That the NEC President could say "It's a big risk to limit yourself to a small number of products. Those have to be very strong products," shows the enormous gulf between Japanese corporate thinking and the competitive and entrepreneurial spirit we have here. Innovative companies here are often one (or few) product companies. If your product isn't strong, why are you in that market in the first place?
Choosing technology winners and losers is probably not an area in which government will outperform the market. Is a bureaucrat going to do a better job than entrepreneurs, VCs and big company CEOs with skin in the game? We're better off putting our resources into basic science (the underlying infrastructure for technological advances) and science and engineering education.
In the late 1980's, Japan dominated the global computer chip industry, overtaking the United States in what was seen as a symbol of American economic decline and Japanese ascendance.
Those roles have been reversed. Japan's global market share is now half of what it was then, while Intel of Santa Clara, Calif., has risen to become the world's largest and most profitable chip maker. Indeed, Intel and Samsung Electronics, a South Korean company that was not even in the picture in Japan's glory days, together have a market share as large as the combined shares of the 20 large Japanese chip makers tracked by the research firm iSuppli.
Japanese chip makers are trying to snap out of this decline by joining forces, either by sharing factory construction costs or through outright mergers. The latest move came Dec. 28, when the Japanese chip makers Hitachi, Toshiba and Renesas Technology announced they were in talks to jointly build a semiconductor factory, a project that would be backed by the government. The media has called the plant the Rising Sun chip factory, after Japan's flag.
Efforts to combine forces have failed in the past: a wave of mergers two years ago produced companies as unprofitable as their predecessors.
At their height in 1988, Japanese companies produced 51 percent of the world's semiconductors, and the top three chip makers by market share - NEC, Toshiba and Hitachi - were all Japanese. Now, Japanese companies have a combined share of 23.4 percent of the $237.3 billion global semiconductor market, according to iSuppli. Just three Japanese companies made the Top 10.
"This has been a lost decade and a half for Japanese semiconductor companies," said Yoshiharu Izumi, an analyst at J. P. Morgan Securities. "Japan has been caught between the United States and Asia, and this middle ground keeps shrinking."
The chip makers' woes have spurred much soul-searching in Japan, where the industry had been a source of national pride. But analysts say an intense sense of national mission in Japan's chip industry has been one cause of its undoing.
For years, chip makers helped the country's export machine by supplying consumer electronics companies with every type of semiconductor imaginable, often at little regard for profits. Much of this was done in-house, as many of today's chip companies started life as divisions of Japanese electronics giants.
Chip sales rose while Japan's consumer electronics were globally dominant, but plunged when the world started buying cheaper televisions, laptop computers and other products made elsewhere in Asia. As losses mounted, many Japanese electronics companies could no longer afford their chip operations and spun them off as separate companies. These new companies lacked the cash to keep pace with the billions of dollars that rivals like Intel and Samsung were spending on new factories and production lines.
Now, many analysts here say, the only way the industry can save itself is by learning from American chip makers like Intel and Texas Instruments, which reinvented themselves two decades ago in response to Japan's strength. These United States companies succeeded by building strong overseas sales networks and concentrating their resources on a small number of products that they made well. Intel focused on building microprocessors, the brains of personal computers, and now dominates the global market. Texas Instruments specialized in chips used in cellphones.
"In the 1980's, the United States figured out a new business strategy," said Toshio Nakajima, president of NEC Electronics, the chip subsidiary of the Japanese electronics giant NEC. NEC fell from being the world's largest chip maker in 1988 to the 10th-largest today. "It is remarkable how these American companies learned to compete."
Mr. Nakajima said his company might eventually focus production on just three types of chips, though it had not decided which three. "It's a big risk to limit yourself to a small number of products. Those have to be very strong products," he said.
Toshiba is doing well focusing production on a specialized product, advanced NAND flash memory chips that are used in digital cameras and music players like the Apple iPod. Toshiba's chip revenues are expected to have grown a healthy 7 percent in 2005, according to iSuppli. (Like most companies, Toshiba does not break out its chip sales figures.)
The picture is not so rosy for the rest of Japan's industry. Of the 20 Japanese chip makers tracked by iSuppli, 12 are expected to report reduced revenues in 2005, including NEC Electronics and Renesas, which was created by the 2003 merger of the chip operations of Hitachi and Mitsubishi Electric.
The Japanese chip makers' problems are not the result of a lack of technology but an overdependence on their home market. Even the three biggest chip makers - Toshiba, Renesas and NEC - still sell about 60 percent of their chips within Japan, according to the Ministry of Economy, Trade and Industry. By contrast, Intel, Samsung and Texas Instruments do about 80 percent of their business outside their home countries.
Another problem is high costs, partly because of outdated and inefficient factories. As sales fell, companies had to cut back on buying new facilities and equipment. In 2002, such spending by all Japanese chip makers totaled 266 billion yen (about $2.3 billion), a third of its level in 1989, according to J. P. Morgan. It is now back up to 741 billion yen ($6.3 billion), still barely enough to keep pace with the $33 billion that Samsung alone plans to spend over the next six years to build nine new semiconductor production lines.
Japan's powerful bureaucrats, who originally helped guide the industry to preeminence, have been urging companies to pool money and technology, with limited success. They originally pressed the largest half-dozen companies to cooperate in building the Rising Sun semiconductor factory, which could cost as much as $3 billion. But the effort was delayed for years as companies failed to agree on what kind of chips Japan should focus its resources on. In the end, just three companies announced that they would join the project.
"Japanese companies have been looking hard for a winning strategy," said Tatsuya Fujiwara, deputy director in charge of the semiconductor industry at the Ministry of Economy, Trade and Industry. "They still haven't found one yet."