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Japan's PC Makers Respond to PC Clone Invasion
From: Dave Farber <farber () central cis upenn edu>
Date: Thu, 25 May 1995 19:19:56 +0900

       ASIAN TECHNOLOGY INFORMATION PROGRAM (ATIP)


REPORT:  ATIP95.24 :Title Japan's PC Makers Respond to PC Clone Invasion


To: Distribution
From: D.K.Kahaner, Simon Mansfield ATIP-Tokyo [kahaner () atip or jp]
Date: 06/23/95 [MM/DD/YY]
This is file name "ATIP95.24"


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Date: May 23, 1995


REPORT:  ATIP95.24  Title: JAPAN'S PC MAKERS RESPOND TO CLONE INVASION


This report was prepared by ATIP technology analyst Simon Mansfield in
Tokyo. Email <simon () atip or jp>




ABSTRACT


In the wake of the high yen and an invasion of low cost clone computers,
Japan's PC makers are beginning to respond to the needs of home users by
developing low cost, feature packed multimedia PCs that bundle all the
latest goodies in "all-in-one" systems ready to go from day one.


INTRODUCTION




Just how fast Japanese computer makers are adapting to the new PC business
environment can be seen from the latest multimedia PC developed by
Matsushita Electric Industry Co. Priced at 318,000 yen ($3,740), the "Woody
PD" uses Matsushita's new combination phase change rewriteable (PCR)
optical disk drive and CD-ROM drive - in the one unit - setting a new
standard for PCs aimed at home users.


The Woody PD, includes 8 Mbytes of main memory, 100Mhz 486 microprocessor,
supplied by Intel's rival AMD Inc, 540 Mbyte hard disk, surround sound Dome
speakers, 14.4K fax/modem, MPEG1 full motion video card, inbuilt TV tuner,
a super flat 15 inch CRT monitor, and some 20 software applications and
other peripherals needed to get the home user up and running in the first
hour.


"All up a dynamite package", said one securities analyst in Tokyo when
asked how Matsushita would go with the new Woody PD.


ALL-IN-ONE TREND TAKES OFF


The new all-in-one trend began gathering pace late last year when NEC Corp
and Fujitsu Ltd announced their own multimedia PCs, partly in response to
Matsushita's original Woody TV/PC introduced in late June 1994.


NEC's new range of multimedia PCs are being marketed under the CanBe brand
name with a multi-million dollar advertising program heavily promoting the
CanBe series throughout Japan.


CanBe is a typical NEC 9800 series PC using the company's proprietary PC
architecture and customized Windows and DOS system software supplied by
Microsoft. Consumers are enticed to stay loyal to the NEC brandname with a
ready to go multimedia PC that packs dozens of features into each model,
including a TV tuner, plenty of main memory and a decent sized hard disk
drive. However, the price of the CanBe system with a 540Mbyte HDD remains
quite high at 455,000 yen.


Although, NEC is not yet fully ready to respond to Matsushita's cut price
system, as a decision on adopting the PD drive has only just be taken by
NEC, a source at the company said NEC would most likely announce a new
price point that would make its CanBe series price competitive with
Matsushita's Woody series within a matter of days.


At Fujitsu Ltd, the world's second largest computer maker, PCs are
continuing to receive a high priority with the company selling similar
feature-packed multimedia PCs in the 350,000 to 400,000 yen price range.


A Fujitsu source said the company welcomed Matsushita latest multimedia PC
as a solid contribution to building wide spread support for the DOS/V
operating system.


The pace of announcements highlights the increasing competition between
Japanese computer makers in the domestic market. Margins are down to very
low levels, requiring substantial increases in sales volumes in order to
maintain profits levels within the various PC business groups.


According to company announcements, during 1995, Fujitsu is aiming to sell
1 million PCs in the Japanese market, while Hitachi Ltd is aiming to sell
over 1 million units throughout the world. During 1994 NEC shipped 1.81
million units - up 32% over 1993, and is aiming for 2.3 million units in
1995 - up 27% over 1994.


