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The Flattening Forces Affecting the Japanese Optical Industry: How Netscape Changed the World
In the book “The World is Flat, A Brief History of the Twenty-first Century”, the author and celebrated New York Times Editorialist, Thomas Friedman, talks about “the ten forces that flattened the world” and revolutionized the way we do business in the past 15 years. What he means is the forces that are “levelling the playing field” and allowing the entire world to work together, and compete against one another in ways never before imaginable.
Briefly, they are as follows:
1) The Collapse of the Berlin Wall (1989/11/09) – this opened up east and west and allowed two cultures to meet.
2) Netscape’s IPO (1995/08/09) – this started the dot.com boom which led to a huge amount of companies getting funds for crazy projects, laying tons of fiberoptic cable around the world, and basically laying the foundation for extremely cheap broadband connections with the world.
3) Work Flow Software – people were now able to send files back and forth to each other via email, work on these files on their own computers and in effect, collaborate over long distances.
4) Open-Sourcing – this movement led to affordable, cheap and free software that could be used on many different platforms over the internet, developing servers for businesses to run intranets and communicate in a more efficient way.
5) Outsourcing – this movement is the result of companies trying to “cut the fat” by finding cheaper places to get the job done “out-of-house”. Since the internet and broadband was available cheaply, companies could outsource overseas to cheaper labour pools, have the finished product re-imported and finished for the market.
6) Offshoring – by taking entire factories to countries where the labour was cheap and the number of workers was large, it was possible to achieve “economies of scale” and dramatically decrease costs of production.
7) Supply-Chaining – it became possible to develop systems where all of the components for your product were sourced from all over the world where one could get the best product at the cheapest price. Look at Dell Computers as a perfect example.
8) Insourcing – logistics was born and transport companies redesigned themselves to look after entire parts of companies that had some relation to moving product from A to B. This could be inventory, repairs of computers, and more.
9) In-Forming – it is now possible to research anything on the internet and learn about anything in a far more detailed manner than ever before thanks to the massive amount of data in storage on the systems linked to the world.
10) Steroids: Digital, Mobile, Personal, Virtual – these extra little tools acted as a catalyst to make the other nine flatteners extra powerful. Now people were able to communicate freely any time, any place and on a huge variety of portable machinery. Free Internet Telephony (Skype) is one example.
Now I will talk about the Japanese optical industry and how these flatteners are changing the face of the way business is done in this industry.
The most important flatteners affecting the optical industry today
The largest market for eyeglasses is the U.S. and from an optical industry perspective (perhaps others as well), America seems only to want “cheaper” products. This desire for “price down” (at the expense of quality) has driven a large amount of business to China. The manufacturers in China produce acceptable quality at a dramatically reduced price compared to the rest of the world. Japan had the competitive advantage of being able to work titanium and titanium alloy materials which are in high demand for eyeglasses in the world. Due to the “no nickel” policy in Europe a lot of the “standard metals” are being phased out and titanium, being considered “nickel-free” has become a hot commodity.
Japanese manufacturing is very high quality (the rest of the world cannot attain the quality of the manufacturers here for eyeglasses), but also very expensive because in this little industry, we do not use production-line manufacturing. Although everyone would prefer the Japanese quality, the price point has pushed them away to China.
Many Japanese manufacturers went bankrupt and those that survived either did so because they moved to niche manufacturing for a smaller market, or they OUTSOURCED their manufacturing to companies in China. Outsourcing to China for the Japanese market has been very difficult because, even though Friedman talks about “high quality manufacturing in China”, I have to disagree for the optical industry. The poor quality that comes out of Chinese factories, and the way business is conducted is extremely frustrating to companies outsourcing their orders to companies there.
In order to overcome this, the companies that could afford to do so have started OFFSHORING their business by either building their own factories in China and managing themselves, or working with an existing Chinese manufacturer but sending Japanese people over to manage the production of their product.
Outsourcing is not a new concept in optical manufacturing in Japan. There really are very few actual manufacturers of eyeglasses who do the entire process from A to Z. The Japanese system is such that everyone uses smaller companies that specialize in one or several of the 200 steps required to make the frames (brazing, plating, painting, polishing, forming, etc.). A part of an order goes out, is completed and comes back to the company who sends it out for the next process. This is very common in this industry.
However, doing the entire process in a foreign country was very difficult for this industry. It has become necessary, and essential for survival for the frame manufacturers without a manufacturing competitive advantage. They need a price advantage in order to survive.
In the optical industry offshoring their entire process through developing a new factory in a foreign land in order to compete is a very new way of thinking for the manufacturers / suppliers of eyeglasses to the global market.
