Online ISSN 1347-4456 Print ISSN 1347-4464

ABAS: Annals ofBusiness Administrative
ScienceVol. 4, No. 3, July 2005

Koichi OGAWA
Junjiro SHINTAKU
Tetsuo YOSHIMOTO

21

Architecture-based Advantage of Firms and Nations:
New Global Alliance between Japan and Catch-up Countries

http://www.gbrc.jp© 2005 Global Business Research Center

ABAS: Annals of Business Administrative ScienceVol. 4, No. 3, July 2005

CHIEF EDITOR

Junjiro Shintaku

University of TokyoEDITORIAL BOARD

Makoto Abe
University of Tokyo
Takahiro Fujimoto University of Tokyo
Makoto Kasuya
University of Tokyo
Hotaka Katahira
University of Tokyo
Nobuo Takahashi University of Tokyo
Technical Editor: Maki Nishida, Global Business Research Center

ABAS: Annals of Business Administrative Science is published quarterly in January,
April, July, and October, by Global Business Research Center, Hongo, Bunkyo-ku, Tokyo,
JAPAN. http://www.gbrc.jp

Annals of Business Administrative Science Vol. 4, No. 3 (July 2005)

Architecture-based Advantage of Firms and Nations:
New Global Alliance between Japan andCatch-up Countries
Koichi OGAWA
Manufacturing Management Research Center, University of Tokyo
E-mail: ogawa@mmrc.e.u-tokyo.ac.jp

Junjiro SHINTAKU
Graduate School of Economics, University of Tokyo
E-mail: shintaku@e.u-tokyo.ac.jp

Tetsuo YOSHIMOTO
Manufacturing Management Research Center, University of Tokyo
E-mail: yoshimoto@mmrc.e.u-tokyo.ac.jp

Abstract: Competitive advantage of Japanese firms and of catch-up countries’ firms
has been discussed through the case study on optical storage products. The
dynamic change of product architecture from integral to modular mode has brought
out the latent potential of catch-up countries. The more modular the architecture is,the larger the market shares of catch-up countries’ firms and the smaller the market
share of Japanese firms are. The analysis shows that the competitive
advantage/disadvantage of the catch-up countries’ firms depends not on the direct
labor cost but on the overhead cost, in which the patent royalty accounts for the most
portions. Based on the contrastive position in the product architecture and in thepatent royalty, authors propose that Japan and the catch-up countries promote thearchitecture-based global alliance for symbiotic co-prosperity, in which the power ofintegral architecture and of modular architecture are combined into one joint venturecompany.
Keywords: competitive advantage, comparative advantage, product architecture,technology diffusion, catch-up country, Chinese firm, global alliance, patent royalty,
intellectual property, optical storage, CD, DVD.
21

Ogawa-Shintaku-Yoshimoto

1. Introduction

to the surface as a firm in a catch-up country

The aim of this paper is to analyze empirically the

becomes conspicuous by competitive products in thecompetitive advantage of Japanese firms and of

market.
In this paper, the authors introduce first thecatch-up countries’ firms, and to propose a new
global alliance model between Japan and thearchitecture-based

analysisof

opticalstoragecatch-up countries. The product architecture theory

products and then take the Chinese DVD player as

first appeared in US and Japan as a powerful tool toan example to compare empirically the competitive

analyze the competitive advantage of firms and has

advantage of Japanese firms and the catch-up

even been applyed to the comparative advantage ofcountries’ firms. Based on comparative analysis, thenations. US firms have been successful in theauthors propose a new type of global alliance formodular architecture products such as computers andsymbiotic co-prosperity model between Japan anddigital networks, while Japanese firms have been

the catch-up countries.

successful in the integral architecture products suchas automobiles, key parts/components, and key

2. What is Product Architecturematerials. According to the industry analysis by

Product architecture is a basic design concept for the

Fujimoto and Shintaku (2005), Chinese firms haveproduct and can be classified into two basic types:

been and will continue to be very competitive in themodular architecture and integral architecture. A

modular products.

distinctive feature of the modular architecture

The dynamic change of product architecture

includes “open design rule”, “open standard”, “lowfrom integral to modular mode has been accelerated

barriers to entry”, and “less interdependency amongby the innovation of micro-processor and microcode

components”. The typical examples of modular

technology, and this dynamic change has brought out

products are bicycle, PC, packaged software, cellular

the latent power of catch-up countries. However,phone, Dynamic-RAM, CD-ROM, VCD, and DVD

they faced the following three problems: (1) heavy

player. A distinctive feature of the integral

legal claims for patent royalty from advanced

architecture includes “closed design rule”, “closed orcountries, (2) many products were less value-added

de-fact standard”, “high barriers to entry”, andproducts which are made of costly key parts“strong interdependency among components”, which

imported from advanced countries, and (3) labor cost

are represented by passenger car, backup tape drive,

is not a key factor of the competitive advantage.

