September 25, 2014 7:00 pm JST

Kushida, Kenney: Positioning 'Galapagos Japan' in the cloud world

Japan's "Galapagos syndrome," under which its technological leadership and innovation is limited to the domestic market in a wide variety of industrial sectors, is common knowledge. We have called this characterization "leading without followers." But there is an alternative perspective: Cloud computing can bring new opportunities to Japanese entrepreneurs. Cloud services deliver global-scale computing resources from networks of large-scale data centers around the world, via the Internet.  

     The smartphone industry best illustrates the risks of Galapagos syndrome. Japanese companies introduced innovation after innovation to their domestic handsets in the years before the release of Apple's first iPhones, but their devices were not adopted globally. The recently introduced Apple Watch gained attention with its near-field communications chip, which enables wireless payments. Japan has had a wireless payments system up and running on phones and cards, and in retail outlets for a decade. Yet, these services and hardware remain domestic. In industries such as consumer electronics and computers, large Japanese electronics assemblers lost their competitiveness during the last two decades, except in certain high-end or professional equipment sectors. 

     All was not lost. The dramatic and visible decline of many parts of Japan Inc. did not hit the nation's suppliers of engineering-intensive components, which are arguably as strong as ever. The iPhone 5 had more Murata Mfg. components (tiny capacitors) in it than components from any other company. Similarly, the factory assembling iPhones of Hon Hai Precision Industry, better known as Foxconn, is possibly the largest user of Fanuc machines in the world. Remarkably, even Sony and Sharp, whose consumer products seem thoroughly outcompeted by the likes of Apple and Samsung Electronics, supply image processors and liquid crystal displays, respectively, to smartphone companies from Apple to China's Xiaomi.

     Silicon Valley companies such as Google and Apple are at the center of cloud computing. But Japanese companies provide many of the components and machines that allow users to get on the cloud. And the emerging Internet of Things, which describes the increasing connectivity of electronic devices of all kinds to the Web, will herald yet more opportunities for small, high-quality and power-efficient components. Inside the Japanese Galapagos, despite the demise of final assembly markets, valuable knowledge was built and much of it has been commercialized. It is as important to understand what was done right as what was done wrong. For Japan, the new cloud economy provides continuing business opportunities in the physical world and new ones in the virtual world.

     Japan often appears unimportant in the Internet era, but the cloud offers opportunities in cloud content. Japanese popular cultural creations such as anime and manga already have worldwide followings, but they have not been monetized well. New platforms for monetizing this content, such as the iPhone and Android app stores, along with YouTube, now provide the potential for Japanese content creators to escape Galapagos syndrome, which has prevented domestic business models from working well elsewhere. To optimize gains from the platforms the Internet offers today, Japanese cultural creators need to internationalize their products, as K-Pop has done. Japanese design aesthetics are world-renowned, but have largely failed to reach websites and other digital content interfaces on the global market. Here, private sector companies such as SoftBank may be able to assist in encouraging the internationalization of valuable Japanese content. The government is putting significant resources behind its "Cool Japan" policy initiatives, but it needs to carefully consider what will enhance competitiveness rather than simply supporting business models that depend on government funding.

     We expect Japanese components to continue being critical to global supply chains. Unfortunately, the movement to the cloud threatens domestic-only software -- even established U.S. companies such as Microsoft are being severely tested by the changes. New global standards may also assist Japanese companies, if they are able to embrace platforms such as Android, which may increasingly be embedded in products from rice cookers to cameras. Creative young Japanese may be able to innovate and create globally valuable products and brands through the use of websites such as YouTube and the various apps stores. For Japanese companies and entrepreneurs, the key question is how to take advantage of the disruptive changes in global computing and communication architecture.

Kenji Kushida is Japan Program research associate of the Walter H. Shorenstein Asia-Pacific Research Center at Stanford University and Martin Kenney is a professor of Community and Regional Development at University of California, Davis, and a senior project director of the Berkeley Roundtable on the International Economy at University of California, Berkeley.

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