It is said that if you put a frog in a pot of water on top of a stove, turning the heat up fast will make the frog jump out … but if you turn the heat up very slowly, the frog will cook to death.
Japanese electronics manufacturers remind me of a bunch of frogs that are cuddled in a pot in the kitchen of two competing chefs — Apple (NASDAQ:AAPL) and Samsung (PINK:SSNLF) — and have gotten too fat to jump.
Some of them might not survive.
Data compiled by The Economist shows that Sharp (PINK:SHCAY), Panasonic (NYSE:PC) and Sony (NYSE:SNE) “have lost more in the past five years than they have made profits in the past two decades.” The cumulative loss for the most recent five-year period is 3.7 trillion yen ($45.6 billion at 81 USDJPY), while the cumulative profits over the past 20 years have been 3.1 trillion yen ($38.3 billion).
I kept staring at the chart in The Economist: How do you lose more money in five years than you make in 20?
The Apple (and Samsung) Effect
First it was Research In Motion (NASDAQ:RIMM) that felt the blow, then it was Nokia (NYSE:NOK). Now the Apple effect — after bringing leading companies in Canada and Finland to their knees — had gotten all the way to Japan.
It is ironic that the Japanese, who took the whole U.S. TV industry out of business a generation ago, are now being given the same treatment by a U.S.-based computer company, which itself almost went belly up in the mid-1990s.
I can’t wait to see what that rumored soon-to-be-coming Apple TV will look like.
Sony, Panasonic and Sharp were slow to realize that Apple and Samsung were turning up the heat on many fronts. Apple was first with the iPod, then the iPhone, then the iPad, which no one seems to be able to match in user experience and pure “cool” feel. Samsung did a lot with cellphones, TVs and all kinds of electronics in the past 10 years. Then Samsung realized how important the iPhone was and went hard after the smartphone market, where even Apple is feeling a “bite.”
According to Gartner, Google‘s (NASDAQ:GOOG) Android OS accounted for 72.4% of the market for smartphone operating systems sold in 3Q 2012, up from 52.5% a year ago. Samsung is the undisputed leader in Android smartphones, with 55 million total units sold. Apple sold more than 23.5 million phones during the same period, up from 17.3 million a year ago, but it saw its operating system market share drop from 15% in 2011 to 13.9% at last count.
One should be less worried about the drop in Apple’s market share, though, and more worried about those other Android guys, which include the disappearing Japanese electronics makers, as almost everyone but Samsung is losing money in Android phones.
I have a Samsung Galaxy S3, which I have greatly “improved” with the latest Apple EarPods, even though I don’t think it coincidental that neither the mike nor the volume controls are compatible. It is the screen that did it for me in this case, and the fact that at the time, the iPhone 4S had no 4G LTE capability.
Other than James Bond — who has his movies produced by Sony — have you heard of anyone craving a Japanese-made smartphone?
I also own an iPad 3. Samsung has not made great progress with tablets yet, but I think they will have some success. This is because as a user of a Samsung Galaxy S3, I can say the company has made a spectacular device that is both user-friendly and has exceptionally high quality. If Samsung can do that with a phone and compete effectively with the iPhone, it can build a good tablet.
I tried to bait-and-switch my 8-year-old daughter — who was commandeering my iPad 3 at every possible occasion — into a cheaper alternative.
“The Kindle Fire is yours,” I say. “Take it and leave my iPad alone.”
“The Kindle is not the same thing as an iPad,” she replies. “And the games are not good.”
Amazon‘s (NASDAQ:AMZN) Jeff Bezos surely realizes that in addition to the ease-of-use of the iPad iOS and the superior quality, it is the App Store that has made the iPad so great. The Amazon Appstore is different than Google Play, and the Kindle Fire version of Android is not as user-friendly as Samsung’s version of Android.
My daughter has effectively made the diplomacy that Santa has to leave at least an iPad Mini under the Christmas tree this year, otherwise Santa will have to become a persona non grata for an indefinite period of time.
I looked up “tablets” on Amazon and there were all kinds — Android and Windows 8 — some of them made by Sony and other Japanese brands. But they were not any different than the sea of tablets that also ran Android and Win8. There was absolutely nothing to distinguish them — they were commodities.
In the case of smartphones and tablets, the Japanese appear to have lost a major battle for dominance in the entertainment of consumers by getting too comfortable with their long-time leadership in electronics, which they appear to have taken for granted much in the same way Nokia and Research In Motion did.
It is do-or-die time for the electronics industry in Japan. Just like Polaroid and Eastman Kodak faded into the sunset, Sharp and Panasonic might do the same, as they have no content arms like Sony.
I have no desire for their hammered stocks; they have no earnings streams to discount.
Ivan Martchev is a research consultant with institutional money manager Navellier & Associates. The opinions expressed are his own. Navellier & Associates holds positions in Apple for its clients. This is neither a recommendation to buy nor sell the stocks mentioned in this article. Investors should consult their financial adviser prior to making any decision to buy or sell the aforementioned securities. Investing in non-U.S. securities including ADRs involves significant risks, such as fluctuation of exchange rates, that may have adverse effects on the value of the security. Securities of some foreign companies may be less liquid and prices more volatile. Information regarding securities of non-U.S. issuers may be limited.