The lights are off in the lobby of JVC Kenwood (6632) Corp.’s headquarters in Yokohama and there’s no one to greet guests. It’s what’s become a typical weekday afternoon.
The pioneer of the VHS video tape and maker of Japan’s first television set is bracing for tough times. Earnings from car navigation devices -- the hit product that emerged as JVC sales of camcorders and audiovisual systems slumped in the smartphone revolution -- are under pressure. Some car owners have decided an iPhone (AAPL:US) can guide them just as well.
Companies like JVC, that were once at the heart of a consumer electronics export empire, are struggling to shape their own destiny. Their fall is pushing Japan’s entire electrical machinery industry, which regularly generated trade surpluses of 7 trillion yen ($67 billion) until 2007, toward deficits that may emerge as soon as next year, UBS AG estimates.
“This is a critical problem for Japan because these companies have been a driving force in the economy,” said Tomoko Takase, a research manager at the Japan Electronics & Information Technology Industries Association. “The hollowing out of the industry has been in the news but the level of awareness doesn’t match the significance of the consequences.”
Domestic output from the electronics industry is projected to drop to 11.8 trillion yen this year, less than half its peak in 1997, according to the association.
While a move in production overseas to cut costs has brought some of the change, the nation’s share of worldwide electronics output is also falling. Japanese factories at home and abroad together accounted for 18 percent of the global total last year, down from 25 percent in 2007, Jeita data shows.
In a room beyond JVC’s empty lobby, Isamu Endo explains that pushing out completely new products is too risky right now.
“We still need to stabilize our profits after making structural changes,” Endo, the chief of public and investor relations, said in an interview earlier this month. “We want to be building up a little cash.”
The company forecasts a profit for the 12 months through March after reporting losses in four of the six years since JVC and Kenwood merged and separated from Panasonic Corp.
It has cut its workforce by 14 percent to just under 20,000 people since then. About 90 percent of production now takes place overseas, mostly in Indonesia and Malaysia, according to JVC.
The company that stamped its logo on the jerseys of English soccer team Arsenal for almost two decades has a new strategy. Its focus is making products for other companies rather than promoting the consumer brand, Endo said.
JVC’s car electronics business, including audio and navigation systems, posted a loss last fiscal year. It was profitable in the three months through June, the company’s financial statements show.
Japan’s exports of audio and visual equipment including televisions, digital cameras and music players have plunged more than 60 percent to 649 billion yen since 2007, when Apple Inc. (AAPL:US) launched the iPhone, according to the latest data from Jeita.
The year also marked the high point for Japan’s electrical machinery shipments abroad, which reached 16.9 trillion yen and were almost double the level of imports.
“Japan has lost in this transition from the flip-phone to smartphones,” said Gerhard Fasol, president of Tokyo-based consultancy Eurotechnology Japan. “That’s an old issue, but the fallout is coming now.”
Sony Corp. (6758), one of Japan’s best known corporate brands, has posted five annual losses since the smartphone revolution. Its shares have dropped almost 70 percent since mid 2007. JVC’s slumped 64 percent since the merger with Kenwood and split from Panasonic.
Outside the consumer electronics sphere, Hitachi Ltd. has led Japan’s overseas shipments of power generating equipment. The nation’s net exports of these products rose 13 percent to 322 billion yen since 2007, according to Ministry of Finance data.
Hitachi and Mitsubishi Heavy Industries Ltd. merged their thermal power generation businesses this year to tap growing demand in Asia. Hitachi President Hiroaki Nakanishi has said the venture aims to become the world’s biggest provider of thermal-power equipment.
The largest exporters in the electrical machinery category are Sony, Canon Inc. and Toshiba Corp., according to the All-Japan Commerce & Industry Organization Association.
JVC was taken by surprise as smartphones began to rapidly displace its products, said Endo.
Japan’s global brands of the analogue age fell behind in the digital era as profit margins shrank at hardware makers while developers with an eye for software such as Apple thrived, according to Fumiaki Sato, a former JVC engineer.
The nation was overcrowded with companies making similar products, notably mobile phones, said Sato, who is now a partner at a corporate advisory in Tokyo. Too many manufacturers competed for a limited pool of engineers and neglected sales and marketing, he said.
Japan’s cellphone exports slumped 86 percent to 6.7 billion yen last year from 2007, according to Jeita. Mobile phone shipments to Japan surged eightfold to 1.6 trillion yen over the same period.
Weakness in consumer electronics adds to broader pressure on Japan’s economy and Prime Minister Shinzo Abe’s efforts to revitalize the nation, known as Abenomics.
He’s contending with an overall trade balance that fell into deficit in 2011 when a record earthquake struck, ending 30 consecutive years of surpluses.
The closure of the country’s nuclear reactors in the wake of the disaster forced Japan to increase fossil-fuel imports by 10 trillion yen over the past three years.
When Japan’s trade surplus peaked at 14 trillion yen in 1998, the electrical machinery industry generated net exports of 7.2 trillion yen, compared with just 1.7 trillion yen in 2013.
“Japanese companies need to regain the animal spirits they lost over the past 20 years to lead innovation and sell products abroad,” said Masamichi Adachi, an economist at JPMorgan Chase & Co. in Tokyo. “This is something that the government and business have to take more seriously.”
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