DVD-RAM, CPU, optical pickup, magnetic head,

These are typical trade conflicts between catch-up

printer head and so on. From the management aspect,

countries and developed countries which we can see

it can also be defined that the modular architecture ismany examples in our history, and will always comea very powerful design concept to make a profit by22

Architecture-based Advantage of Firms and Nations
Figure 1. Smile-curve Analysis of Product Position

Added Value

IntegralIntegralJapanese Firms

Movie Contents(US & EU Firms)

Market Share of Japanese Firm
-Patent/License >80%
-Key Module/Material> 80%-Manufacturing Equipment>70%

Branded Media/Recorder(Japanese Firms)

In DVD market-OPU>95%-LD/Lens>99%-Injection Molding>70%-Polycarbonate>70%-Dye material > 80%

Korea+ China/Taiwan Firms
Modular

OEM Drive/Player（Korean &Chinese/Taiwanese Firms）

Assembling/
Manufacturing

Source: Interview with the industry, 2004.

Figure 2. Architecture-based Position of DVD Drive

Integral

Modular
DVD Player DVD-ROM

DVD+R/RW

DVD-R/RW

DVD±Ｒ／ＲＷ

DVD-RAM

Major Player Change (as of 4Q/2004)
Japanese to

Chinese firms

Japanese to
Taiwanese/Korean firms

Japanese firms havebeen top players

Market Growth(ＤＶＤ±Ｒ/ＲＷ）

1998
DVD Player
DVD-ROM

ＳｕｐｅｒＭｕｌｔｉ（DVD-R/RW)（±R/RW)+RAM
DVD-RAM（ＤＶＤ＋Ｒ／ＲＷ）

Time since market opening

cost reduction and volume production in a global

know-how within the product.

environment, while the integral architecture concept

Figure 1 shows a “smile curve” analysis of thewill create a high gross margin because theDVD industry: Japanese firms have been very

philosophy of the design is to restrict many of thecompetitive in the domain of key materials, key parts,

technologies,

and branded products, while Chinese/Taiwanesetheintellectual

properties,

and23

Ogawa-Shintaku-Yoshimoto
low-cost

from the integral to the modular mode. The

assemble/manufacturing and non-branded OEM

digital-servo technology of CD-ROM drive and theand/or ODM products. Among various kinds ofwrite strategy of CD-R drive are typical examples of

DVD drives, Chinese firms have very large market

such innovation. The chipset of the digital servo andshare in DVD video player because it is a typical

the software package of the write strategy have been

modular product, while Japanese firms have large

available in the Asian-Pacific market since 1994 andmarket share in the DVD-RAM and the super-multi1998 respectively. These two technologies have

DVD drive as is shown in Figure 2 because it is aplayed critical roles for the modularization andcomparatively integral product. According to theprovided new business opportunity for catch-up

authors’ analysis on the DVD industry, it has beenfirms, such as Samsung and LG in Korea, and BenQ

concluded that the more modular the architecture is,and Lite-On in Taiwan in the mid-1990s. They could

the larger the market share of Chinese/Taiwanese

go into the CD-ROM/CD-R drive business because

firms is and the smaller the market share of Japanese

they can buy the modularized key components likefirms is.

software package and/or LSI chipset that contain the

firms

are

very

stronginsophisticated integral technologies inside.

3.

Modular

DrivesBecause the modularization of the drive

Market Growth and New Entrants

technology reduced interdependency between key

from Catch-up Countries

technologies/key parts and most of them became

The product architecture of CD and DVD drive wasavailable in the market, even catch-up firms who did

initially integral mode when they first appeared in

not have deep background of optical storage

the market, and then changed to modular mode in atechnology, could manufacture CD-ROM/CD-R

process

volumedrives in the mid-1990s. This is one of the major

production (Ogawa, 2005). Engineers should havereasons why Korean and Chinese/Taiwanese firms

integral technological knowledge such as focusing

have quickly become top players in the world-wide

and tracking of optical pickup and reading/writing a

CD and DVD market in a few years. It is said thatvariety of media in order to develop the new concept

more than 50 firms in Taiwan, Hong Kong, andof the products. These integral technologies are

Korea had entered into CD-ROM business since

based1994 and had developed a huge market in the PCofonArchitecture

marketlongdevelopment

term

R&D

and

investment

andenvironment as is shown in Figure 3.

collaboration among experienced engineers.

