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The Flattening Forces Affecting the Japanese Optical Industry: How Netscape Changed the World

In his book The World Is Flat, A Brief History of the 21st Century, author and renowned New York Times editor Thomas Friedman talks about the “ten forces that are making the world flat” and revolutionizing the way we do business. in the last 15 years. What he envisions are forces that “level the playing field” and allow the entire world to work together and compete with each other in ways never before imagined.

Briefly they are as follows:

1) Fall of the Berlin Wall (11/9/1989) – it opened the east and the west and allowed the two cultures to meet.

2) Netscape’s IPO (1995/08/09) – which started the dot.com boom, which led to numerous companies raising funds for crazy projects, laying tons of fiber optic cables around the world, and basically laying the groundwork for incredibly cheap broadband connections to the world.

3) Workflow software – people could now send files to each other via e-mail, work on these files on their computers, and actually collaborate over long distances.

4) Open source – this movement has led to affordable, cheap, and free software that can be used on many different platforms over the Internet, developing servers for businesses to manage intranets and communicate more efficiently.

5) Outsourcing – this move is the result of companies trying to “cut the fat” by finding cheaper places to do work “outside the home”. Because Internet and broadband were cheap, companies could source cheaper labor overseas and re-import and re-market the finished product.

6) Offshoring – by moving all factories to countries where labor is cheap and the number of workers is large, it was possible to achieve “economies of scale” and drastically reduce production costs.

7) Supply Chain – it was possible to develop systems where all components for your product are sourced from all over the world, where you can get the best product at the cheapest price. Look at Dell Computers as a great example.

8) Insourcing – logistics emerged and transport companies re-engineered themselves to look at all parts of companies that have some connection with moving products from A to B. This includes inventory, computer repair, etc. can be.

9) In-forming – it is now possible to research anything on the Internet and learn more in detail than ever before, thanks to the huge amount of data stored in systems connected 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 could communicate freely anytime, anywhere, and in a multitude of portable vehicles. Free Internet Telephony (Skype) is an example.

Now I will talk about the Japanese optical industry and how these aligners are changing the face of doing business in this industry.

The most important aligners affecting the optical industry today

The biggest market for glasses is the USA, and from the point of view of the optical industry (and maybe others), America only wants “cheap” products. This desire to “lower the price” (at the expense of quality) drove a large amount of business to China. Manufacturers in China produce reasonable quality at dramatically lower prices than the rest of the world. Japan had the competitive advantage of being able to process titanium and titanium alloy materials, which were in high demand for glasses worldwide. Due to the “nickel-free” policy in Europe, many “standard metals” are being eliminated, and titanium, which is considered “nickel-free”, is becoming a hot commodity.

Japanese manufacturing is very high quality (the rest of the world can’t match the quality of the glasses manufacturers here) but also very expensive because in this small industry we don’t use production line manufacturing. Although everyone prefers Japanese quality, the price pushed them to China.

Many Japanese manufacturers went bankrupt, and those that survived either did so as they moved into niche production for a smaller market, or outsourced their production to companies in China. It was very difficult to appeal to China for the Japanese market, because although Friedman talks about “high-quality manufacturing in China”, I have to agree with the optical industry. The poor quality and manner of work coming out of Chinese factories is extremely frustrating for companies that outsource orders to companies there.

To cope with this, the companies that could afford it began to OFFSHORE their businesses, either by building their own factories in China and managing them themselves, or by working with an existing Chinese manufacturer but sending the Japanese to manage the production of their products. .

Outsourcing is not a new concept in optical manufacturing in Japan. There are very few actual eyeglass manufacturers that carry out the entire process from A to Z. The Japanese system is such that everyone uses small companies that specialize in one or more of the 200 steps required to make frames (soldering, plating, painting). , polishing, shaping, etc.). Part of the order goes out, is completed, and returns to the sending company for further processing. This is very common in the industry.

But doing the whole process in a foreign country was very difficult for this industry. Manufacturing has become necessary and essential to survival for frame manufacturers without a competitive advantage. They need a price advantage to survive.

Offshoring the entire process by setting up a new factory in a foreign country to compete in the optical industry is a very new way of thinking for eyewear manufacturers/suppliers to the global market.

