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Fatal addiction: Authors accuse Apple of destroying Japan's tech industry

Richard Smart
Thursday, 24 Oct 2013 | 9:41 PM ET
Kiyoshi Ota | Bloomberg | Getty Images

Wall Street loves to speculate on whether Apple's latest gadget is a winner or a dud.

But here in Japan, the tech giant has another constituency desperate to see iPhones disappearing from store shelves: The nation's once-proud electronics producers.

Executives and employees of companies like Sony, Panasonic, Toshiba and Sharp watch Apple with trepidation — not because it is a competitor, but because their livelihoods and the performance of their companies depend on it.

(Read more: Apple suppliers fall as new line-up fails to impress)

And that's not necessarily a good thing, according to Japanese authors Naoyoshi Goto and Jun Morikawa, who co-wrote the critically acclaimed book Appuru Teikoku no Seitai (The Real Apple Empire).

"Apple is very popular in Japan and it has a great image. But there is a hidden side for contracted firms and workers," Naoyoshi Goto told GlobalPost.

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The book's argument: Apple's triumph is partly due to the technology of its component suppliers, who reap big rewards, but face big risks. Low margins on each component sold to Apple are counterbalanced by the sheer volume ordered. Because Apple generates a significant portion of their revenues, the companies find themselves dangerously dependent on its success.

Imagine a situation in which the new iPhone does not sell well.

What happens to the Japanese manufacturers supplying Apple? "They can't survive on their own," Morikawa says.

Apple suppliers — a who's who of former Japanese greats — have seen their market capitalization plummet since the beginning of the century. Profits at these companies have shrunk or disappeared, and investors have lost faith in them.

(Read more :Apple increasingly adopting 'freemium' software model)

Take Sony, whose shares are worth around 2,000 yen ($20.56) today, compared to a 16,300 yen all-time high in March 2000. Last year, the company's profit margin shrank to a miniscule 1 percent. By comparison, Apple's was more than 25 percent.

Japanese electronics makers appear incapable of making the world-winning products that they made a generation ago. Even credit agencies are not optimistic about their prospects. Sony's credit rating? Junk. Sharp? Junk. Panasonic? Junk.

Research by Morikawa and Goto shows how in 2012 Japan's electronics giants were using Apple as a life support system.

(Read more : AMAT, Tokyo Electron deal a vote of confidence in Japan?)

Some of the figures are staggering.

At Sharp's Kameyama No. 1 factory near Osaka, 100 percent of liquid-crystal display panels were devoted to Apple. Of the camera sensors from Sony's Kumamoto factory, 50 percent were for the US company's devices. Half of the DRAM production at Elpida's Hiroshima factory: for Apple.

The companies declined GlobalPost's requests for comment.

Japanese Apple seeds

The story of Apple and Japan starts more than a decade ago in the sleepy Niigata Prefecture city of Tsubame. The shiny case on the 2001 iPod was polished by Kobayashi Kengyo, a small company in the city. In the early years, the company produced around a million cases for the iPod.

(Read more: Smartphones: Why one size doesn't fit all anymore)

"Steve Jobs went there and asked the company to polish glass until it reflected people's faces," Goto says. "Jobs always looked for the best people." Later, Goto alleges that individuals, possibly Chinese, came to the village with video cameras and learned the Kobayashi's techniques. The Japanese company later lost its Apple contract and returned to higher-margin, lower-volume jobs.

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The Japanese press has celebrated the country's role in supplying Apple.

The two authors have long had their doubts.

Some companies have not been as lucky as Niigata's Kobayashi. Shicoh, a Kanagawa Prefecture-based small motor company, went bankrupt last year. "Apple pulled out of its business with Shicoh and the result was sudden death," Goto says. The company is looking for outside funding as it goes through restructuring.

(Read more: MarcFaber: Apple 'could go bust' )

"Put simply, it's Apple or die. Or, these days, Samsung," Goto says. Who is to blame for the dire situation the Japanese electronics industry finds itself in?

"We have been warning people for years, but management are already too old," Morikawa says. "They just want to survive in their position right now."

The two argue that Samsung is not a savior for Japan, but the opposite. As Samsung imitates the model created by Apple for doing business with Japan, the situation has worsened.

William Saito, a Japan-based venture capitalist, agrees. "I am quite worried about innovation in Japan," he said in a July presentation on the country's future prospects in Tokyo. "The country is becoming a parts culture. Parts generally have margins of less than 2 percent. One reason is that the number of parts in devices is declining."

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A creativity dearth in Japan has hobbled the nation's electronics industry. World-beating products such as the Sony Walkman, Nintendo Entertainment System and VHS video cassette recorder are no longer produced. The nation has a technological edge that it is unable to translate into consumer hits.

"Many Japanese have great intellectual property, but our management forget where we are from," Goto says. "Once Sony was a startup. It is not a startup any more." He points to the contradictory nature of Sony's camera business. It supplies high-end lenses to Apple for low margins, damaging its own business.

At Sharp, the situation is more dire. "Sharp has no core products other than LCD," according to Morikawa. LCD accounted for 18.5 percent of company sales in 2011. The figure had risen to 26.2 percent by 2012, with sales rising by 276.32 billion yen ($2.84 billion).

"There is no way they can get out of this situation. It is impossible to become big again," says Morikawa. When the iPhone 5 performed worse than expected last year, Sharp faced potential bankruptcy, and eventually was rescued by a $111 million investment from Samsung.

(Read more: Sony-Netflix strike production deal for an original series)

The authors also point a finger at Apple. They argue that the Cupertino, Calif.-based company's negotiating terms are unreasonable. "Apple requests the highest technology at the lowest cost," Goto says. "Dell and Hewlett Packard pay low fees but only require middle technology [which is cheaper to produce]."

Burning one's suppliers is dangerous. "Apple has to change its strategy, it is not a startup anymore," Goto says. Now that its business is maturing, "It needs to take care of its supply chain more than in its past. They have to share some profit with their most important suppliers," or risk losing partners it relies on, and damaging economies where it has many customers. "But maybe they don't care," he concludes.

Japan had better hope that terms do improve.

Away from Apple components, a major focus for the country is televisions. 4K technology now coming to the market has taken massive investment from companies such as Sony. Prices for the televisions are coming down, portending future troubles.

"Managers at these companies are hardware oriented with old hobbies," Goto says, pointing out for many older Japanese, a night in front of a large, state-of-the-art TV is the a common way of relaxing. "Sometimes, YouTube on this screen is good enough."

He points to his iPhone 5.

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