The radical effect of modularization in the PC

According to our investigation, the innovation
micro-code

industry of US in the 1980s, has also been observed

technology has radically changed the architecturein the CD and DVD industry of Asian-Pacific arenaofmicro-processor

(MPU)

and

24

Architecture-based Advantage of Firms and Nations
Figure 3. Market Expansion after Product-architecture Change in Computer
Market Environment
N ew 5 0+ firm s in
A sian-P acific A rena

1 2 0
Volume Shipment (million)

1 0 0
8 0

C D -R O M D rive
D igital Servoin 1 99 4

6 0

CD -R D rive
W rite Strategy
in 199 8

4 0
2 0
0

1 s t

3 rd

5 th

7 th

9 th

C D -R O M :19 91 , 0.8 8 m illion un it/year
C D -R ;19 96 , 0.9 2 m illion un it/year

Sources: TSR (2004) and authors’ interview with Giga-Stream Inc. and optical storage
industry, 2004.

Figure 4. Effect of Product-architecture Change on Market Share by Country

120

Ｉｎｔｅｇｒａｌ Ｍｏｄｅ

Modular Mode

100
Market Share (%)

Japanese +EU’s Firms

80
CD-ROM Drive60
CD-R/RW Drive

40
20

China/Taiwan + Korean Firms

0
91/'95

92/'96

93/'97

94/'98

95/'9996/'0097/'01

98/'0299/'03

Product-architecture change of
CD-R/RW by Write Strategy in 1998
CD-ROM by Digital Servo in 1994

Source: Authors’ interview with Giga-Stream and optical storage industry, 2004.

in the mid-1990s. The change of product architecture

countries and has grown into a world-wide market

to the modular mode has brought out the latent

up to over 800 million units of CD and DVD drive

power of the catch-up countries. The modular

per year and 30 billion pieces of CD and DVD media

architecture was very powerful to popularize the CD

per year in 2004. We have observed almost the sameand DVD product not only in US/EU/Japan but also

phenomenon in the PC industry of the 1980s and thein BRICs’ (Brazil, Russia, India, and China)

1990s.
25

Ogawa-Shintaku-Yoshimoto
Compaq and Dell in the late-1980s.

The architecture change from the integral to themodular mode has accelerated the technology

The transition of the market share in CD-ROM

diffusion from front-runner countries to catch-up

is almost the same with CD-R/RW. The similar trend

countries. Figure 4 shows the sudden drop of market

has also been observed in DVD player, DVD-ROM

share of Japanese and European firms. Whiledrive, and writable DVD drive. The trend will be thekeeping the product architecture at the integral mode,same with HD DVD drive of post DVD. This is theor until the time when the digital servo chipset andpower of the product architecture change which has

write strategy software became available in theaccelerated

Asian-Pacific market, the share of CD-ROM andwithdraw from the market in most optical storage

CD-R drive by the Japanese and European firms

products in the past 20 years. The relation between

have exceeded 90%. But the market share suddenly

market growth and dynamic change of the

dropped after the architecture changed into modular

architecture is schematically summarized in Figure 5.

mode as is shown in Figure 4. It is interesting to

According to the authors’ investigation andmention that this relation between front runner firms

analysis, the number of Japanese scientists/engineers

and catch-up firms is the same with the relation

who have contributed to the world authorized major

between IBM and clone PC manufacturers such as

international symposium on optical memory called

JapaneseandEuropeanfirms

Figure 5. Dynamic Change of Product Architecture and Contribution to Market GrowthIntegral
CD-ROM

Product Architecture
Modular

CD-R/RW
DVD
Video/ROM

Post DVD
Writable
DVD

1998
1994

Write
Strategy

DigitalServo
Year since Shipment/Accumulated Volume

Market Growth

7˜10%Overhead ofMarket-entry Firm

13˜15%
20˜35%
Year since Shipment

26

toArchitecture-based Advantage of Firms and Nations
ISOM, has been about ten times larger than that of4.

Sustainability

Korean and Taiwanese. But the market share ofAdvantage in Integral Architecture

actual products of Japanese firms in the PC market

The optical pickup (OPU) is a core component of theenvironment has decreased to 22-23%, while the

CD and DVD drive. The role of OPU is similar tomarket share of Korean and Taiwanese firms

Intel CPU’s in PCs. The product architecture of OPU

together has rapidly increased up to 77-78% since

first appeared as integral mode, and remains the

1994. The authors believe that it is very importantsame integral mode even today. The integral

for Japanese firms to understand the reason whyarchitecture has also

many of the Japanese firms who have developed

manufacturers to maintain over 70% market share as

almost all of the technologies, the products, theis shown in Figure 6. The same trend has also beeninternational standard, the new applications, andobservedeven most of the patents, have been forced to

manufacturing equipments in DVD products (Seewithdraw from the market when the architecture

Figure 1). Even among the DVD drive families,changes into the modular mode.