How these forces affect/affect industrial strategy

This necessity has dramatically affected companies, forcing them to do one of two things:

i) Go deeper into the niche market to keep manufacturing in Japan at a higher cost but produce a product that is specialized and cannot be copied or produced in the mass market of Chinese manufacturing. These frames are much more expensive (in the retail market) than those made in China due to the eyeglass marking system in Japan. Manufacturers here have had to reduce their margins to sell Made in Japan, despite the existing niche market, because the huge margin of mass-produced Chinese frames that dilute the market has always undercut the value of Japanese quality, regardless of its superior quality.

ii) Accept lower quality product at lower price to get larger market share. This has been difficult for the Japanese companies involved, but it seems that the outside observation that “Japan demands higher quality” is not entirely true for this market (or other products after looking at the market). “China” goods). Taking this fact into account, those who were the first to enter the “three-price glasses market” made huge profits from it. Instead of manufacturing in Japan at a higher price, they adjusted their strategy to buy offshore through OEMs in China.

Another interesting effect of this change is that, even in Europe, it is no longer a viable option for eyewear manufacturers to manufacture “originating” in Europe. Europe did not invest in titanium or niche production, so when the Chinese learned how to process the material from Japan, Europe could no longer do anything the Chinese could not do at a fraction of the cost. My partner/customer in France who buys my materials can no longer buy them because all the manufacturers have stopped making glasses in France. They have had to completely change their strategy to survive and now instead of manufacturing their own frames, they use their deep understanding of fashion and design to develop products and manufacture them in China, ordering them through companies they have connections with, like my partner. with their producers.

Changes in the industry structure that can improve the company’s competitive position

As this process has been going on for the past few years, the structure is slowly changing so that the inferior product (or we can now say the quality has definitely improved over the past few years, because the “standard”) is made in China. Outsourcing to Chinese factories or offshoring by the company’s own factory overseas, while high-end products are kept in Japan and produced by specialists who know specific aspects through traditional outsourcing. This polarized the industry and created a very different market segment for companies to target.

Companies that choose to stay in Japan find that over time overseas customers also return to a high-quality product because they see that quality really makes a difference in profit margins. There is a new shift that rewards these niche market players with increased orders for higher quality products.

Another change that can improve a company’s competitive position is to determine whether it offers both product lines, outsourcing the lower/standard models to customers who demand it, and keeping the higher-end/specialty product “in-house” (in-country). This requires developing relationships with other companies that have relationships with foreign manufacturers (as in France).

China has a certain comparative advantage in terms of economies of scale. In the beginning, when a company wanted to order from a Chinese company, they could get a high price, but they were required to order a ridiculous amount of product, like 10,000 frames! Nobody could do that in Japan, so it was very difficult. Finally, Chinese companies have reworked their production lines (just like any other company in the world to get more orders) to meet the needs of customers who cannot place such large orders. In the last 5 years, these numbers have sharply decreased to tens of thousands, thousands, and now hundreds. This is putting a real squeeze on the Japanese optical market, as well as other manufacturers around the world who were once able to get “small” orders. Now China has decided to capture even THIS market. This change definitely improved the competitive and comparative position of Chinese manufacturers.

The “broker” system is very popular in the optical industry for several reasons: Japanese companies rely so heavily on importers/exporters that many small and medium-sized players lack the capacity and understanding to import/export. internal. They are also notorious for their lack of English skills. In addition, there is another factor of their fear of “collecting fees from abroad”.

Because of these factors, many companies are afraid to outsource directly. They need business, so have brokers do the work / take risks on their behalf. This of course increases the price as brokers are known to take high margins 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 essential for Japanese manufacturers to take full advantage of the low price of acceptable Chinese products and combine this with their competitive advantages. maintaining its niche production in the high quality market segment.

Having said all that, the fact that China can produce most of the low to medium price/quality eyeglass frames for Japan (for the world) will allow these products to bypass the low profitability (in Japan). and manufacturers can instead focus on higher profit margin regions of the market. In the end, those who want cheap glasses can buy them, and those who want expensive glasses can also buy them. The total market surplus from this new way of doing 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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