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NEC to exit Japanese smartphone market

Lane Oatey | Agency Collection | Getty Images

NEC, once the leading cellphone maker in Japan, said on Wednesday that it would quit making smartphones, acknowledging that it had lost sight of the development of mobile technology and failed to keep pace with the likes of Apple and Samsung Electronics.

The retreat in the face of competition from an American and a South Korean company highlighted the country's shift from electronics industry leader to laggard over the course of the last decade.

"We were late to enter the smartphone market, and we were unable to develop attractive products," Isamu Kawashima, the chief financial officer of NEC, said at a news conference here. "That's what it comes down to."

(Read more: Smartphone 'saturation' fears for Apple, Samsung)

Like other Japanese phone makers, NEC clung to old-fashioned flip phones — great for making phone calls, taking pictures or playing simple games, but not for much else — as rivals elsewhere were developing smartphones that put the entire Internet and more in users' pockets. The first NEC smartphone did not appear until 2011, four years after Apple's iPhone.

The strategic failure cost NEC hundreds of millions of dollars in losses as its share of the Japanese cellphone market slipped into the single digits. And corporate Japan suffered another blow to its once vaunted reputation for innovation.

"NEC was like the face of the Japanese phone industry," said Nobuyuki Hayashi, a technology consultant and writer. "Losing them will be very upsetting for those who take pride in Japanese manufacturing."

NEC's surrender is the latest in a series of consolidations. In 2010, NEC absorbed the remnants of the mobile phone divisions of two other Japanese stalwarts, Casio and Hitachi, with NEC holding a controlling stake. In 2008, Kyocera acquired the phone-making arm of Sanyo. In 2010, Fujitsu and Toshiba combined their handset businesses; Fujitsu bought out its partner last year. Mitsubishi, another big electronics company, got out of the phone business entirely.

Analysts say NEC and other Japanese cellphone makers were tied too closely to Japanese network operators, developing what has come to be known in that country as a "Galápagos" effect; devices were cut off from the evolution of the phone business elsewhere. As a result, the makers failed to grasp the significance of the rise of the smartphone.

As Japanese consumers embraced the smartphone in a big way, the companies had nothing to offer. Although flip phones from NEC and other Japanese makers are still in wide use in the country, smartphones now make up a majority of new sales. Japanese brands struggle to compete with imported smartphones, especially the iPhone.

(Read more: Apple vs. Samsung debate: Which really makes more money?)

"As the market for mobile phone handsets, including the rapid spread of smartphones, has dramatically changed, economies of scale have become increasingly important for the maintenance and strengthening of competitiveness," NEC said in a statement. "However, NEC's mobile phone handset shipments are following a downward trend, and it is difficult to foresee improved performance in the future."

By last year, Apple had become the market leader in Japan, where the iPhone had won 25.5 percent of overall cellphone sales, according to the MM Research Institute. Even Samsung, which has been slower to establish a foothold in Japan than elsewhere, surpassed NEC last year, with a 7.2 percent market share.

In smartphones, Apple is even more dominant, with 40 percent of the Japanese market in the first quarter, according to another research firm, IDC.

For NEC, the final straw may have come when NTT-Docomo turned to a Samsung smartphone, the Galaxy S4, in an effort to stem the loss of subscribers to two rival network operators, SoftBank and KDDI, which have been marketing the iPhone aggressively.

Docomo does not offer the iPhone; instead, it has been featuring the Galaxy S4 and a Sony smartphone, the Xperia A, in a summer sales promotion. It is the first time that Docomo has featured a Samsung phone so prominently. Given the longstanding ties between Docomo, a former state-owned monopoly, and domestic phone makers, the decision was widely seen in Japan as a slap in the face to the Japanese industry.

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There could be further bad news in store for the Japanese smartphone makers. Docomo has been talking with Apple about adding the iPhone to its range.

"Nothing has been decided and we're always considering which models to launch," Docomo said in a statement.

"There will be further consolidation in the industry," said Jean-Philippe Biragnet, a partner at the Bain & Company consulting firm in Tokyo. "There is not space for more than two or three of these players. The question is, Who?"

Among the domestic brands, the leaders last year, according to MM, were Fujitsu, with a 14.4 percent share of the overall mobile phone market; Sharp, with 14 percent; and Sony, with 9.8 percent.

(Read more: Smartphone price drop: Is this when it starts?)

Panasonic and Kyocera are much weaker, though they were slightly ahead of NEC, whose share of the business had fallen to about 5 percent last year from nearly 28 percent in 2001, according to MM.

Among the remaining contenders, only Sony has a significant presence outside Japan. The other Japanese phone makers have been outflanked at the high end of the smartphone business by Apple, Samsung and others, and at the low end by a growing number of Chinese manufacturers.

NEC was in talks with one of the Chinese companies, Lenovo, about a partnership aimed at saving the smartphone business, but the negotiations broke down several weeks ago, making the company's announcement Wednesday inevitable, analysts said.

For fans of retro-styled Japanese flip phones, which have come to be known here as "gara-kei," short for "Galápagos phone," there was at least one saving grace in NEC's announcement. The company said that even though it was quitting the smartphone business, it would continue "developing and producing conventional mobile handsets."

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