Excellence: How Japan’s Best Semiconductor Companies Prevailed over the Lost Decades.

Summary : How some Japanese companies thrived in spite of the many challenges of the lost decades.

Excellence: How Japan’s Best Prevailed over the Lost Decades.

 

This is a summary of my talk to the SEAJ, in which I had the honor of being the first non-Japanese keynote speaker to ever address their annual meeting. Instead of focusing on what went wrong, the purpose of this presentation was to focus on what went right. Much attention has been given to what went wrong in Japan’s Lost Decades. Many lament over the lost semiconductor manufacturing base – one that was the envy of the world in the eighties. Instead of focusing on what they did wrong, why not focus on the Japanese companies that thrived in spite of the many challenges presented by the strong headwinds of this stormy period. These headwinds included: 

·         A strong Yen

·         A weak banking system

·         Emergent competitive threats from Korea, Taiwan, and eventually, China

·         The weakened chain of customers based in Japan

The research behind the talk examined how Japan’s best technology companies not only stayed competitive against these threats, but actually grew market share. From this, it presents the maxims of excellence that can be learned from them and their managements. This includes what they did differently from other Japanese companies that lead to their success. My focus was to provide a template for how Japanese companies succeed under extreme adversity by looking at the ones who thrived through this period.

Many of those standing at the entrance to the nineties thought Japan’s dominance of the global semiconductor industry was a given. Japan had gained share of the semiconductor industry for 3 decades. It was systematic and at the expense of America’s share. Looking back, it would prove to be Japan’s Golden Era of Semiconductors. It had done so well, in part, through this period because they had better long-term planning; they had a deep understanding of the power of Moore’s Law and how to apply it to memory; and they had a better, more focused, workforce that delivered higher quality and higher yields with higher efficiency at lower cost.

Their semiconductor industry had thrived in an economic climate where Japan’s economy had grown at double-digit rates over these three decades. Their top bank’s value in assets had surpassed many of the top ten ranked banks worldwide. Most of which were in the United States. While it is hard to imagine today, the value of NTT had surpassed that of the entire New York Stock Exchange at one point.

They were seen by many as unbeatable. But this golden era was on a precipice that was about to reverse.

As the nineties came, Japan entered what would come to be called the “Lost Decade” and then as it stretched out, the “Lost Decades.” There were plenty of macroeconomic and competitive challenges to Japan’s lead. Japan’s growing share of the global economy reversed and began to slide. With it, the fortunes of its semiconductor industry started to reverse. Some blamed America’s semiconductor industry. But in terms of manufacturing it lost share as well.

Japan’s dark era for semiconductors came with a systematic reversal of its share gains.

Japan’s share losses were accounted for by the rise of Korea and Taiwan. But this only describes what happened – not why it happened. 

Japan had lost its competitive advantage in semiconductors because its competitors had figured out its weaknesses and used them as a wedge to gain share. The market was changing and becoming more dynamic. The result was that Decision-Cycle-Times and being able to react fast to rapidly changing environments became more important than long-term planning. Long-term planning was a weakness because it dulled reaction times. Another weakness was Japan’s over-reliance on memory chips for its international competition. Outside of memory, it really wasn’t a global competitor. Moreover, Japan’s quality advantage became less important as foreign semiconductor companies, especially America, learned how to match Japan’s best. In the U.S., SEMATECH had a significant impact on American competitiveness. In Korea, the development of yield management techniques by Samsung and KLA-Tencor put Japan at a disadvantage, due to lower yields. Worse, the rising yen meant they now had to compete with a higher cost structure. And Japan’s banking system weakened as the essentially zero-interest bonds of the early-eighties that had funded the capacity needed for it’s share gains came due. This meant poor access to capital at a time when the world was moving to 200mm wafers.

Back at the time, I had actually predicted Japan’s decline based on these and a variety other reasons that would take too long to go into here. The point is that when a model forecasts well, it’s usually good evidence that the expected causality that makes up the model is correct.  Moreover, some of Japan’s best companies addressed these weaknesses and did well.