Japanese firms have a very large market share in the

in

many

of

Competitive

enabled Japanese OPU

keyparts/materials

andslim type DVD drive and the super-multi DVD drive,
because these are comparatively integral products(See Figure 2). It can be concluded that the more

Figure 6. Market Share of Optical Pick-up by Country (year 2004)
JPN: 93%
Korea:
6.5%
Taiwan 0.5%

100
90

JPN:
67%
Korea: 19%
China; 10%
Taiwan: 4%

80
60

30
20
10
0

Korea
+Taiwanfor PC
PCmarket

270Million

K+C+T

Total

40

Japan

Japan
In Consumer Market

50

Japan
In Computer Market

Market share(%)

70

JPN: 75%
Korea: 13%
China; 7%
Taiwan: 5%

Korea+China+Taiwan

for Consumer
A/V market

550Million

Total
820Million

Sources: TSR (2004) and interviews with Nomura Research Institute Ltd. (NRI) and OPU
suppliers.

27

Ogawa-Shintaku-Yoshimoto
Table 1. Share of Japanese Firms in Optical Storage Industry in 2003

Drive*

Optical Pickup

CD-ROM

5.25%(54.49%)

92.50%

CD-RW

5.64%(40.53%)

94.00%

DVD-ROM

10.27%(78.13%)

98.20%

DVD-W

67.60%(87.17%)

82.80%

Note*: The numbers in parentheses include share of joint venture companies
between Japanese firms and Korean and Taiwanese firms.
Sources: TSR (2004) and field survey by authors.

integral, the larger the market share of JapaneseEach country has a unique and strong position

firms, and the smaller the market share ofin their product architecture. Their position will not

Chinese/Taiwanese firms (See Table 1).

change quickly because it originates in the businessculture and the characteristics of each nation. Based

5. Architecture-based Global Allianceon their different unique advantages in the productin Asian-Pacific Arenaarchitecture, Hitachi of Japan and LG Electronics ofFigure 7 summarizes the product architecture

Korea have started a new joint venture company

position of Asian countries in the optical storage

called HLDS in 2000 (Ogawa, 2003; Yoshimoto,industry. It should be emphasized that Japanese firms

Shintaku & Ogawa, 2005). Hitachi takes charge of

which are positioned in the domain of integral

the integral technology and products, while LG isarchitecture products and components cannot exist in

responsible for the modular technology and products.

the

of

In other words, the power of the integral architecture

Chinese/Taiwanese and Korean firms. On the otherand the power of the modular architecture have been

hand, most of the modular products cannot be

combined into one company (See Figure 8). Since

manufactured nor shipped to the market without the2003, only three years after the company started,

integral components from Japanese firms. In other

HLDS has been number one CD/DVD drive

words, many firms of the optical storage industry in

manufacturer in the world and has grown into a very

Asian-Pacific arena have been and will continue toprofitable company.

marketwithout

modularproducts

be in symbiotic business relationship.
28

Architecture-based Advantage of Firms and Nations
Figure 7. Position of China/Taiwan, Korea and Japan in Product Architectureof CD/DVD Families

ModularIntegral

India
VCD ,Audio-CD
CD-R media, DVD Media (OEM)CD-ROM, DVD-Player
Read Only Pickup
Single DVD Recorder
CD-R/RW Drive ,Digital ChipSet
Rec-DVD Drive

Super-multi Drive
Read-only Optical Pickup
HDD DVD RecorderJapan Brand Media
Slim Drives
Analogue Chipset
Writable- Optical Pickup
MiniDisc, MO
Motor, Micro-optics
Laser, Micro-Lens, OEIC

China

Taiwan
Korea

Positionof JapanFigure 8. Hitachi-LG: Global Vertical Integration Model- - C o m b in e d p o w e r o f m o d u la r ＆ in t e g r a l a r c h it e c t u r e in t o H L D S -M o d u la rA r c h it e c t u r e
P ro d u cts

C D - R O M D r iv e
C D - R / R W , C o m b o D r iv e
D V D - P la y e r
D V D R e co rd er
D V D ± R / R W D r iv e

L G E le c .G r o u p( In v e s t m e n t : 4 9 % )HLDS

D V D S u p e r - m u lt i D r iv e
S lim - t y p e D r iv e

P a t e n t L ic e n s e

In t e g r a l
A r c h it e c t u r e
P ro d u cts

B r a n d e d M e d ia
C h ip S e t
O PU, Laser
N e x t G e n e r a t io n P r o d u c t s

H it a c h i G r o u p(5 1 % )F u t u r e T e c h n o lo g y

6.

