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    • Apr 1, 2020
    • 3 min read

Excessive Competition in Japan

By Ichiro Suzuki


Over a generation ago, when the competitiveness of Japan Inc. was the envy of the world, it was in part attributed to fierce competition in the domestic Japanese market. In the second largest economy back then, consumers were, and still are, extremely quality-obsessive. Products these fussy consumers choose, therefore, can be well accepted anywhere else on earth. In fact, made-in-Japan products from cars, electronic devises to stationary and powdered milk were very well accepted outside Japan. “You have to beat Japanese competitors in the domestic market in the first place, in order to conquer the world”, it was said back then. Intense completion in the domestic market keep the prices of their products from rising, making quality products affordable to consumers. It’s great for both consumers and the economy, it was understood.


That was a narrative during the 1980s, when some pundits thought that the Japanese economy would overtake the United States, angering Washington with its huge bilateral bilateral trade surplus. Then, the infamous Japan Bubble popped at the outset of the 1990s. Later in that decade, Japan’s famed electronics industry lost a glitter suddenly and almost totally. The Japanese industry failed to adapt itself to the emergence of the new paradigm. Advent of the Internet shifted the tech industry’s focus from hardware to software. Stubbornly holding onto the hardware business, Japan’s tech moved deeper into what they thought as an advanced stage of technology and customer focus, and in fact drifted from the mainstream. As it turned out, Japanese tech ended up with over-engineered gadgets with too many functions that few people used. Mired in a domestic competition and excessively focused on what they thought as Japanese consumers’ superior taste, they drifted away from consumers in the rest of the world. This phenomenon was later called Galapagosization, a Japan’s own unique progression in islands isolated from the world. As Galapagosization went on, Japanese tech companies were selling products few consumers wanted outside the home market. In the mean time, consumer tech was on a trend of moving toward simplicity. It was epitomized in Steve Jobs’ war on buttons that went onto removal of as many buttons as possible from Apple’s products, and total elimination of thick users’ manual. This is how the once-famed Japanese tech industry sank, fiercely competing on wrong products with thin margins.


As opposed to the tech industry, Japanese car makers essentially sailed into the 21st century though Nissan had to be bailed out by Renault right before the turn of the century. Despite some modest consolidation in the industry, there still are seven independent Japanese car makers: Toyota, Nissan, Honda, Mazda, Mitsubishi, Subaru and Suzuki (Nissan and Mitsubishi belong to the triple alliance with Renault.) Of course, this number is awfully excessive compared to only 3 in Detroit. With the exception of Toyota, everyone is sub-scale in the increasingly globalized market. (Globalization relentlessly pressed on until recently.) Not being sufficiently profitable, some of these companies are kept afloat in part by Japan’s ridiculously low interest rates for a generation. Not all of them would have survived through today, should interest rates have been at the levels experienced in the 1980s or before. While the car industry is typical, such over-competition in the crowded market, and hence depressed profits, are seen in many other industries. Those companies that are barely surviving are often referred to as ‘zombies’. ‘In the last decade, ‘shareholders' became a popular management buzzword, but few companies managed to achieve an oft-stated goal of double digit return on equity. Too much competition cuts into profit margins, preventing Corporate Japan to achieve such goals.


In the old days, unprofitable and marginal competitors were weeded out by higher interest rates. In the 21st century, however, they stay afloat thanks to perennially low interest rates, allowing their industry’s over-capacity and weak pricing power to persist. There is no scope for ultra low interest rates to move decisively upward, raising a possibility of allowing zombies to hang around indefinitely. Then, the coronavirus pandemic has struck the world, shutting down the entire global economy, dragging it into a deep recession. Major central banks around the world are injecting liquidity into the economy fiercely, and those who are still left with room are cutting interest rates. Ultra low interest rates, therefore, are here to stay for the foreseeable future, and this is supposed to be good for marginal players in theory. However, this deep recession is causing a spectacular downward shift in demand and credit crunch. Reduced revenue pushes up the company’s breakeven point. Tight credit conditions might make weak firms to miss timely payments of bills. The could be how zombies disappear without draconian monetary policies. This could be how over-competition in Japan’s domestic market is brought to an end at last.

About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.

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