Finding Sharp's Focus

Dec. 21, 2004
New president Katsuhiko Machida looks to inventions to lift the electronics giant from its financial hole.

In the ancient Japanese capital city of Nara, a giant 1,200-year-old bronze Buddha presides over railway lines, traffic jams, and other symbols of modernity. And a two-lane road winds past rice paddies and neon-lit pachinko-game parlors, noodle stands, and chemical factories to the center of the Sharp Corp.'s culture of innovation. In 1970 Sharp built its Advanced Development & Planning Center, which has incubated the key devices that have turned Sharp into a $14 billion electronics giant. Some 50 miles from corporate headquarters, the center, the hub of Sharp's 21 worldwide R&D labs, seems far removed from the financial problems confronting executives at the head office in downtown Osaka. The center's directors happily buzz about the products that were pioneered there -- including the world's first solar-powered calculator, the Viewcam camcorder, and the Color Zaurus personal digital assistant. They refuse to disclose much about the "gold badge teams" that work on top-secret projects, but let slip a few words about their favorite technologies in progress. There's the "paper-thin computer," for example, which will be able to hold screen and computer on the same sheet of glass. Physicist Masaya Hijikigawa, group general manager of the LCD Development Group, expects to announce a test model this year and ultimately dreams of running the device on solar power. "We have started fundamental research into using continuous-grain-silicon technology to create a highly efficient solar cell," he reveals. Such visions are critical to the future of Sharp. Its new president Katsuhiko Machida is counting on them to lift the company out of its troubles. The strategy has worked before. And Machida brings a refreshing twist. He's determined to modernize the rusty, tradition-bound parts of the corporation by introducing new ideas and people in his globalization plan. The picture looked bleak when 55-year-old Machida took over last June as the fourth president of the electronics giant. A favorite of analysts in the early 1990s when its innovation machine turned out one blockbuster after another, Sharp saw pretax profits plummet in the fiscal year that ended Mar. 31, 1998. Operating income declined 41% from the previous year to $451 million, and net income declined 49% to $189 million from approximately $380 million in 1996. When discussing those results last October, Machida frankly admitted to a group of journalists that he took over "during the worst year in Sharp's history. . . . We find ourselves in a situation in which we dare not relax our vigilance." The market for its mainstay -- LCD flat-panel displays -- was soft. In Japan, which accounts for 48% of total sales, consumer purchases had slowed to a trickle in the country's worst recession since the end of World War II. The situation among its neighbors also looked grim. "Asian economies are still sluggish. We expect recovery in three to four years," Machida said late last year. In other markets consumers faced so many choices, thanks to product saturation and price wars, that profits proved elusive. A strong yen, which makes Japanese goods more expensive, worsened the situation. Analysts called for U.S.-style restructuring changes, unknown in Japan until recently. Among the suggestions: speed up decisions, limit the product line, reinvigorate development, spin off unprofitable divisions, and slash the workforce. A consumer-electronics bellwether, Sharp is not the only giant under pressure. Many of its challenges -- squaring Japanese corporate culture with an "Internet time" business environment, catching up to the U.S. in software development, and finding a role in the digital era -- are common to the industry. Corporations are making changes, and a few tsunami-like reorganizations have been announced. In March Sony Corp., for example, outlined dramatic moves: It would eliminate 17,000 jobs and close 15 factories. Most Japanese reorganizations have been less seismic than Sony's. Sharp has chosen a gentler approach, and employees and several analysts applaud the plan. When Machida assumed the top job amid plummeting sales and profits, colleagues saw his promotion as a fresh start for a company whose entrepreneurial roots had atrophied. "From the start Machida's message has been don't get tied up in experiences of the past -- break company taboos," points out Sueyuki Hirooka, a corporate senior executive director. Japan Inc.'s next generation A Sharp company man, Machida joined the manufacturer in 1969 with a degree in agriculture from the prestigious Kyoto University and three years' experience at a domestic dairy company. Early on, Machida made a name for himself in sales of microwave ovens. The first to introduce one with a rotating turntable, Sharp struggled to find customers who would buy the novel appliance. The jocular new hire wouldn't take no for an answer. He boosted sales by traveling to retail stores cracking a few eggs with one hand and turning them into a perfect egg custard in the company's new microwave, all the while entertaining prospects. Machida, who married the daughter of Sharp's second president, climbed the company ladder for nine years before being named to his first major post: group deputy general manager of the domestic sales and marketing group. By 1990 he was executive director for consumer electronics. In 1995 the rising star, who speaks some English and is regarded as a member of Japan's next generation of corporate leaders, was appointed senior executive director of international business. Although Machida never held an overseas post, supervising foreign operations took him to Sharp facilities outside Japan monthly. "He has always been very progressive, strong in interfacing with customers, and offering a strong global outlook," points out 15-year Sharp veteran O. Perry Clay, now president of the corporation's U.S. subsidiary. By late last summer, Machida had reorganized Sharp. To speed up decision-making, he