Competitive

Advantage

andperformance have been restricted to the niche market

Vulnerability of Chinese Firms

domain. Japanese firms have first developed most of

Figure 9 shows the market growth and the rapid

the products and were the top players while theprogress of Chinese firms in the world-wide DVD

product architecture was the integral mode. It was aplayer market. The market growth has been strongly

profitable business but the market size was very

dependant on the sales price (See Note 1). In othersmall, because the sales price was very high.

words, the higher price products with better

The integral mode of the DVD player has
29

Ogawa-Shintaku-Yoshimoto
Figure 9. Rapid Progress of Chinese Firms in DVD Player Market
160

Shipment (millions of units)

140
120

Worl d-w ide
Market100

C hinese F irms

80
60
40
20
0
９７
Market Share

９８

９９

００

０１

０２

０３

1998

1999

2000

2001

2002

2003

Chinese Firms
Japanese Firms

95%

90%

０４
2004

０５
2005
(forecast)

10%

25%

40%

40%

45%

49%

75%

65%

45%

42%

31%

22%

Note: Chinese firms defined here includes joint venture companies between Chineseand Taiwanese firms.
Sources: TSR (2004) and authors’ interview with Giga-Stream and optical storage
industry, 2005.

Figure 10. Contribution of China-made Loader to Rapid Progress of Chinese DVD
PlayerMarket share of Chinese DVD in the World(%)

50
45
40
35
30
25
20
15
10
5
0

2004

2002

2003

2001

2000

0

20

40

60

80

100

Ratio of China-made Loader Unit in Chinese DVD Player(%)

Source: TSR (2004).

gradually changed into the modular mode in themodular mode has accelerated technology diffusion

process of market development (see Figure 5). The

from front-runner firms to the catch-up firms. In themodularbusinesscase of Chinese DVD player for example, many

opportunity for the catch-up firms like Chinese firms

Chinese firms have been able to start assembling theto join the new market, because the change into theloader unit (see Note 2), since the product

mode

has

provided

new30

Architecture-based Advantage of Firms and Nations
architecture has been further modularized by

Chinese firms originates in very small overhead

combining the chipset of Taiwan and the opticalwhich is estimated to be 5-7% smaller

pickup of Japan into simple solution-kit whichfirms (see Note 4) and 10-20% smaller than

Taiwanese firms and Japanese firms have jointly

traditional Japanese firms. With the lower retail priceprovided. Figure10 shows an emblematic potential

and then the smaller gross margins, almost all of thebrought out by the product architecture change, inJapanese firms and even Korean firms will not be

which the China-made loader unit has greatly

able to compete in the DVD player market. This iscontributed to the rapid progress of Chinese DVD

the reason why Japanese firms have been forced toplayer since the key parts have been further

withdraw from the market, and Chinese firms havemodularized into the solution-kit (See Note 3).

been pushed into top player in the market. As can bethan Korean

andexpected from Figure 9, the Chinese firms shall sooninterviews to the DVD industry people, Chinese

take more than 50% of the word-wide market share.

firms have not joined the DVD standardization

It is projected by the industry people that Chinese

activitytechnology

firms will take 80% of the share in the DVD player

development. However, as has been observed inmarket by year 2010 if the overhead is kept small as

Taiwanese and Korean optical storage industry since

it is.

Accordingnortoauthors’ investigations

contributed

to

the

1994, it did not always require deep technical

What is the vulnerability of Chinese firms?

backgrounds for the Chinese firms to startup

Chinese DVD industry, as a typical example of thebusiness of the modularized DVD product. As thecatch-up country-industry, has faced the following

modular mode advances, price of the productthree problems:

radically drops, because the barriers to entry become1) heavy legal claim for patent royalty from front

very low and many catch-up firms can easily enterrunning countries,

into the business. The modular mode inevitably2) most of the value-added key parts and modules

brings excessive price competition. This is one of thehave been and will continue to be imported

major reasons why the top player has gradually beenfrom front running countries, andreplaced by catch-up firms such as Korean firms and3) labor cost is not and will not be a key factor ofthen by Chinese firms. This is the power of thecomparative

modular architecture.

advantage

and/orcompetitive

advantage of China/Chinese firms.