How those forces affect/influence the industry strategy
This necessity has affected the companies dramatically and forced them to do one of two things:
i) Move deeper into a niche market to maintain manufacturing in Japan at a higher price, but producing a product that is specialized and cannot be copied or produced on the mass market of Chinese manufacturing. These frames are much more expensive than those made in China (on the retail market) due to the markup system of eyewear in Japan. The manufacturers here have also had to cut their margins in order to sell Made in Japan product in spite of the niche market they are in because the huge difference of mass-produced Chinese frames diluting the market has invariably pushed the value of Japanese quality down, irrespective of it’s superior quality.
ii) Accept a lower quality product at a lower price point to take a larger market share. This has been tough for the Japanese companies involved in this business, however it seems that the “Japanese demand higher quality” outside observation does not hold entirely true for this market (or that of other products after looking at the market major shift to “Made in China” goods). Those that capitalized on this fact were the first to enter the “three price eyeglass market” and took a huge profit from it. They adjusted their strategy to purchase offshore through OEMs in China rather than make them in Japan at the higher prices.
Another interesting effect of this change is that even in Europe, the “origin” of eyeglass manufacturers, manufacturing in Europe is no longer a profitable option. Europe did not invest in titanium, or niche manufacturing so when the Chinese learned from Japan how to work the material, Europe could no longer make anything that the Chinese couldn’t make at a fraction of the cost. My partner/customer in France who used to buy my materials can no longer buy them because all of the manufacturers have stopped making eyeglasses in France. They have had to completely change their strategy to survive and instead of manufacturing their own frames now, use their deep understanding of fashion and design to draw up product and have them made in China, which they order through companies like my associate, who have connections with manufacturers.
Changes in the industry structure that may improve a company’s competitive position
Since this process has been going on for the past several years, the structure has slowly been changing such that lower-end product (or “standard” we could now say because quality has definitely improved over the past several years) is manufactured in China through outsourcing to Chinese factories or offshoring by a company’s own factory overseas, while the higher-end product is kept in Japan, manufactured in the traditional way of outsourcing to the specialists that are proficient in the particular aspects. This has polarized the industry and created a very different market segment for the companies to target.
The companies that have chosen to remain in Japan are finding that as time has progressed, overseas clients as well are coming back to a higher-end product because they find that quality really does make a difference in profit margin. There is a new shift which is rewarding those niche-market players with an increase in orders for higher quality product.
Another change that may improve a company’s competitive position is to determine whether or not it can offer product in both ranges, outsourcing the lower/standard-end models for the clients requesting it, and keeping the higher end / special product “in house” (in country). This requires developing relations with other companies that have connections to such overseas manufacturers (as in France).
China does have a definite comparative advantage in terms of economies of scale. Initially when a company wanted to place an order with a Chinese company they could get a great price, but were required to order a ridiculous amount of product, like 10,000 frames! Nobody in Japan could do that so it was extremely difficult. Eventually the Chinese companies re-worked their production lines (just like any company around the world in order to get more orders) to meet the needs of the clients who could not order such large amounts. Over the past 5 years those numbers have dramatically decreased from tens of thousands, to thousands and now even to hundreds. This is putting a real pinch on the Japanese optical market as well as the other manufacturers around the world who could once get orders on “small quantity”. Now China has positioned themselves to take even THAT market. This change has most definitely improved the competitive AND comparative position of the Chinese manufacturers.
The “broker” system in the optical industry is very popular for several reasons: the Japanese companies have relied on importers/exporters so much that many of the small to mid-size players do not have the capacity or understanding for import/export to perform in-house. They also are notorious for lack of English skill. In addition to this, one more factor is their fear of “collecting payment from abroad”.
Because of these factors many companies are afraid to do outsourcing directly. They need the business so contract brokers to do the work / take the risk on their behalf. This of course drives up the price because brokers are known to take a high margin in this industry. I believe that a change in this mentality, a better understanding of the global industry and a better command of international business is imperative for manufacturers in Japan to take full advantage of the low-cost of acceptable Chinese product and combine it with their competitive advantage of maintaining their niche manufacturing in the high-quality market segment.
Having said all of that, the fact that China is now able to manufacture the majority of low to medium cost/quality eyeglass frames for Japan (for the world), this will allow the low profitability on these products (in Japan) to be bypassed and manufacturers can instead focus on higher profit margin regions of the market. In the end, the people that want cheap glasses can get them, and those that want expensive glasses can also get them. The total market surplus from this new style of business is positive and outweighs the decrease in producer surplus because the consumer surplus is greater than the loss of producer surplus. The market wins.
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