New business models can return short-term results, but getting back to the core competency of manufacturing excellence is needed for long-term success.

Japan’s Ministry of Economy, Trade and Industry (METI) released production data from the Japanese PCB industry for the first half of 2007.

It is difficult to summarize in a few words the trends within the entire PCB industry because nothing eventful stood out looking at the industry as a whole; however, new trends within certain segments are apparent. During the first quarter of the year, the whole industry mirrored its performance from the second half of 2006. Depending on the product category, several PCB products bucked this trend and posted growth during the second quarter of the year.

Total revenue from PCB production for the first half was 494.9 billion yen (about 4.3 billion U.S. dollars), an 8.6% growth compared to the same time frame of the previous year. Total production volume dropped to 12.17 million square meters, a 1.4% decline from the same period of the previous year. This translates into making more money by producing less.

During the first half of 2006, Japanese PCB industry managers moved to higher price products to elevate their margins, and that business plan continued for the second half of 2006. The trend continued during the early part of 2007, and manufacturers enjoyed double-digit revenue gains, while volume fell by more than 5%. Japanese manufacturers changed direction during the last few months. They are placing an emphasis on volume and are willing to shrink their margins in an effort to hold market share.

Each product category has different marketing strategies associated with it. Flexible circuits could be very typical. Manufacturers changed over to double-sided and multilayer from single-sided circuits because of their higher selling prices. Total volume for flexible circuits declined by 2.7%, but revenue increased 3.0% during the first half of 2007 compared to the first half of 2006. Volume and revenue for single-sided flexible circuits dropped 4.6% and 7.6%, respectively, compared to the same period of the previous year, and average selling prices continue to decrease. On the other hand, revenue from double-sided and multilayer flexible circuits continued to increase 10.1% despite a declining production volume of -1.3%. Average selling prices for double-sided and multilayer circuits remained high during the first half of the year.

Results from the rigid board circuits segment are mixed. Six to eight layer boards were up 22.6%, and build-up boards up 15.8% posted double-digit growth rates compared to the same periods in 2006. However, four, 10 and higher layer count boards suffered negative growth for both revenue and volume compared to the same period in the previous year. Revenue and growth from double-sided rigid boards remained flat. Nowadays, single-sided rigid boards are considered an insignificant product in the industry; however they still reported a 4.6% revenue growth while volume declined 8.8%.

Module circuits listed mixed performances; revenue and volume from rigid-type module circuits increased by 40.2% and 32.3% respectively. A pessimistic concern is that both revenue and volume declined significantly during the last month of the first half. Other module circuits showed virtually no revenue growth (-0.1%), but volume spiked by 11.2%. The majority of circuits are earmarked for the driver module in flat panel displays. It is understandable that the whole market has grown rapidly, but prices are continuously declining.

After analyzing data from the first half of the year, I would like to predict possible market trends for the second half of 2007; however, these are not easy to forecast because of the new industry trends that appeared during the second quarter of the year. If the industry maintains the status quo from the second quarter, the whole year should enjoy significant revenue growth, even though production volume will be flat or decline. Unfortunately, the outlook for the consumer electronics market in Japan is very unclear; I cannot be optimistic right now.

Realignment Within Japan’s Electronics Industry

The number of large electronic companies in Japan reached more than a dozen during the heyday of the 1980s. The global electronics market continuously expanded during this decade, justifying the number of companies in the industry. Most of the Japanese electronics manufacturers took advantage of the exporting business because the domestic market was saturated with competition.

Over last 20 years, Korean and Taiwanese electronics manufacturers have nibbled their way into the global consumer electronics market, and Chinese manufacturers gained a foothold during the last decade. Now, the pie is not big enough to share with Japanese manufacturers if they want to stay in the low-cost consumer market. There are too many Japanese electronic manufacturers, and they must change business direction to survive increased competition within the market. Unfortunately, they are too big to change directions quickly, and recent changes from the companies are not very smart.

Several announcements and strategy changes from major manufacturers transpired over the last few months. Matsushita Electric Industry sold its entire stake in JVC, one of the world’s leading manufacturers of audiovisual equipment, because of poor performance. JVC will collaborate with Kenwood, another major Japanese audio equipment manufacturer, to survive in the industry.

Sanyo has posted significant losses over the last few years, and most of its management recently resigned. Sanyo decided to cut off several major business segments that include cellular phones in the near future. Sony, the global consumer electronics giant, has decided to shut its semiconductor manufacturing and sell to Toshiba.

Sharp, the largest LCD device manufacturer in Japan, announced its intentions to buy a 15% stake in Pioneer, another major AV equipment supplier and the second largest PDP device manufacturer in Japan. Both companies stated they will not merge but will maintain a tight business relationship with each other. Japanese media outlets are speculating on the next company to broadcast a major development: Hitachi or Fujitsu?

Not only is a redeployment of resources affecting manufacturers but also retailers within Japan’s consumer electronics market. Big Camera and Best Denki, the sixth and seventh largest retailers within the consumer electric and electronic market announced their intentions to merge last week in an effort to survive in a very competitive consumer electronics market. They will be the second largest retailer after Yamada Denki, the retail giant in the Japanese consumer market. The companies explained they could be more competitive with Yamada by joining forces.

Most of the recent restructuring plans from Japanese electronics companies are targeted at cutting off the non-profitable divisions, and growing through mergers and acquisitions. It seems that Japanese electronics companies are taking a page out of the same book as the Americans.

Some say that one plus one will be more than two through the collaborations of different companies. Historically, the track record in the industry for companies becoming successful after a merger or acquisition is not very good. For these companies, one plus one is less than two. It is very common that total revenue from the post-merged companies is larger, but incomes may not necessarily increase. Sometimes, one plus one is less than one.

New business models from some of the electronics companies will provide some short-term positive results. However, long term, it could be a struggle if they do not improve upon their bread and butter functions such as manufacturing. Without improving on what they do best, the future may be bleak.

Dominique Numakura is president of DKN Research; dnumakura@dknresearch.com.