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What Happened To Japan’s Electronics Dominance?

Japan’s electronics industry was once synonymous with high quality and affordability, with major companies like Sony, Sharp, Hitachi, Panasonic, and Toshiba being household names worldwide. However, after World War II, Japan faced a decline and was on the verge of famine. The Cold War led to the redrawing of battle lines, and the US and Soviet Union became adversaries. In 1953, North Korea invaded the South, and the US entered the conflict. The US army began shipping supplies from the US to Japan, but this was inefficient. The US army turned to Japan for supplies, stimulating Japan’s economy and reintegrating it with global markets. Prime Minister Hayato Akita embarked on a policy of sustained economic development through heavy industrialization, coordinating Japan’s banking sector and industrial manufacturers. Miti, a key player in Japan’s economic development, oversaw the emergence of major integrated conglomerate groups called Keretsu, which focused on priority industries for industrialization.

Japan’s early transistor learning efforts were extensive, and in 1952, Masaru Ibaka, founder of Tokyo Telecommunications Engineering Corporation, learned that Miti was licensing out transistors to other companies. This interaction demonstrated Japan’s economic model, where low-cost capital was used to fund investment. By 1960, Japanese transistor production had reached parity with the US, and the Japanese model became a blueprint for rapid economic growth.

In the late 1960s, Japan’s economy was booming and maturing, with manufacturing decreasing in importance compared to more complex manufactured goods such as cars, ships, and electronics. The government and major companies were focusing on semiconductors, which led to the VLSI project in 1976. This project brought together five of Japan’s leading semiconductor companies, NEC, Toshiba, Hitachi, Mitsubishi, and Fujitsu, collectively known as Sogo Denki General Electric Companies.

By 1982, Japanese semiconductor companies were producing more dynamic random access memory chips (DRAMs) than America, and by the middle of the decade, Japan was spending more on R&D and making more semiconductor products in total than America. Japan’s economic model combines strong government influence, close collaboration between banks and manufacturers, an outstanding education system, protection from overseas competitors, low wages, and a devalued currency that makes its exports more attractive.

One of Japan’s key strengths is its monozukuri, or production or making of things, which encompasses technological progress, know-how, and a desire to innovate. The greatest innovations in Japanese manufacturing include lean manufacturing and just-in-time production, which were heavily based on the Toyota production system developed by its industrial engineers over 25 years following World War II.

Japanese manufacturing also introduced concepts like Kaizen, which focused on scaling production with maximum efficiency and minimum waste. These concepts were introduced by American business teachers during the U.S. occupation in Japan’s classrooms and factory floors, contributing to Japan’s rise in semiconductors and becoming the world’s second largest economy. However, many Americans were angry with Japan’s rise, and Miti subsidized Japanese semiconductor companies, leading to a trade practice known as dumping.

In the 1980s, American manufacturing was declining, and Japan was blamed for this decline. Politicians like Walter Mondale argued that America needed to adapt its industrial policy to keep up with Japan, as Japan had created an automatic wealth machine. However, as the boom boxes were being smashed, storm clouds began to gather on the horizon.

Acute short-term factors combined with structural long-term weaknesses were the main causes of Japan’s economic decline. The Indako recession in the mid-1980s was caused by a rapid appreciation of the yen, which undercut Japan’s traditional advantage in exports and capital investment. The Japanese government responded by adopting an expansive fiscal policy, while the Bank of Japan pursued aggressive monetary easing.

As the market plummeted, Japan’s stock market index peaked at 39,916, almost five times higher than at the start of the decade. Other countries, particularly Japan’s East Asian neighbors, made progress. Examples include the TSMCC-led semiconductor industry in Taiwan, the new conglomerates in South Korea, and Deng Xiaoping’s China.

Japan’s companies failed due to their business model, which allowed them to grow so large through close collaboration with the government, a heavy focus on traditional industries, and a reluctance to admit foreign companies. This business model couldn’t confront the decentralization of supply chains and software, which prioritized flexibility and lower cost jurisdictions.

Japan’s continued strength in internal production products like cars and cameras contrasted with its weaknesses in modular production, such as smartphones. Semiconductor companies like TSMCC, founded by Morris Chang Bay, broke apart what had been a highly centralized industry, benefiting both manufacturers and startups that could outsource their manufacturing.

Japan’s dominance in manufacturing was largely due to its strong software industry, which was a key factor in its economic decline. Many economists attributed Japan’s weakness in software to the country’s competitive decline compared to the United States. Many of the electronics goods associated with Japan’s dominance were mechanical products, relying on hardware rather than software. As software changed consumer tastes, many of these mechanical goods and their manufacturers were left behind.

Japan’s economic collapse in the 1990s was devastating and traumatic, with almost half its market share in critical industries like semiconductors plummeting. This led to the decline of Japanese electronics companies, such as Apple, which shifted their manufacturing strategy away from Japan and toured China. By 2018, only one of the world’s top 50 companies by market cap was Japanese.

Japan’s demographic challenge is related to its age and reluctance to admit new people and ideas. The US, with its dynamism and optimism, has a strong culture of dynamism and optimism. With the help of a forward-thinking government and robust industrial and banking sectors, Japan now faces enormous challenges in trying to catch nations like the United States and China.

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