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No.2 ,Economy  Aug 02, 2010

STRIVING TO BE NUMBER ONE IN BATTERIES

ITOH MOTOSHIGE How does the current global business environment look to you?

HOMMA MITSURU The American economy has been extremely active of late. And even though unemployment remains high, pricey consumer products in cars and electronics have begun to move, in particular in May and June. If we don’t see a recurrence of the financial problems, I think the recovery will move forward steadily.

On the other hand, Europe is still not showing much sign of recovery following the Greek financial crisis. But solar power generation is doing well; this is probably due to the “feed-in tariffs” whereby privately generated power is purchased at a set price.

ITOH I heard that FITs had been a failure in Spain.

HOMMA Yes, it’s true that the system did collapse in Spain at one stage. Following this failure, countries such as Germany are moving ahead very cautiously. Having said that, Spain is now beginning to recover gradually. Actually, I think we can say that the demand for renewable energy and sustainable energy will be steady everywhere from now on. Meanwhile, though I’m not sure if the unsettled weather is the result of the Icelandic volcano eruption, air-conditioning equipment is suffering. Whichever way you look at it, the European business environment remains tough.

ITOH How is Asia doing?

HOMMA It did very well last year, with double-digit growth at our company, Sanyo Electric. Things have slowed down a little this year, but performance remains strong, and the April-June quarter showed signs of a recovery. I think there is still much potential to achieve market growth by providing the kind of product that is suited to the lifestyles of people in Asia. We’re now manufacturing both refrigerators and televisions locally rather than in Japan. The idea is to produce locally what is consumed locally, use local people for product planning, and even procure all the materials locally. This has been a major success since last year and is another reason for our strong performance in Asia.

ITOH What kind of consumer electronics products are hits in Asia?

HOMMA In Southeast Asia it’s televisions and refrigerators. In countries there, the majority of TVs are still CRT models, and the penetration rate for flat-panel displays, such as LCDs, remains very low. Even for refrigerators, the penetration rate in places like Indonesia is still only 30 to 40 percent. People are keen to buy good products, but those made in Japan are too expensive and beyond their budget. That’s where changing marketing techniques by moving to local production makes it possible to grab the market for people who are trading up.

ITOH I hear that there are concerns that Japanese companies cannot keep up with their rivals in China and other Asian countries when it comes to growth speed. For example, Honda saw a 22 percent increase in Chinese sales last year, but the market itself grew by almost 40 percent, so that it lost market share. The same goes for Toyota. And in terms of actual units sold, the figures for Korea’s Hyundai are higher than for Toyota, Nissan, or Honda. What do you think about all this?

HOMMA In China’s case for example, the speed of decision making in terms of investment is incredibly fast. In addition, the government lends its support to fund raising and takes initiatives. It’s natural for their growth to be faster than that of Japanese companies. Japan’s integrated electronics manufacturers in particular are involved in a multitude of businesses. The more businesses you are in, the more important it is to make well-balanced investment decisions, which in turn results in a slower decision-making process.

In the case of Korean manufacturers, the industry saw a restructuring following the financial crisis of 1997/98. The end result was Samsung and LG for consumer electronics and Hyundai for cars. It seems that, consequently, they were able to engage in very dynamic investment decisions and fund raising. In Taiwan’s case also, specialized manufacturers are in the majority, so they have the power to raise funds dynamically and globally. I think that Japanese manufacturers have been overtaken on all fronts as a result of this difference in corporate culture.

The Battery Market: Poised for Major Growth

ITOH It looks like the battery market in particular will grow into a globally competitive market in the future. What kind of development do you foresee?

HOMMA It seems to me that batteries are currently at a turning point. Up until now, batteries have been a core component for consumer electronics products like laptop computers, mobile telephones, digital cameras, and electric tools. But that market represents only 900 billion yen globally. This is tiny by comparison with autos or home electronics products.

But now, sales of info-communications products such as smart phones and the iPad are growing rapidly. Even though there will probably be an ongoing large-scale price collapse, the market looks set to reach 1.5 trillion yen by 2020.

There are two additional points that contribute to the great expectations for batteries. The first is the movement that’s getting underway to build a low-carbon-footprint society on a global scale, in conjunction with dealing with environmental issues. In particular, the momentum toward electric cars is picking up substantially. Sanyo Electric has believed since 1997 that the day of the electric car would inevitably come, and we’ve been investing in development ever since. Even if one makes a conservative estimate, this market is likely to grow to between 1 and 1.1 trillion yen by 2020.