What Went Right in the Lost Decades: Some Japanese companies actually thrived through this period. They provide a template for how to succeed in difficult times. There are many great Japanese companies to choose from, so I chose to focus on the ones who made steady market share gains in spite of these difficult times. I then narrowed this down to two on the basis that I am intimately familiar with what drove their success, having followed them since the late-seventies. They provide the essence of what I believe was a template for how Japanese succeeded in a way that blended the best of Western and Japanese management and leadership techniques. These two were Tokyo Electron and Advantest.

Both companies have done well in good times and bad, as measured by gains in their relevant market shares in wafer fab and test equipment.

 

TEL & Advantest also gained share in an economy that was sinking in global share.

 

TEL & Advantest also gained share with a home customer base that was sinking in global share.

All these metrics demonstrate the value of trying to parse out what they did that led to their success. So what can be learned from them?  Like most successful companies before them, they selectively borrowed and applied the best maxims from those that went before them. TEL and Advantest took what was good from Silicon Valley and Japan and blended the two. Here are some:

Take big risks, swim upstream, and learn from failure: If you look at any of the successful Japanese companies during this time, they all took big risks to break out of the doldrums.

They risked failure as they took on a customer development focus. Here the issue is simple: if your primary customers are in decline, you must develop new ones in order not to follow them down. They also improved on western ways by interleaving the best of Japanese methods. They build trust and loyalty by investing on handshakes when it was essential for their customer to sell the program to others. Negotiations centered on coming to an agreement before a contract was ever written. They reasoned if you couldn’t agree, why did a contract matter? Also, agreement leads to definitive action. Contracts are filed. This was especially true as they would always bend when disagreements erupted, using the Japanese classic rule, ‘The customer is God.’

TEL was a shining example of this. They had huge challenges to overcome, as TEL had started as a rep for foreign companies in Japan. They started to manufacture, but now they had to become a full-fledged equipment company, with capability spanning product development to full service and support on a global scale in addition to crossing cultures.TEL would make heavy Investments in Oregon, Texas, and New York on a promise that it might pay off. It was especially risky when Terry Higashi committed to investing in Albany … an essential move in order to catalyze suppliers, CNSE, IBM , and the State into creating a new global technology hub. 

Advantest provides more examples. They focused on technology leadership in ATE. Risked everything, going their own way. They built ‘Big Iron’ Memory when customers said they wanted small. Advantest didn’t follow wants, they went after needs. Customers didn’t need the cheap testers they wanted. They needed lower cost-of-test-per-device. Advantest knew that big massively parallel testers could better deliver on these needs. When handlers were a limitation, Advantest designed and built their own product line in order to complete the solution.

Then Advantest pivoted 180 degrees to co-develop the T2000 SoC tester with several customers. Here they listened to customers closely, as they had traditionally been weak in this area. It was introduced and had a huge sales ramp.

Another important move for Advantest came in 1992, when they adopted a profit center and cash flow management approach. So important to the company’s future, that it is listed in their official history. While this may seem elementary to a western company, it shows the marked difference between Japanese and western business.

Go Global — Develop customers outside your comfort zone: At the time, many Japanese companies were more cautious than TEL or Advantest. They worried about failure, since customers outside Japan were not  loyal to suppliers to any degree near that enjoyed between Japanese suppliers and customers. According to the Bushido code, a Samurai who fails must commit ritual suicide to maintain his honor. This puts a high price on failure. Instead, the companies that excelled adopted the Silicon Valley wisdom of there being no failures, only lessons.

TEL and Advantest had gotten their feet wet in the global pool with their European and North American entries. Then they plunged in, expanding early into Korea and Taiwan. Looking in the rearview mirror, this seems like a no-brainer today. But at the time, the customers here were small and weak. Few people anywhere gave them much chance of beating the giant semiconductor companies in Japan and the United States. But TEL and Advantest sought to treat all customers alike. In technology, being big does not guarantee a future. It was smart to cover their bets.