The replacement of the top player shown in
Figure 4 and Figure 9 originates in the difference of

It will become very difficult for Chinese firms to

the total business overhead cost. In the case of DVD

run the DVD business by paying all of the royalty

player for example, competitive advantage of thewhich have been claimed from front runner countries,
31

Ogawa-Shintaku-Yoshimoto
because the percentage of the relative amount of thetechnology of the key parts, the late coming catch-up

royalty will become unreasonably higher and higher

countries would take over their market position by

as the retail price of the DVD player becomes lower

means of much smaller overhead.

and lower. It is a noteworthy fact that, in a case of aAs the cost of total business operation is only amajor DVD manufacturer in Taiwan, the ratio of thefactor to win the business of the modular products inroyalty was estimated to be over 50% of the total

the given market, the role of the overhead rises up

overhead in year 2004 (Note 5) and have becomeout of the depth of business operation. This isalmost impossible to continue the business if they

because most of the modular products are built fromwould keep paying all of the claimed royalty.

almost the same key parts and/or solution-kits which

It has been said that Chinese/Taiwanese firms

are in wide use in the market and because not only

should establish their patent claims to rank with the

Chinese/Taiwanese firms but also Japanese firms andfront running countries, as it would be indispensable

Korean firms manufacture the product at factories in

to invest in bringing up talented people in the long

China. This means that the manufacturing/assemble

run, but it would invariably increase the overhead of

direct costs turn out to be the same for all firms of

the firm. On the other hand, if Chinese/Taiwanese

any country.

firms would continue to pay the license fees, it also

The overhead defined here includes the patent

would certainly increase the total overhead ofroyalty fee, long term investment for basic R&D,

business operations. The Chinese/Taiwanese firms

key parts development, product development, market

need to solve this dilemma. As it has always beendevelopment,very difficult for the firm in the modular productmanufacturing factory/equipment, SCM, tax, and sobusiness environment of any country to makeon. As is schematically shown in Figure 11, amongaffordable investments in key parts development on

the overhead in the DVD business, patent royalty

long-term business strategy, it has been and will be

accounts for the most significant portion of thevery difficult for the Chinese/Taiwanese firms to get

product competitiveness for the catch-up countries’

out of the modularity trap. This is because modular

firms (see Note 6), because the royalty of the DVD

products such as VCD and DVD player have been in

is much higher than that of CD’s.

international

standardization,

excessive price competition and is very difficult to

A Japanese firm called Funai Electric, a typicalmake profit. Even if the firms could afford tocatch-up type firm in Japan, has started DVD player

develop the key parts by themselves, it would also

and recorder business and has quickly joined the top

definitely increase the overhead and would loserunner group in the world-wide DVD market.

competitiveness.

theFunai’s products are manufactured at factories in

Chinese/Taiwanese firms do not acquire the integral

China and directly shipped to the US market. Its

Above

all,

if

32

Architecture-based Advantage of Firms and Nations
Figure 11. Product-cost and Overhead Comparison of DVD Drive between Chinese Firmand Japanese Firm
CompetitivenessLaborCost+R&D+Transport
Cost+PublicityCost+Tax,etc

Chinese Firm

Material/Parts/Solution-Kit

Vulnerability

Royalty
Overhead

Wide Use
Available in market
CompetitivenessJapanese Firm

Royalty

Material/Parts/Solution-Kit
Vulnerability

Overhead

Assemble Cost

Basic R&D,
Standardization,
Product Development,
Market Development
Labor Cost,
Tax, SCM, Publicity
etc

at Factories in China(Almost the Same Cost)

overhead is much smaller than Korean firms andas the products of front running counties are forced

even

to be banished from the market.

smaller

than

major

TaiwaneseDVDmanufacturers. Funai is the toughest competitor to

7. Proposal of New Global Alliance

Chinese firms (See Note 7).
The

competitive

advantage

andbetween

the

Japan

and

Catch-up

above,

thevulnerability of the Chinese firms described above

Countries

are the typical international trade conflict betweenAscatch-up countries and developed countries whicharchitecture has been gradually changed from thewe can see many examples in our history, such as

integral to the modular mode and the modular mode

between India and England in the late 1600s and thehas provided new business opportunity for the

early 1700s (Kawakatsu, 1991 and Note 8),

catch-up firms to join the market. The catch-up

Germany/France and England in the mid-1800s,

countries’ firms has been and could be very

USA and Europe in the early 1900s, and Japan andcompetitive in the modular product if the overhead

USA in the 1970s and 1980s (Shintaku, 1994). These

would be kept very small as it has been, while

conflicts will always come to the surface as firms ofJapanese firms have been and will be competitive incatch-upby

the integral product because it restricts many of thecompetitive products in the worldwide market and/or

technologies, integral properties, and know-how

countries

becomeconspicuous

33

has

been

described

product

Ogawa-Shintaku-Yoshimoto
Figure 12. Overhead-position of China/Taiwan, Korea, Japan and Direction ofProfitable Business Operation

