Monday, March 18, 2013

Quality and the Japanese Economy

During my early years at IBM, all that was talked about was the Japanese. At that time they seemed invincible producing quality products and marvelous engineering. Years later it was DELL that was all the buzz ... but, back then, it was all about Japan, Inc.

How things have changed. (For both Japan AND DELL!) What brought the reversal of fortunes to Japan’s economy, which looked pretty much invincible in the 1980’s? More specifically, I’m interested in finding out why the pride of Japan Inc., the electronics industry, has sunk so low. I was a bit shaken by the recent news that Panasonic, a Japanese company that built my first transistor radio I had back in Junior High, was downsizing and laying off and selling divisions in an attempt to remain solvent.

The diagnosis of Japanese semiconductor companies and consumer electronics vendors involves no shortage of theories and speculation.

Armchair analysts often zero in on macro factors like the rote-learning education style of Japan (less emphasis on creativity), the utter lack of a sense of urgency among Japanese workers (getting too comfortable with their wealth), non-existent global perspectives, Japan’s stubborn lack of fluency in English, outdated industrial policies driven by elite bureaucrats, slow decision-making process (or their skills in making no decisions at all), and perhaps most important, a complete lack of leadership in management—both in the political and industrial worlds.

Meanwhile, Japanese electronics companies, when reporting their dismal performance in recent years, typically blamed their failures on three factors: the historic high of the Japanese yen, the devastating flood in Thailand, and the dramatic cratering of prices for DRAMs, LCD TVs, etc. Surely, there’s truth in these alibis. But these outside factors are hardly the root cause for what ails Japan.

However, there are two things—although often absent from the debate, especially among Japanese themselves—that I’d like to suggest as the real culprit behind the downfall of Japanese electronics industry.

One is the tendency among Japanese companies to overbuild over-specified, high-quality chips and systems in the costly and time-consuming pursuit of perfection. Another is the decline of technology innovation in Japan.

Let me be clear. Japanese companies love talking about “technology innovation.” But they almost always define innovation as the “most advanced technology” they can develop by throwing around a lot of R&D money. They rarely talk about the innovation that opens and creates new markets. More to the point, Japan today appears almost incapable of the innovation necessary to reduce the cost of products and create fresh demand. The Japanese has forgotten this art. Samsung, in South Korea, has apparently inherited it.

These two realities are deeply intertwined. Casual Japan observers should notice that Japanese companies take great pride in the “high quality” of their products but they often fail to mention “at what cost.”

Let me explain what I mean by high quality vs. cost. Consider, for example, LCD manufacturing. Many Japanese consumers bought into the legend of Sharp Corp.’s Kameyama fab, which developed and produced in the mid-2000’s the most advanced, high-quality LCD panels—billed at that time as “the most revolutionary.”

Believing in its own Kameyama myth, Sharp poured billions of dollars into a new LCD manufacturing plant. The Sakai plant was designed to be the first in the world to manufacture tenth-generation LCD glass substrates, capable of producing eight 50-inch panels per sheet. In 2008, Sharp announced that Sakai plant would dwarf the Kameyama 2 plant, describing it as “30 times the size of Yankee stadium.”

Manufacturing 50-inch panels per sheet was surely an enviable technological feat—at least on the drawing board. I’m skeptical, however, about how much analysis and due diligence Sharp’s management team—including its own engineering and marketing executives—invested before taking to what proved to be the suicidal step of building a fab big enough to accommodate 2.4 million vicious Yankee fans.

Takashi Yunogami, a director of the Fine Processing Institute, points out the fallacy of the 25-year quality guarantee Japan’s memory chip vendors promised for their DRAMs in recent articles in the Electronics Engineering News—an excellent newspaper to keep up with the happenings in the electronics industry. He is a former engineering expert in dry etching at Hitachi and now author of books on the Japanese semiconductor industry and a lecturer at several universities.

He has written that the 25-year guarantee on DRAMs was born when DRAMs were first designed into large-scale, mainframe computers and communication infrastructure equipment such as telephone switching. NTT, one of the biggest customers for DRAM in early 80’s, told Japanese chip vendors at that time: “Bring us DRAMs that won’t fail.”

In efforts to meet that onerous 25-year standard for mainframes and a 23-year guarantee for phone switching equipment, quality-conscious Japanese memory chip engineers amazed the world by actually accomplishing the goal. Their unparalleled skills in developing fine processing technology and manufacturing high-quality DRAMs led Japanese semiconductor companies to dominance in the global DRAM market by the mid-1980’s.

What followed then were inexplicable choices by Japanese semiconductor vendors. They didn’t scale back from 25-year “perfection” to cost-effective alternatives that didn’t need to last that long, even well after the computer industry made a dramatic shift to personal computers. In spite of the typical PC’s much shorter life, Japanese memory companies kept pumping out high-quality, over-specified DRAMs. The result was a massive loss of market share against Samsung which mass-produced low-cost, three-year guarantee DRAMs for PCs.

By the late-1990’s—right around the time when Japan began retreating from the DRAM market—Yunogami states that noticeable differences existed in a photomask set used for 64-Mbit DRAM fabrication process used by Japanese, compared to those by non-Japanese vendors.

A mask set for a process node typically contains as many as 20 or more masks, each of which defines a specific photolithographic step in the semiconductor fabrication process.

While Japanese DRAM vendors then used as many 29 to 26 masks, Korean and Taiwanese vendors used 22 to 20 masks. Micron was believed to use only 15 masks, according to Yunogami. More masks means more processes, and more processes means more semiconductor manufacturing equipment. “This led to the high-cost structure of Japanese semiconductors,” said Yunogami.

That structural problem continued to dog many Japanese semiconductor companies including Elpida, a DRAM joint venture between memory divisions of Hitachi and NEC. Elpida was known for operating a lot of screening tests for the DRAM manufacturing process. Take the example of a wafer-level burn-in test. Applying a certain power supply current to wafers on which DRAMs are formed allows vendors to spot defects. At one point, DRAM vendors outside Japan reportedly stopped doing burn-in tests, because the cost didn’t justify the discovery of extremely rare failures.

Japanese semiconductor engineers were shocked to learn that other vendors had stopped burn-in tests. But instead of dropping the test to save cost, the Japanese soldiered on, proudly declaring their commitment to this extra step in quality control. The logic may have worked with quality-conscious Japanese system OEMs, but it made no sense to anyone whose job depended on pushing down the cost of their systems.

Historically speaking, by the 1980’s, Japan’s consumer electronics industry was well on its way to ditch the “cheap copycat” stigma that had plagued the nation’s reputation after World War II. Japanese semiconductor makers, who closely followed the invention of chip technologies in the United States, also by the mid-1980’s succeeded in sweeping the global market with DRAMs.

The Japanese electronics industry earned respect for the quality products the nation’s engineers had earnestly pursued. Meanwhile, the industry lost perspective on the cost that their products need to compete on the global market. They needed to heed the words of Mr. Miyagi, the wise Okinawan in the 1980’s film, “The Karate Kid.”

“Balance,” said Miyagi-sensei. “Balance.”

There’s nothing inherently virtuous about overspending on production equipment and multiplying manufacturing/testing processes in the worship of quality for its own sake. Sometimes, innovation and quality work hand-in-hand at lower cost. This is where Japan might heed the words of one Mr. Miyagi’s philosophical forbears, Henry David Thoreau, who said: “Simplify. Simplify.”

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