As the semiconductor industry transitions to smaller process geometries, the transformation is affecting competitiveness of manufacturers in Japan, Korea, and China. The reaction of management at semiconductor companies in each region to this transformation is determining the nature of their business going forward. Japan’s consensus management style is in contrast to Korea’s style of rapidly following changing consumer preference and to China’s obsession with the highest performance at the lowest cost alternative.
For the last 40 years of the 20th Century, Japan’s electronics and semiconductor manufacturers were dominant players in their respective markets. Chip companies could rely on supplying their system customers who manufactured consumer electronics for both the domestic market and for export throughout the world. During this time, Japan’s semiconductor companies developed their business by fabricating chip designs as subcontractors to consumer electronics giants. They did not develop products with the end consumer in mind but rather followed the direction set by their systems customers. In addition, they did not build and market chips to customers outside of Japan, and they did not create their own value and differentiation.
With the rapid change that occurred in the consumer electronics market worldwide at the turn of the century, competition began eroding Japan system manufacturers’ market share. As competition forced margins down and with no large customers outside of Japan to make up for the decline, Japan’s semiconductor manufacturers’ dependence upon these system manufacturers saw their margins likewise steadily decrease. In addition, the Logic LSI business model in the global market had changed from ASIC to ASSP. This meant that Japan’s semiconductor manufacturers could not mount a challenge in the global chip market against U.S./Taiwan fabless chip manufacturers because they had not created their own value and differentiation. Thus, Japan’s semiconductor manufacturers had to change their business model from integrated device manufacturing to a fab-lite chip manufacturing model to reduce their overhead. However, this direction accelerated the downward spiral for Japan’s semiconductor manufacturers.
By contrast, Korea’s semiconductor manufacturers embraced a fast-follower business model. They determine the precursors to market shifts then invest their resources intensively to swiftly grow market share. They build market share by lowering their costs drastically with mass productions and use their power to set price to continue expanding their market share. Also, they grasp the market needs through marketing efforts, and adopt them flexibly. The major characteristic that enables the success of this strategy is the company management’s quick decision-making capability without the fear of taking risks.
Conversely, the characteristic of Japan’s manufacturers is their “Seeds Concept.” Company management cultivates their company’s core competencies to produce new products and/or ideas based on their technologies rather than adapting their core competency to shifting market needs. The Japan semiconductor company’s decision-making is slow and deliberate as management emphasizes consensus and avoids risks. Thus, the Japan semiconductor company cannot quickly adapt to fast-moving changes in the digital consumer market.
China’ semiconductor consumer market is huge, but 90 percent of the chip supply comes from large semiconductor manufacturers outside of the country. And to gain market share in the China market, products must provide high performance at the lowest possible cost. Thus, it is extremely difficult to increase profits in the China market. Obtaining market share in this enormous market involves significant risks and heavy losses.
The question for Japan’s semiconductor industry is how to regain its competitiveness given the new international competitive environment. The problem for Japan semiconductor industry is that manufacturing capacity by itself does not create value. In reality, the factories are not even high value assets, but rather large burdens that require continuous investment with little time to achieve a healthy return on new investment.
What Japan’s semiconductor industry does have is a wealth of “human resources” that possess the know-how to achieve the maximum return from the large installed base of physical capital. Japan’s semiconductor manufacturers have outstanding people with talents to innovate and create materials, processes and designs to deliver a high rate of return. The issue here is how to manage this talent and value, and how to utilize them to generate profit and grow market position. Recent changes in top management at major Japan’s high tech companies suggest that a move in this direction is beginning to occur.
About the author:
Tatsuya Yamazaki is Vice President of Business Development Asia-Pacific for Kilopass Technology Inc. He has more than 30 years of semiconductor and electronics industry experience at Fujitsu and Samsung. He started his career at Fujitsu in process technology and device physics and eventually became the Vice President and General Manager of Worldwide ASIC and Foundry business. At Samsung, he was a Vice President for Marketing for the Japan region.
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