allocated responsibility for business development and commercialization for each of the company's three fields -- audio-visual systems and appliances; information, communication, printing, and reprographic systems; and electronic components and devices -- to his three deputies, each senior executive vice presidents. "This allows each division to make its own decisions to respond quickly to market changes," he explained. The company's traditional seniority system was abolished. In its place emerged a results-based management-promotion system. While putting his own house in order, Machida began calling on the Japanese government to make changes. He wants officials to encourage more consumer spending. "The government should reduce taxes for housing purchases. When a new house is built, consumers buy appliances, which helps us. Japan is far behind the U.S. in terms of housing standards, and a tax reduction should help this," he observed. More power to subsidiaries The Sharp president appointed local executives to key foreign posts, which formerly were run by Japanese. In the U.S., Sharp's top revenue-producing market outside of Japan, he named Clay president -- the first American to hold the post since Sharp opened its U.S. subsidiary in 1962. Sharp is ranked third in market share for copiers in the U.S., but has its eyes on the top slot. In April Clay created a new operating unit -- Sharp Document & Network Systems of America, headquartered in Mahwah, N.J. -- to more easily reinvest profits in sales, advertising, and dealer support to grow market share. Machida also cut costs. He halved capital spending to $672 million in the fiscal year that ended Mar. 31 from $1.1 billion a year earlier and began slimming down product variety. Similar to other Japanese manufacturers, Sharp makes a huge number of products, and with other local companies selling competitive models, many are chronic losers. "In the past we tried to have a full line of products, but we are now thinking that we do not need to make products others make. We are trying to focus on the ones that only we can make," he explains. Machida has talked about spinning off units, but, unlike Sony executives, firmly ruled out layoffs. The corporate leader increased investment in liquid crystal displays, which he sees as crucial to turning the company around. Since 1973 Sharp has pioneered the development of LCDs, which produce images in response to electrical charges hitting liquid crystals and selectively allowing light to pass through them. Most Sharp products -- from cameras and televisions to computers and microwave ovens -- use the core technology. In the last seven years Sharp has devoted an average of 9% of sales to R&D (compared with its giant rival Matsushita Electric Industrial Co. Ltd., which put just 6% of sales toward R&D in 1998). A majority of its research funds went toward LCDs. But LCDs have not always been so critical. Overwhelmed in its early years by larger, kieretsu-based companies, Sharp developed an underdog's scrappiness and gambled on novel technologies, especially ones its competitors ignored, a tactic Japanese electronics expert David J. Collis, a visiting professor at Yale School of Management, calls a "contrarian R&D strategy." One such wager centered on solar energy. The first Japanese manufacturer to mass produce solar cells in 1963, Sharp now supplies the National Space Development Agency of Japan, powering more than 80 orbiting satellites. The company is a leading supplier of solar cells for homes in resource-starved Japan, and it plans to introduce more solar-powered devices in the next few years. "For environmental reasons, many governments, including those in Japan and Germany, are very strong supporters of solar-cell use. This area will have dramatic growth in the next five to six years," predicts Hirooka. Sharp's biggest bet, the one that paid off most handsomely, was on LCDs. More than once Sharp has grappled with weak sales and profits. Its solution: invent itself out of problems. In the 1960s Matsushita elbowed its smaller rival out of many retail stores, and a recession in Japan also hurt sales. Undaunted, Sharp licensed LCD technology from RCA and began putting the displays into calculators. "The industry was accustomed to adding bells and whistles to existing products in order to encourage consumers to replace their obsolete old models with new ones," writes Bob Johnstone, author of We Were Burning: Japanese Entrepreneurs and the Forging of the Electronic Age (1998, Basic Books), which reveals the origins of Japan's most creative companies. Sharp took a different approach and used LCDs to create new products or to entirely transform older models. Its success attracted imitators, but they failed to match the Osaka underdog's LCD-based innovations. Sharp's strategy helped it win the calculator wars of the 1970s when more than a dozen manufacturers introduced models. Within six months of launching its Viewcam camcorder, Sharp captured one-fifth of the market, thanks to the camera's novel LCD viewfinder. Sales of flat-panel displays, which use thin-film LCDs, carried the company through its glory days in the first half of the 1990s when competitors such as Matsushita struggled with weak profits and revenue growth. Today Sharp holds 40% of the market for LCDs, and they account for $2.5 billion of its annual sales. Increasing sales of professional equipment made with them -- as well as selling the flat-panel screens to other manufacturers of computers and mobile equipment -- has shifted the electronics maker's product line in the last five years away from lower-margin consumer electronics. In 1992, 54% of its products fell into the consumer category. By 1998 that had dropped to 35%. LCD-led recovery Demand for the application in 1999 is expected to increase 30%, and Sharp announced it would increase prices by June. The company also began moving employees from its suffering semiconductor division to LCD manufacturing. "We need a lot of people for the production of LCDs, so we'll move employees from other areas, instead of layoffs," Machida