ITOH That’s on the same scale as batteries for consumer electronics.

HOMMA The second point is the move toward smart grids. The market is just getting underway for large-scale storage batteries as devices to optimize power generated by solar and wind energy and distribute it in a stable fashion.

There is no urgency about this in Japan, since we have an extremely stable supply of electric power. But in the United States, the supply is very unstable, so demand is developing for microgrids that work in conjunction with small-scale power generating facilities. California is working on laws to require power companies to put in place power storage facilities that conform to set standards; the state also provides subsidies for homes where solar power generation or wind power generation facilities are installed. The same trend is being seen in some other American states as well as in Canada, Singapore, and Germany. And in view of the trends in use of electric power, China is eventually likely to become the biggest market. This market looks set to grow rapidly and will probably be worth at least 2 to 3 trillion yen by 2020.

In short, once new markets in consumer electronics, environment-friendly cars, and smart grids take shape, batteries will go from being worth 900 billion yen in business now to a minimum of 4.5 to 5.0 trillion yen.

However, that scenario will lead to problems relating to rare metals and other raw materials. The presence of lithium-ion batteries is particularly vital in creating a low-carbon-footprint society. Since rare metals are also natural resources, there are limits to their availability. Looking at it from a global perspective, there is a need for governments to consider how to replenish resources.

ITOH In which of the three fields does Sanyo consider itself particularly strong?

HOMMA We have the top market share worldwide in consumer-use batteries.

For cars, we have chosen a different approach from other manufacturers that have tied up with particular car makers: We’re open to doing business with all manufacturers, and we’re aiming for a minimum share of 30 to 40 percent globally by 2020. To achieve this, we need to start by consolidating our relationship with major car manufacturers in Japan as well as Europe and North America, and we’re planning to offer them our help when they’re looking to establish production facilities or a market presence in China.

At the same time, we will lock squarely with a number of Chinese manufacturers. It’s probable that there will be a move in the future toward standardizing batteries among car manufacturers. European and North American manufacturers are working toward a standardization that would include Chinese manufacturers. That is where Sanyo Electric becomes involved and will look to take the initiative in standardization.

ITOH Is China likely to be the main location for this in the future?

HOMMA That’s likely to happen eventually. But right now it’s Europe that is moving forward rapidly in terms of environment-friendly cars. The situation has really evolved over the past three years. Carbon dioxide emission levels of up to about 180 grams per kilometer were accepted in the past in Europe, but the goal is to bring this down to 120 grams by 2012, with penalties being considered for manufacturers and consumers failing to meet the standard. This is going to be a major incentive, and demand for eco cars will continue to rise.

It is likely that manufacturers will look to develop demand first in Japan, Europe, and America and then turn to China and India. If we lag in doing this, we will lose out in the fight for global leadership. That’s why I think we need to move first. And one must consider that, in the case of China, there is always the fear of barriers suddenly being thrown up, which makes it all the more important to move in early.

Maintaining a Technological Edge

ITOH I chaired the Industrial Competitiveness Committee of METI [Ministry of Economy, Trade, and Industry]’s Industrial Structure Council, and the key line that kept coming up for discussion there was that “Japan wins on technology and loses in business.” That is what happened in the past with liquid crystals and semiconductors, with companies from Korea and Taiwan, such as Samsung, gaining victory one after the other. In the case of rechargeable batteries also, companies like Samsung are gearing up for battle, so how are you planning to fight them off?

HOMMA In the end, it comes down to technological capability. If we get left behind at that stage, we will already have lost.

ITOH How will you hang on to that technological ability? Both in the cases of liquid crystals and semiconductors, Japan had an overwhelming technological superiority over Korea in the early stages.

HOMMA In the case of semiconductors, if they take each step logically, anyone can move up to the next stage. But batteries involve chemical reactions, and it’s not that simple to create something new. While learning from the errors of the past, you need to maintain an even match between manufacturing technology and battery technology. This is extremely difficult to do. Our rechargeable battery division has accumulated experience dating back to 1946. People often talk of “black boxes” of production technology. And our production technology truly is outstanding.

The other thing that I keep pounding into our battery division is the need to master the use of Chinese materials. At the moment, some of the Chinese materials are not quite on the level of Japanese ones in terms of performance, but both Chinese and Korean manufacturers are making the best use of them. However good your technology may be, you won’t make it in the market if your costs are not adequately controlled. What’s important is to put to use outstanding technology within the same cost structure. This makes it possible to reach the same levels as with materials from Japan. I think that one of the keys to success lies in improving production technology at the same time as improving battery technology.