In contrast, when senior executives from countries south of Japan arrived to consider buying new tools, companies that would eventually falter often only sent lower-level product managers and technologists to meet with them. They were treated as the second class customers they were at the time. But when this second class upended the first class, companies that had not addressed Korea and Taiwan early on found themselves cut out of the decision cycles.

Tokyo Electron, for example, focused on AMD, IBM, TI, & Intel in the late eighties and then turned their attention to TSMC and Samsung. In the late eighties the common wisdom was that Japan’s giants would run these companies over. But these giants would soon have flat tires.

Another key change was that they drove R&D to customer’s shore, where most were only putting sales offices in. It was local R&D that helped understand how to tailor products to local interests. Moreover, many things learned locally could be applied globally, thereby adding value.

Advantest would change its name in 1985 from Takeda Riken. While it may seem simple, it signaled that Advantest was serious about being a global citizen. Moreover, customers could not pronounce it. Toshio Maruyama would wince as customers would call them ‘Take-it Rye-kin.” But instead of be offended, they rolled with the punches and changed their name. Also, even Tokyo Electron softened its name to a simple TEL.

Then, Advantest listed on the New York Stock Exchange — another big signal that they were serious about being global. As for customer development, Advantest focused on Samsung, Hynix, Intel, & Micron.

The results of these efforts became clear as the share of both company’s sales outside Japan soared. While unfortunately we don’t have this data before 2000, one can still see the effect of their efforts as recently as 2013.

 

 

Be customer driven … Really is another lesson to be learned from both companies. Everybody, listens to their company, but executives coming from these companies from some of the top American companies would remark that they, “Really listened to their customers” to a level they had no idea existed. Even at a cost of short term earnings.

Empower your people to drive the organization: key to being customer driven is having boots on the ground that both management and the customer trust. In TEL’s case a key move was hiring Barry Rapozo and giving him full access. There was no Japanese shadow manager between him and headquarters. He had express lane access to the top of the companies and could drive efforts down into the Japanese side of the organization. Barry, Terry Higashi, and Tom Tuneshi would work together as one to build one of the world’s largest equipment companies.

Always build trust: When customers learn you do what you promise, it builds trust. So many equipment companies would listen, promise, and then fail to execute because there was no organizational commitment to back-up their promises. A sales VP of one company once told me that the whole purpose of SEMICON was to sit there while customers yelled at you for not meeting your commitments and then take the order (neither he or his company still exist).

But do not follow blindly: There were times when both TEL and Advantest did things with customers which would turn out to have no path to profitability. Sometimes what the customer wants or needs does not have the value to be profitable to you. When this happened, the trust dividend would really pay off.

Don’t be afraid to ask for more: If the customer really trusts you, they will believe you when you go hand-in-hand to ask for more. The return may be in the future, but in the future there must be a return. Trust as key to getting customers to reassess their position on what they really needed and what they were willing to pay. In contrast, a lot of companies would just shut the product line down, leaving the customer hanging.

CEO engagement is critical: If you learn anything from the above examples it is this. Neither company’s CEOs were disengaged, hiding away in Tokyo. They also applied a uniquely Japanese way of using logos to embed their mission deep into the organization. It wasn’t meaningless fluff either, because these CEO’s always backed it up, setting themselves as examples.

More takeaways from the success of TEL and Advantest

         Balance long and short term management

        Profit in the short term

        Price to value

         Manage the cycle

         Be ready for downturns

         Invest in the long term

        Favor needs over wants

        Favor benefits over features

         Commitment and Trust go hand-in-hand

         People win, not companies

        Trusting employees sets an example for how to earn customer trust

        They extended the Ringi-sho

        It amplifies in a feedback loop

        Relationships matter

         Build an ecosystem around them

Now no single one of the principles they used can account for their success. All were systematically applied throughout this period.

As for the future, these maxims will be just as important going forward as the semiconductor industry faces new challenges. And not just for Japanese companies. These are maxims anyone can apply.

Originally published June 13, 2014, The Chip Insider

Author: G Dan Hutcheson

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