Abstract

Several Second-Tier Makers Expected to Exit Market

Since 2005, Japanese mobile phone makers have started to run into difficulties in overseas businesses. Except Sharp, almost all the other Japanese makers have suffered a market share decline and serious losses, as a result of which makers successively announced they would exit overseas value-line markets and consolidate businesses in the Japanese market featuring products with higher specifications and profit margins. However, it is not certain that Japanese makers can assure their survival by returning to their home market after the setbacks in overseas markets. There are two major reasons for this.

Firstly, as the number of Japanese mobile phone subscribers has topped 90 million, with the market penetration rate exceeding 70%, sales momentum in the market mainly comes from demand for new functions and the replacement of 2G phones with 3G models. The market share gap among the three leading makers is less than 1%, underscoring fierce competition in the saturated market. Although the inauguration of mobile TV and MNP  services in late 2006 is expected to boost market scale to 50 million units in 2006, it is very difficult for Japanese mobile phone makers to achieve product differentiation as mobile phones in Japan have been able to provide integrated functions and advanced content services. Japanese makers, therefore, are endeavoring to keep their heads above water by cutting production costs and increasing clients. For instance, Kyocera has outsourced over 80% of its production, while Sharp and Panasonic will start supplying to three major mobile phone service providers.

Secondly, the Japanese market has completely stepped into the 3G era, as 3G system accounted for 70% of the Japanese mobile phone shipment in 2005. This development spells the end of the era dominated by the Japanese PDC system. Meanwhile, due to the consideration of the compatibility with international specifications and the cost pressure triggered by declining ARPU (Average Revenue Per User), Japanese mobile communications service providers have introduced offerings by major international brands, such as Nokia, Motorola, and Korean brands. Therefore, Japanese mobile phone makers will have to pay a higher cost for maintaining their existing market shares and profit margins.

It is projected that over 15 makers will be scrambling for a share in the Japanese mobile phone market in 2006. The existing capacity of the Japanese market, ranging from 45 million to 50 million units a year, will not be able to support the survival of over ten brands. Unable to make profits in the competitive market, second-tier makers are likely to exit the market.

Depth of Cooperation Key to Strategic Alliances

In order to concentrate R&D resources and cut operational costs, Japanese mobile phone makers have been seeking strategic partners, hoping to salvage their declining competitiveness. However, whether Japanese makers can gain synergy from the strategic alliances will hinge on the content and the level of their cooperation.

With the constant evolution of mobile phone functions, operating systems and software and hardware integration R&D have become increasingly important for mobile phones. For example, Nokia, the leading mobile phone brand, adopts a single-platform, multi-device R&D strategy. At first, it developed several platforms, from value-line Series 30 to high-end Series 80, for different market segments, and it matches the platforms to different user interfaces, display specifications, and multimedia applications. It then selects the optimal platform based on individual market characteristics, and incorporates specific specifications and industrial design. The strategy allows Nokia to roll out a large amount of customized and cost-competitive products on the basis of fast time-to-market, economy of scale, and the "small volume, large variety" strategy, and garner 30% of global market share.

Currently, Japanese makers form alliances in order to allocate their R&D resources more efficiently and to jointly develop platform and modularized structures. However, in addition to R&D cooperation, whether makers can expand the strategic ties from R&D activities to production, channel, and even brand management to cut overall operational costs will be crucial for makers to survive the fierce competition.

In addition, conflicts of interest and partners' differences are also issues that need to be solved by Japanese mobile phones makers. Take NEC and PMC for instance. Although they started to develop a Linux-based software platform for 3G mobile phones as early as 2001, the cooperative effect has failed to live up to original expectation, due to their market rivalry, competition for NTT DoCoMo orders, and strategic differences between NEC, which aims at next-generation networks, and Panasonic, which focuses on AV home appliances.

Appendix

List of Companies