ITOH So you can use technology to make up for the fact that Chinese materials are inferior in some ways to Japanese ones?

HOMMA Even without that, labor costs are cheaper in Korea than in Japan, and then half that in China. The gap in fixed costs even between Japan and Korea is 20 percent. The question is to what extent can that gap in fixed costs be absorbed through value-added production technology, thereby reducing costs. That’s the third issue. Korea is beginning to put its own production technology in place. So we need to battle them on level ground.

The fourth thing that’s needed is quick decision making in terms of investments, with funds being raised in a timely manner. I feel that Japan lacks the dynamism of Korea and China in looking at various markets.

And if I were to cite a fifth point, it would be that the battery business is not just another components business; it seems to me that it merits consideration by the government as a key national business. Even though it is expected to reach a scale of 5 trillion yen, it has not been included in the national growth strategy, whether for consumer-use or automobile-use or large-scale power storage. I think there is a need for governmental support, as is the case in Korea and China. Putting in place a proper social infrastructure that includes the recycling of scarce resources is a major support measure. Without that, we can’t hope to battle Korean and Chinese manufacturers on even terms.

Japan’s Strength Lies in the Value Chain

ITOH Korean companies are now aggressively putting up factories in China. Will it not be difficult to compete with them by doing the same thing as them?

HOMMA You are right in that we cannot win just by doing that. I cannot stress enough the importance of technological capability. Korean manufacturers are already approaching the level of the Japanese for lithium-ion batteries. We have to stay one step, even two steps ahead of them.

ITOH What about solar-generated power?

HOMMA The reason why Japan is playing second fiddle to China and Europe is that they have specialized manufacturers, and these firms are receiving help from their governments. It is a waste of time to try and win out over them on price by reducing the cost of materials. What is important is to create a value chain by building a power management system that includes solar power generation and storage and adding controllers, so as to win with this total package.

ITOH What sort of thing would that be in concrete terms?

HOMMA We are currently building a factory for automotive-use lithium-ion batteries in the city of Kasai, in Hyōgo Prefecture, and are putting in the Sanyo Electric “Smart Energy System.” This is a system that combines solar cells and large-scale storage batteries for efficient, no-waste energy. We can expect to save energy and make optimum use of energy through the efficient control of consumption in the factory as a whole by storing both solar power and low-cost night-rate electric power.

ITOH Is that where the “black box” technology comes into play?

HOMMA Yes, there is a lot of that. Controlling the battery is in itself entirely a black box matter. We have installed massive batteries and have to thoroughly inspect the temperature, state of charge, and resistance of each one of them, so that we have control equipment that’s even more high-performance than systems for car batteries. The ability to put together such value chains is a strong point for Japanese electronics manufacturers. Even when they offer value-added services, the Chinese and Europeans don’t go beyond installation and maintenance.

ITOH The ultimate needs of users are not just low prices for panels and batteries but an energy environment that offers greater efficiency, is more environment-friendly, and is also reliable. Japan’s potential victory lies in delving into this, doesn’t it? But isn’t Samsung also thinking along the same lines?

HOMMA There’s no doubt that companies like Samsung will quickly move toward putting in place value chains. However, even the Korean manufacturers are not yet in a position to supply their customers easily with the most appropriate solar batteries for the scale of the facility and integrate it with various other equipment to create a system. We need to already be thinking of the next step up by the time they have caught up with us.

ITOH We keep hearing nowadays that even IT companies like Google are aggressively moving into smart grids. There is a possibility that, rather than the closed-value-chain business model that you were talking about just now, there will possibly be a move toward a more open model. Is there not the fear that, with Korean and Chinese manufacturers supplying components, there will be competition between “All Japan” and a world alliance, and we will lose after all?

HOMMA But, as I mentioned earlier, we have a number of black boxes on our side when it comes to operating electric power systems, and I think that we can more than stand up to them by digging deep into these. It will, however, be important to anticipate future trends and decide which companies to work with. The fact is that if you don’t have the technological lead, nobody will buy from you. Looking at Japan in recent times, I think that we have totally lost our sense of purpose in terms of technology and business. I feel that this is also connected to being too lax in our standards for deciding on investments. Japan will be left behind unless we regain a sense of urgency and take the lead aggressively. For batteries in particular, we must be global leaders; if we’re number two, we can’t possibly make profits and survive in the face of global competition.

Translated from “Denchi wa sekai ichi de nakereba mōkaranai,” Voice, August 2010, pp. 62-69. (Courtesy of PHP Institute) [August 2010]

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