Why did Japanese electronics companies surpass rivals in technologies and number of patents, but lose in business?

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Car navigation systems, DVD players, liquid crystal displays, solar panels, DRAM memory and lithium ion batteries are products that have been invented and developed mainly by Japanese companies. The companies created new markets and got high market shares with many patents to exclude rival companies. Then the world’s markets expanded several times larger in scale. They kept investing high amounts in R&D for higher functionalities. Their world’s market shares recorded once more than 80% in all above-mentioned products except for DRAM memory (more than 40%). However, even though the market expanded, their shares have been drastically decreasing although they had developed cutting edge technologies with many patents related thereto. There is one report (Masahiro Samejima et al., Encouragement of IP Strategy, February, 2016), which analyzed the reason of their defeat in business and introduced a new interesting point of view. I would like to briefly discuss it here.

All those patent holders are major electronics companies, which paid great attention to patent strategies and quality/number of patents. Therefore, there was generally not a problem with the patents as such. What could have been the reason? In general, it is widely known that a patent is an exclusive right and accordingly can, if utilized correctly, contribute to increase a market share. This is true, especially at the early stage of marketing products. Pioneering companies often have patents to protect their newly marketed products, which can keep rival companies out of markets for years. But what would happen when these patents expire? Perhaps you might not be so worried about this situation because pioneering companies would have, as a result of continuous R&D, improvement patents on higher functionalities, and these patents would be continuously useful to keep rival companies away.

According to the report, this notion is a serious misunderstanding. Quality/number of patents doesn’t make much of a difference under a certain circumstance. It is to be noted that end users of products don’t necessarily desire super highly functional products. When one product reaches a certain level of functionality, it is possible that end users are quite satisfied with that quality and don’t want to pay extra cost to buy even better product any more. What’s worse, if rival companies are able to manufacture this satisfactory level of products only by technologies of expired patents, they would legally start selling products at much lower prices. Thus, pioneering companies suddenly lose their market shares. Their next improvement patents can’t be of any help at all to stop it. This may have been what happened to the products mentioned at the outset of this article. For example, most people don’t want to buy an expensive DVD player with extra high functionality (e.g. shock absorbing function for stable playing during driving a car) while there are cheap alternatives available in a market, which work well enough to play DVDs in normal use. In short, Japanese electronics companies were obsessed with one thought, which turned out to be a misunderstanding; the better technology they develop and include in their products, the more market shares they would be able to get.

The report cites one example case on solar panel business. One Japanese company had more than 90% of world’s market share for solar panel business in 2000. However, it drastically lost its share to 3% in 2010 regardless of its 5,000 relevant patents. The no. 1 share company (7%) at that time was a Chinese company with only 10 patents. The conclusion the report has reached is that there is “no relationship” between the number of patents owned by a company and its market share.

Of course, the above does not apply to all kinds of products and it is merely one side of the story. But, according to the report, there will be many products, which may experience the same fate in near future as above-mentioned products (e.g. digital camera). In order to avoid this situation, the report emphasized that it could be effective to formulate a business strategy in which companies don’t stick to super high functionality especially after a product has achieved market satisfactory level, but instead differentiate their products by product design, maintenance service, operability and long life span etc.

Finally, we need to understand this analysis is not the only answer and there could be many other reasons for the Japanese companies’ defeat in business. But, it is also true that this analysis could be perceived to be a good lesson to all manufacturing industries. Innovation and patents are important, but as such not enough to succeed in business.

2017-04-23

Hirotaka Nonaka

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