One of the few companies to successfully make an NEC clone is Seiko-Epson
Co. But with the increasing trend towards an open standard based on IBM's
Japanese language compatible DOS/V operating system, Seiko-Epson is hedging
its bets by offering its own multimedia PCs using the DOS/V operating
system through its direct sales channel Epson Direct, while continuing to
develop NEC 9800 compatible systems.


In the notebook segment of the market, Sanyo Electric Industry Co has
announced a feature rich notebook, that on the basis of its specs looks
very attractive. However, Sanyo has decided to use a locally based Sanyo
group company to assemble the system, forcing the company to charge nearly
600,000 yen for a notebook PC that doesn't even include a high-quality
TFT-LCD screen.


But the biggest move in the notebook market is at Toshiba, which has just
introduced several new notebooks for the Japanese market. With prices and
features very competitive to that of its rivals, Toshiba is aiming for a
10% share of the Japanese market, and sales of around 400,000 systems this
fiscal year. As part of its new marketing push, Toshiba will also beef up
its office server systems by introducing a new range of systems based on
Intel's Pentium processor.


Finally, among foreign PC makers, Compaq (Japan) Inc has announced 37 new
PC models ranging from notebooks to high end office servers. Prices, remain
high by world standards, however, making it difficult to differentiate
Compaq's products from those of Japanese computer makers.


Furthermore, the ability of Compaq and other DOS/V system makers, including
Japanese vendors, to seriously undercut NEC's prices has virtually
disappeared.


NEC RESTRUCTURES AND REDESIGNS TO MATCH PC CLONE PRICES


Over the past two years, NEC has undertaken a major program to shift its PC
design and assembly operations out of Japan to Hong Kong, Taiwan, mainland
China and the USA, where it can design and make PCs at prices comparable to
Compaq and other clone makers - for both the Japanese and US markets.


For example, NEC will build a joint venture facility in Shanghai, China
with Chang Jiang Computer to make PCs. Initially the joint venture will
produce 20,000 units during 1995, rising steadily to 150,000 units/year by
2000.


But more importantly, is that NEC has substantially redesigned its 9800
series architecture enabling the company to use industry standard
sub-systems rather than the more expensive hard disk drives and other
peripherals previously required for the company's proprietary PC
architecture.


This use of industry standard products, along with offshore production, now
puts NEC in a position to match the prices of anyone attempting to
seriously undermine NEC's stranglehold on the Japanese market. A
predication by this analyst, which goes very much against the prevailing
wisdom of many commentators now following the Japanese PC market.


CONCLUSION


The essence of this "black sheep" analysis is that NEC's competitors had
only a brief window of opportunity over the past two years to attack NEC's
commanding position in the Japanese PC market. And while, the impact of
Compaq, Dell and DOS/V in general has been a substantial reduction in
prices, the main winner among foreign PC vendors has been Apple, which has
seen its market share grow to around 10% of the Japanese market, and making
its number two after NEC in the PC market.


A few years ago, NEC enjoyed a market share of just over 50% of the
Japanese PC industry, by 1994 this had fallen only a few points to just
under 50%. Exact figures vary between analysts and research institutes.


During this time, most DOS/V vendors, including Compaq and Dell, maintained
a price point that was much higher that prevailing prices in the US. As a
result, NEC was able to essentially match these prices, while create fear
and doubt among potential customers with Compaq's ability to support them
adequately. Hence, NEC continued to dominate major corporate accounts, and
when did loose out it, Fujitsu and IBM were the main winners.


But now that NEC has redesigned its 9800 series to use mainly industry
standard sub-systems, while increasing offshore production, its cost
penalty, for using small production runs of parts made specifically for its
9800 series architecture, is largely gone. As such it is very doubtful that
the company will see any dramatic 10% plus type falls in its market share,
which could have happened if Compaq and other DOS/V makers sold systems
closer to their real production costs.


For PC makers and industry in general the message is quite simple. Enjoy
the high profits of Japan's inflated prices for a few months to recoup
start up costs, but don't give your competitors one moment of respite to
change their operations.


Grab market share, and reduce the dominance of the established market
leaders. Otherwise, before you know it, companies like NEC will have
restructured and brought their cost overheads down, enabling them to bring
their full marketing weight into play, and depriving you of any cost
advantage not yet brought into play.


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