sound easy? It is. That's all I did to
find one of the most picturesque landscapes in Okayama.

Of course, you might be wondering why I would want to go to
Yoshinaga in the first place.The reason: beer! My
destination was a micro-brewery that I had heard about.
When I went about looking for it the only name I had to go
on was Mitsuishi Renga. I was told that this was the
company that owned the brewery. Upon arriving in Yoshinaga,
I was given directions to what was a brick making company.
Renga means brick in Japanese. Indeed, I did notice there
were so many brick buildings in central Yoshinaga, such
buildings being rare in Japan.

Arriving at Mitsuishi Renga I wandered in an out of brick
buildings with no one to be found. Finally, came across a
couple of guys who looked like they were working on a new
mixture for bricks. One of them took the time to confirm
that the brewery was related to the brick company but was
located a good fifteen minutes away. With that, I continued
my search for the elusive brewery.

=> Tengu Kogen, Ehime

Only a two hour drive from Kochi City, Tengu Kogen is a
beautiful mountain retreat away from the hotter weather and
industrious pace of urban life. The huge park is located
in the Ishizuchi mountains to the east of the Shikoku Karst
on Kochi`s border with Ehime -- there is even a line in the
parking lot where you can straddle the two prefectures! The
steep, twisting ride up the mountains is not for the faint
of stomach (unluckily for me), but it is well worth it.
Before exploring the alpine forest trails and karst rock
topography the highlands are known for, stop off at the
rustic yet somehow grand looking hotel awaiting you at the
end of your ascent. It offers food, bathrooms, a gift shop,
and cottages for overnight stays.

I was lucky enough to visit Tengu on a free “monitor tour”
for foreigners sponsored by Kochi`s tourism department. The
theme of the tour was “therapy.” We had a “therapy walk” on
a soft, wood-chipped trail through the forest and enjoyed
healthy, beautifully presented “therapy bentos” for lunch.
Before and after exploring the highlands we had our stress
levels measured. We had to stick a little indicator under
our tongue and then an expensive machine apparently read
the stress hormone levels in our saliva.


+++ JAPAN BUSINESS Q&A -- Consumption Tax Calculation

=> Q. What is the actual formula for calculating consumption
tax? Is it a straight 5%, or something less? What factors
are taken into consideration?

A. Consumption tax ratio is 5% (4% for national tax plus 1%
for local tax). There are two calculation methods for the
consumption tax.

Calculation formula:

1) Ordinary Calculation Method

Consumption tax payable = Consumption tax received -
(Consumption tax prepaid + Import consumption tax)

* Consumption tax received is Consumption tax received on sales
and asset transfers (Consumption tax on taxable sales)

* Consumption tax prepaid is Consumption tax paid upon
purchases of goods/services and other expenditures
(Consumption tax on taxable purchases etc.)

* Import consumption tax is Consumption tax paid at the time
of import

If the amount of consumption tax payable is negative on the
consumption tax return, such negative amount will be

To continue reading....


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