explained. Several analysts praise the new president's renewed commitment to LCDs. Takano Kimihide, a senior analyst for Dresdner Kleinwort Benson in Tokyo, rates the Osaka company a "buy" based on recovery prospects led by LCD sales for fiscal-year 1999. Adds Mami Indo, a senior analyst with the Daiwa Institute of Research Ltd. in Tokyo, "Sharp's new business model has the potential to produce a new-category product." Others are less sanguine. Basking in its early 1990s success, Sharp became flabby, slow, overstaffed, even dull. Its avid focus on LCDs prevented the company from coming up with other commercial winners and a strong brand image. That's what Masami Fujino, a senior analyst with Jardine Fleming Securities in Tokyo, thinks happened. "Sharp's trailblazing status in LCDs helped it maintain profit growth through 1996 when other consumer-electronics makers had already begun to suffer," she writes in her February analysis. "This run of success, however, is now proving Sharp's undoing." Competitors are way ahead in restructuring. Five years ago, for example, Matsushita developed an early retirement program and performance-based pay packages. Later it restructured its semiconductor unit and its financial affairs, writes Fujino in her report on Sharp entitled "Resting on its Laurels." Sharp's own forecast for the fiscal year ended Mar. 31 shows that results of Machida's strategy will take time to become apparent. Consolidated sales and profits are expected to remain flat, and the company predicts net income will plummet by 80%. The global vision One thing is certain: The corporation needs a few new hits. To increase his company's chances, Machida is preserving the structures that led to its laurels and hopes to earn new wreaths of achievement by turning to globalization and to best practices developed outside Japan. Hirooka, who is rolling out the globalization strategy as group general manager of the International Business Group, is already shifting the way he looks at markets as the information highway creates new ways of conducting business. "Changes in distribution, technology, and consumer purchasing mean that advanced markets are transforming to resemble new ones," he explains. Sharp used to test all products in Japan before introducing them internationally. In a shift, officials rolled out TVs with LCD screens abroad shortly after they were launched at home. Analysts would like more devices to go global faster. "In terms of sales, Sharp is one of the biggest players in the personal digital assistant [PDA] market in Japan," points out Dresdner Kleinwort Benson's Kimihide. "But many of its PDAs are very-Japanese-niche products, because they can't operate on personal-computer networks." To allow its digital assistants to be linked to networks, the company is beginning to produce them with Microsoft's Windows CE to give them a broader, worldwide appeal, Kimihide explains. To cater to individual markets and to tap local expertise, Machida is speeding up the spread of product planning, design and services, and research and development from Japan to its subsidiaries. For example, U.S. engineers are conducting research on a critical application involving the "digital home." This tool will serve as a central engine linking appliances and electronic devices, allowing users to check e-mail, sportscasts, laundry, and dinner simmering in the microwave oven all by remote control. "Since the company's backbone is in supplying entertainment and household products this 'digital central station' is one of the most important elements for the future of Sharp Corp.," believes Hirooka, who predicts it will introduce such a central station this year or early next year. A good deal of Sharp's work on the digital linking device occurs in Camas, Wash., on the Oregon border, where Sharp chose to build its first U.S. R&D laboratory in 1990 to draw from the West Coast's high-tech talent and ideas. "Every lab has a mission related to that area's talent or ability," explains Hirooka. "So in the U.S., for example, they're focusing on digital home appliances, information, and software, areas in which the U.S. is leading for the moment." The globalization plan also speeds the spread of Sharp's overseas production. This move mirrors one happening throughout the consumer-electronics industry -- transferring manufacturing from Japan to Southeast Asia, Mexico, and other low-wage regions. Increasingly, Japanese factories in developing countries are exporting back to wealthy markets in the U.S., Europe, even to Japan. In 1998 Sharp boosted its overseas production to 37% of total, up from 10% in 1986. By 2005 as much as 60% of production will occur outside of Japan. Also critical to Machida's corporate strategy is a change in reporting to reflect international accounting and financial standards. Shortly after taking office, he announced a new corporate image -- a crystal-clear company. Crystal refers to LCDs, but together the words also describe a more open way of managing, a shift away from the infamous fortress-like mentality favored by many Osaka corporations. "This approach is still in its early stages, but Sharp is trying to show us both the positives and negatives of the company," Kimihide relates. Machida's message came through crystal clear during a meeting with journalists last fall: "Japan's electronics industry is trapped in severe competition that is unprecedented. We cannot possibly survive by pursuing only sales volume and business size as we have done in the past." He also crystallized plans for digging the company out of its hole, but the best signs of the future lie in the product pipeline and the speed with which innovations reach markets. Author Johnstone sees one of two scenarios developing: The Sharp dinosaur will walk into the sunset, or the company will rapidly Westernize, led by a new generation of entrepreneurial employees. "I'm impressed by the resilience of the Japanese and their willingness to adapt," he observes. "There's nothing like the fear of God to force change."

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