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Is Japan losing its tech edge to East Asian rivals?
By Peter Morris

Once on the global cutting edge of virtually all things technological, Japan's high-tech industry appears to be losing its edge, showing signs of wear and tear and flagging innovation.

After a failed satellite launch and a slew of cyber-security problems ranging from faulty automated teller machines (ATMs) to personal information leaks on its popular Yahoo! DSL (digital subscriber line) service, Japan is doing some soul-searching on the state of its high-tech industry and trying to galvanize the sector into once again being the world's leader. That may not be possible, at least not in the near future.

The Nihon Keizai Shimbun recently reported that Prime Minister Junichiro Koizumi is considering establishing a new ministry that would reformulate - and reinvigorate - Japan's information-technology (IT) policies. Koizumi also aims to enter the new space race. After China's successful manned space flight and US President George W Bush's announced plans to send Americans to Mars, Koizumi has decided to revamp his country's flagging space program and send Japanese astronauts into orbit.

And last Thursday, the government kicked off an important Internet public service for its citizens, who now can file tax returns and apply for passports online. The government also will accept payments for certain administrative fees, such as patent filings and labor insurance, via ATMs or Internet banking.

Japanese society often appears to be synchronized, and so it's no surprise that the government, by promoting a national reinvigoration of the tech industry, has also encouraged colleges and corporations to renovate their approaches to technology - and keep Japan in the forefront of technological creativity and development. These moves are expected to help Japan maintain its dominant role in the global automotive and consumer-electronics industries, among others.

Because of its restrictive immigration policies and a dearth of qualified tech professionals, Japanese IT firms and universities alike are tripping one another in pursuit of young, tech-savvy students. For the first time, top-ranking Keio University is offering full-tuition, merit-based scholarships in order to attract the best incoming freshmen. Last Wednesday, Matsushita Electric Industrial Co Ltd launched its "entrepreneur" recruitment program, mainly targeting new college graduates. The aim is to create new businesses and promote entrepreneurship in Japan.

Too little, too late?
In some respects, Koizumi's move to renovate and energize Japanese technology may be too little, too late.

Back in 2000, Japan took the first major step toward becoming an e-commerce nation by passing the IT Basic Bill. The law calls for an "electronic government" through the creation of a broadband-network infrastructure, the promotion of e-commerce and the protection of secure networks and private information. The law was intended to help companies bypass the 733 regulations and 124 laws that were inhibiting expansion of Japan's e-commerce, and it has facilitated the development of intriguing ventures in cyberspace. One example: on March 20, Yamaha Corp will begin selling electronic organs that can be connected to the Internet. Still, despite some advances and removal of some of the regulatory underbrush, galvanizing the IT sector still faces quite a few obstacles.

For example, despite strides in the lucrative mobile commerce market, Japan's "m-commerce" industry still lags behind that of South Korea. Furthermore, the expansion of Japan's broadband infrastructure, critical to nurturing an Internet-savvy population, has been hampered by government regulations. Another barrier to e-commerce in Japan is the lack of widespread credit-card ownership.

Japan is still very much a cash society, and even credit-card holders are often reluctant to give away their card numbers online because of the widespread perception that it is not safe. This perception was reinforced after a security lapse at Yahoo! Japan, one of the country's most popular DSL providers, compromised some users' personal information.

Finally, advocates of better high tech in Japan have called for more foreign professionals to give a boost to the industry. Their urgings, however, have mostly fallen on deaf ears, as the country's homogeneous society is reluctant to encourage immigration and open what some fear might be the floodgates of demographic and cultural change.

The government's campaign to introduce technology into virtually all aspects of daily life is regarded by some not as a way to improve efficiency, but as an attempt to maintain the country's technological edge over Japan's East Asian rivals, China and South Korea.

Korea has better Internet penetration, broadband
Over the past decade, Japan's East Asian neighbors have been making strides in the IT arena and have surpassed Japan on a number of IT fronts. Internet penetration in South Korea is much higher than in Japan, and Seoul boasts one of the most sophisticated broadband networks on the planet. Japan's personal-computer (PC) and broadband penetration is still very low, and many people are still using slow dial-up services.

South Korea also has surpassed Japan in other tech industries, including liquid crystal displays (LCDs), semiconductors and mobile technology. Samsung and LG are now leaders in the ultra-competitive global consumer-electronics market, and even Korean video-game makers are making inroads into the market at the expense of their Japanese rivals, particularly in China, where Korean video games are hot.

