Ignore Silicon Valley, Japan is still innovating

Tokyo — Viewed from Silicon Valley, much of Japan’s industry looks like toast. Once-mighty Japanese consumer companies such as Sony, Canon and Panasonic are struggling to adapt to the digital age.

With the brutal reductionism favoured by his caste, one West Coast venture capitalist said corporate Japan faces an enormous challenge. “It’s like walking through a graveyard. Terrible demographics, no innovation, smacked around by the US, China and Korea.”

Viewed from Tokyo, which has long been more opulent than scruffy San Francisco, the outlook seems a lot less bleak. And in far more delicate terms, the champions of the Japanese model counter that Silicon Valley does not fully understand the significance of innovation. Which is more innovative: A ride-hailing app, which cleverly mashes up existing technologies, or an artificial spider silk that could revolutionise clothing?

Where the Silicon Valley view is probably correct is that Japanese companies will find it tough to compete in some of the areas they once dominated. The giant consumer platforms that are emerging — such as Alibaba, Amazon, Facebook and Google — already understand far more about people’s needs and desires than consumer products companies do and are merrily extracting profit along the value chain.

They know what consumers want to buy and when they want to buy it. Like many other consumer companies, slower-moving Japanese producers might increasingly be forced to shift from a business-to-consumer to a business-to-business model.

But there are at least two reasons to believe that corporate Japan can continue to prosper. First, in many respects, the Japanese economy remains highly innovative; there is certainly no shortage of intellectual capital. Since 1949, the country has won 23 Nobel Prizes, mostly in the natural sciences. Japanese companies have accounted for seven of the top 10 corporate patent holders over the past decade, according to the World Intellectual Property Organisation.

Kentaro Hyakuno, executive vice-president of Rakuten, who previously worked at Toyota, said that Japan’s weakness has been in commercialising these smart ideas. But he believes that is changing fast as established companies grasp the need to open up and a new generation of start-ups exploits intellectual capital more imaginatively.

“We have a problem letting the devil out of the box because the box is always locked,” he said. “But I think the environment is changing. This bottled-up innovation is opening up. There is huge potential in Japan.”

Rakuten, an online retailer which has been the first company to commercialise delivery drones, is itself a model of a new-style Japanese company. It is a fast-moving, outward-looking, English-speaking company that now makes most of its engineering hires from abroad.

Second, as David Edgerton, a historian of technology, has written in his counterintuitive book The Shock Of The Old, it is often misguided to obsess about “techno-nationalism”. The most innovative economies are not always the most successful. Historically, he writes, “It has not been the case that countries that innovate a lot, grow a lot.”

All too often we exaggerate the importance of new technologies while underestimating the value of the old. Many companies have prospered simply by transferring existing technologies to the developing world.

Take just one example. In 1965 the world produced roughly the same number of bicycles and cars each year — about 20 million — and you might have thought that the more modern technology would prevail. But by 2003, the annual output of bicycles had surged to 100 million, far outstripping car production at 42 million. As it happens, Japanese companies still dominate the manufacture of high-end bicycle parts.

Moreover, innovation can apply as much to business models as to the products that companies sell. Ikea, which has developed a formidably effective system for manufacturing and selling cheap wooden furniture around the globe, is a great model.

Naturally, Silicon Valley is obsessed with cutting-edge technology. But very few of the planet’s seven billion people live in their world. According to William Gibson, the science fiction writer: “The future is already here — it’s just not very evenly distributed.”

For most of the planet’s population, corrugated iron, condoms, elasticated plasters and air-conditioning systems still count as the most valuable inventions. And for the things people rely upon daily: Japanese quality is still prized. THE FINANCIAL TIMES