Gross Margin

P

le
tab
r of i

(A)
(B)

Bus

atio
per
O
s
ines

（D）

K or e

a

ion
r at
Ope

Jap

Integralan
Heavy deficit

r giaChin oss Ma
imMin

profit

ＨＬＤＳ

(C)

r
n fo

n

Gr
um

Modular5%

Price Competition

10%

20%

30%

40%

Overhead of DVD firmcombined into one joint venture company called

within the products.
Understanding (1) the difference of the product

HLDS. Funai Electric, the typical catch-up type firmarchitecture position (see Figure 7), (2) that thein Japan, had started a joint venture company called

patent royalty claimed from Japanese firms accounts

Digitek with Mitsubishi Electric in 1999 before

for the most significant portion of the overhead for

Funai started DVD player and recorder businesses.

the catch-up countries’ firms (see Figure 11), (3) that

It is very important for the industry of themost of the Japanese firms have been and would becatch-up countries to understand the reason why theforced to withdraw from the market saddling withpercentage of Hitachi’s investment to HLDS is 51%,

heavy deflects (see Figure 4 and Figure 12), and (4)and why Mitsubishi’s investment to Digitek is 51%.

that each nation has its own strong point, authors

The 51% from Hitachi means that HLDS is

propose that Japan and the catch-up countries

consolidated subsidiary company of Hitachi and thus

promote the architecture-based global alliance forall the patent royalty issues are automatically

symbiotic co-prosperity. As has been mentioned inhandled by Hitachi. It is said that the actual royalty

Section 5 of this paper, we can see a successful

fee of the DVD business has been significantly

example of the alliance between LG of Korea anddecreased because Hitachi has established patent

Hitachi of Japan, in which the power of integral

claim to rank with other patent holders, andarchitecture

moreover Hitachi has many cross-licensed partner

and

of

modulararchitectureare34Architecture-based Advantage of Firms and Nations
has been said that without moving on to the alliance,

firms in the world.
Most of the optical storage products were first

Hitachi would have been forced to withdraw fromdeveloped by Japanese firms who have competitive

the optical storage industry. The joint ventureadvantages in the integral product. However thecompany between Mitsubishi Electric and Funai

position of the top player has been quickly replaced

Electric also shows similar success story that Funai

by catch-up firms in the process of market

is exceptionally a profitable firm among the DVD

development and/or volume production. A very

suppliers in Japan because Mitsubishi Electric is theserious problem for the Japanese firms is that the

majority (51%) among the investors and is one of theperiod of profitable business operation has become

major license holders in the DVD Forum.

shorter year by year, because speed of theAccording to our investigation, similar relationarchitecture change from the integral to the modularof symbiotic co-prosperity has been observed in themode has become faster and faster. In these digitalbusiness relation between JVC and Lite-On (2002),

business environments where product architecture

Philips and BenQ (2003), and Toshiba and Samsung

shift occurs rapidly, Japanese firms need to find(2004) aiming at the same success story. From abusiness partners who have strong competitivenessstand position of the firms of the late comingin the modular products, while catch-up countries’

catch-up countries like China, to start the global joint

firms need to build up closer cooperation with aventure company with Japanese firms will change

partner who has strong competitiveness in thethe business direction of the firms along arrow (A) inintegral products and has many essential intellectual

Figureproperties of the product. Without moving on to aarchitecture-based global joint venture company,

global alliance, the catch-up countries’ firms could

most of the catch-up countries’ firms would go in the

not continue the business even in the modular

direction of arrow (B), in the same way as many of

products under the WTO environment.

traditional Japanese, US, and European companies

12.

Without

moving

on

to

the

We must emphasize that positive technology

have experienced. If they would pay all of thetransfer does not mean technology leakage. From aclaimed royalty, the overhead cost of almost all the

position of Japanese firms, the global joint venturefirms of the catch-up countries would become very

company shown in Figure 8 means that it haslarge and will push the business direction alongsidechanged the business direction of Japanese firms

arrow (B) in Figure 12 (see Note 9). On the otheralongside arrow (D) in Figure 12. Since 2003, only

hand, without moving on to the architecture-based

three years after the joint venture company has

global joint venture company, many of the Japanesestarted, HLDS has turned into one of the mostfirms except for the firms like Funai (see Note 10)

profitable subsidiary companies of Hitachi group. It

would be forced to withdraw from the market
35

Ogawa-Shintaku-Yoshimoto
those of the read only DVD player, and because

saddling with heavy deflects.
The concept of the symbiotic global joint

Taiwanese chipset suppliers cannot provide even a

venture company in the digital business environment

single chipset nor further modularized solution-kitof the Asian-Pacific arena is inevitably required as

to Chinese firms. Japanese chipset suppliers havethe dynamic change of the product architecture tolearned much about the business strategy in themodular mode occurs and as the total businessmodular product business environments in theoverhead, in which the royalty accounts for the mostpast 15 years.