Greater China - including mainland China, Taiwan and Hong Kong - is gearing up to supplant both South Korea and Japan as the center of Asia's consumer-electronics industry, both on the production and development sides. After acquiring a majority stake in TCL-Thomson Electronics, a joint venture between TCL and Thomson SA of France, China's TCL International Holdings Ltd is now the world's largest television maker. China is also developing its own standards for the next generation of cellular phones and digital video disc (DVD) players, and it is fine-tuning its software industry to cater not only to the promising Chinese market but also to the lucrative international software market.

Moreover, Japanese companies have set up numerous research and development centers in China to take advantage of the large number of Chinese engineers who cost a fraction of their high-priced Japanese counterparts, and these facilities are developing products both for the domestic market and for export. The integrated-circuit foundry industry is also red-hot in China, where local companies are designing and fabricating tailor-made semiconductors to be used in mobile devices under international brand names such as Intel, Nokia and Fujitsu. However, companies face pitfalls in doing business in China - notably the loss of intellectual property.

In a New York Times article on January 13, Steven Lohr described efforts by the Chinese government to use its own standards for the next generation of technology products, such as cell phones and DVD players. China is developing software standards for wireless computers and tax policies favoring computer chips destined for the Chinese consumer market. The global semiconductor industry is protesting a Chinese tax that is nearly 14 percent higher on imported computer chips than on those designed or manufactured in China. The higher tax rate applies to chips used in products sold to the Chinese market but does not apply to exports.

China's encryption demands, regulations daunting
Even more disconcerting to Japanese tech companies is a new regulation, announced in December, that will require foreign companies to use Chinese encryption software and to co-produce their goods with a designated list of Chinese companies when selling wireless devices to Chinese consumers. The Times article notes: "Foreign computer makers, led by American companies, have protested the decision. In addition to their concern about the separate standard, foreign companies are worried about the possible loss of intellectual property if they are forced to work with Chinese companies that have the potential to become competitors."

These new regulations will have the biggest impact on "wi-fi" (wireless fidelity) devices that permit short-range wireless connections to the Internet. Beijing insists that wi-fi regulations are necessary to safeguard national security, as encryption codes for communications are critical to a country's security. Experts in China and abroad have routinely emphasized the need for improved security for data communications. But critics outside of China say that wi-fi communications do not pose a security risk because they only extend a few hundred feet, and that China's national standards are in essence regulations designed to inhibit foreign companies from taking a big slice of the Chinese wi-fi market.

Aside from developing its own wi-fi standard, China is actively promoting open-source computing to reduce its dependence on Microsoft Windows, and is even developing its own standard for DVD players. The Chinese standard for the next generation of DVD players and discs, called EVD (enhanced versatile disc), is expected to have four or five times the storage capacity of current DVDs, but will not be widely available until at least 2005.

China hopes to avoid steep royalty payments to patent-holding corporations in Japan, the United States and Europe by creating its own technology, but it will face intense competition. Two separate consortiums of Japanese companies, one led by NEC and another headed by Sony, are already in the final stages of developing their own next-generation DVD standards.

To be sure, "Japan Inc" has realized that in order to stay competitive in the global economy, it is crucial to tie up with other companies, whether they are Japanese or foreign. Sony Ericsson is one of the more notable examples; the Swedish-Japanese mobile-phone maker, after struggling from losses due to increased competition in the mobile-phone industry, surprised analysts by swinging into profit in the final quarter of 2003 on strong sales of phones equipped with cameras and games.

In fact, there have been a string of tie-ups between European and Japanese high-tech companies in recent weeks, including an agreement to develop a unified standard and equipment for security products, such as face and fingerprint recognition based on biometric technology. Finally, on January 23, Hitachi said it had concluded an agreement with Fraunhofer Institute for Secure Telecooperation in Germany to develop technologies to help users validate digital signatures without being hampered by different infrastructure environments used in various countries.

In addition to cooperating with foreign companies, Japan will need to start importing foreign labor if it really wants to stay competitive in the global IT industry. Whether the Japanese like it or not, opening the door to foreign workers is not a question of if, but when. Otherwise, in the near future, Japanese employees might need to start looking for high-tech jobs in China and South Korea.

(Copyright 2004 Asia Times Online Co, Ltd. All rights reserved. Please contact [e-mail] for information on our sales and syndication policies.)