important portion, becomes the key factor of theNote 4competitive advantages. The authors propose that

The overhead of Chinese firms noted here does

both Japan and the catch-up countries promote thisnot include the royalty which has been claimed

new type of architecture-based global alliance. Thesefrom front runner countries. The percentage isalliances will definitely contribute not only toestimated by the authors based on the interview

prevent Japanese firms from withdrawing from thewith the industry analysts and to direct interview

market but also to produce the cash-flow for thewith major DVD manufactures of Japan, Taiwan,

Japanese firms to develop new integral technologies.

and Korea.

Furthermore, the alliance will contribute not only toNote 5the economic growth of each country but also to

The percentage noted here is estimated based on

solve trade conflicts between Japan and the catch-up

the authors’ interview to the analysts who havecountries.

been deeply involved in Taiwanese optical storage
industry.

Note 1

Note 6PCST Report (2005) by Giga-Stream referring theMore than 80% of the essential patents in DVD

American CEA report which analyses the DVD

are covered by Japanese firms (DVD Forum

player and the DVD recorder market in USA.

http://www.dvdforum.org/forum.shtml), but not

Note 2

many licensers have opened the royalty fee.

Loader unit defined here includes optical pickup,

According to industry analysts, total sum of thedisk rotation motor, traverse mechanics, androyalty claimed against Chinese firms is estimatedloader mechanics.

to be well over 10 dollars per a DVD player even

Note 3though the retail price of the player in US market

Chinese firms cannot join the writable DVD

has dropped to 30-50 dollars in 3Q/2005, while

market so far, because technology of the chipset

royaltyand optical pickup is much more advanced thanestimated to be 2-4 dollars because the firms are36

claimedagainstJapanese

firms

is

Architecture-based Advantage of Firms and Nations
major license holders in the DVD forum. Further

out good firms in China.

more, the street price of Japanese brand DVD

Note 10

player is 50-80 dollars, which is 50% higher than

If Japanese industry policy could encourage andthat of Chinese brand products.

bring up powerful manufacturing firms such as

Note 7

Funai Electric, Orion Electric, Nidec, Minebea,

On top of the low overhead, Japanese firms like

Mitsumi Electric, Teac, and so on, the integral

Funai Electric has a high potential to reduce thetype Japanese firms would choose these Japanesemanufacturing cost of the DVD player, that is,

manufacturingmuch lower than that of Chinese firms, because

architecture-based alliance. In such an alliance,

Funai

integration

Japan could control the technology diffusion moremanufacturing system based on technologies andstrategically than today even while the productsophisticated production system FPS (Funai

architecture changes to the modular mode. And if

Production System) like Toyota’s, which Chinese

the Japanese firms could strictly control the patentfirms do not possess. By taking many of theroyalty, the architecture-based alliance among theadded-values inside of the vertical integration,

Japanese firms would take over the world-wide

Funai can reduce the cost in each process of theDVD market. According to DVD industry people,

manufacturing system at the factories in China,

Japanese firms have gradually become profitablenonetheless.

even from the low price DVD player business in

Note 8US market, nonetheless, where the royalty is

The fur textile industry of England was forced toattached a great importance to the DVD business.

withdraw from the market by the mass export of

The authors believe that not only the innovation of

calico (cotton) from India in the late 1600s and thethe vertical manufacturing integration but also

early 1700s. But the withdrawal had created thestrategic control of the patent royalty which havetechnology-enabledinbeen created through the long term R&D

England, where they manufactured copied calicoinvestment, will be the fount/source of theby newly invented spinning machine (Kawakatsu,

comparative/competitive1991).

Japan/Japanese firms. The authors will report in

Note 9another paper the new direction of Japanese

According to the DVD industry people, themanufacturing

number for the DVD players formally reported bymodular product by combining the importance ofChinese firms to the licensers is much smaller

the vertical integration and of the strategic control

than the actual shipment. Bad firms have drivenof the patent royalty.

haspowerfulverticalindustry

revolution

37

firms

as

management

partners

advantage

system

for

of

of

the

Ogawa-Shintaku-Yoshimoto
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〔Received July 5, 2005; accepted August 15, 2005〕

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