MMRCDISCUSSION PAPER SERIES
No. 382

Supply Chain Network of IT Industry in East Asia:
From the Viewpoint of Japan’s Core Competence
Junjiro SHINTAKU
Graduate School of Economics, the University of Tokyo
Youngwon PARK
Manufacturing Management Research Center, the University of Tokyo
February 2012

東京大学ものづくり経営研究センター
Manufacturing Management Research Center (MMRC)
Discussion papers are in draft form distributed for purposes of comment and discussion. Contact the author for
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Supply Chain Network of IT Industry in East Asia:
From the Viewpoint of Japan’s Core Competence

Junjiro SHINTAKU 1*, Youngwon PARK 1
Manufacturing Managemment Research Center, Faculty of Economics, the University ofTokyo, Japan1
Abstract:
In studying catch-up of newly industrialized nations such as Korea and Taiwan, it is necessary
to think about supply chain network structure among East Asian countries centered on Japan.
While Korean and Taiwanese firms have achieved a very successful catch-up with Japanesefirms and Chinese firms became world factory on behalf of Japan, the cutting edge
technologies of steel and chemical industry remained with Japanese firms.
When we see Japanese manufacturing history, Japanese firms have also changed their
manufacturing strategy corresponding to environment change. Japan’s domestic
manufacturing industry has for more than a decade shifted to one based on intermediate goods,
and intermediate goods can now be said to be the source of Japan’s manufacturing
competitiveness. In recent years, new developments are providing signs of changes to Japan’s
industry. Until now, Japan’s intermediate goods makers maintain strong competitive
advantage, and have attained high profits in exporting their goods to Korea and Taiwan in
East Asian market. However, Japanese intermediate goods makers are increasingly building
production bases in Korea, Taiwan and China for LCD and semiconductor related goods.
Japanese firms will thus come under new pressure to reinvent their unique position in the new
East Asia production network. In an increasingly volatile global market environment, nocountry’s competitive position remains permanently fixed. Thus, Japan’s changing position in
IT industrial network in relation to the dynamic global competitors--particularly those from
Korea and China--are worthy of continuous research and careful examinations.
Keywords: Supply Chain Network, IT Industry, East Asia, Japan, Core competenceSupply Chain Network of IT Industry in East Asia:
From the viewpoint of Japan’s Core competence

Junjiro SHINTAKU 1*, Youngwon PARK 1
Manufacturing Managemment Research Center, Faculty of Economics, the University ofTokyo, Japan1

1. Introduction
In studying catch-up of newly industrialized nations such as Korea and Taiwan, it isnecessary to think about supply chain network structure among East Asian countries centeredon Japan. Although Korean and Taiwanese firms have achieved a very successful catch-up
with Japanese firms and Chinese firms became world factory on behalf of Japan, the cuttingedge technologies of steel and chemical industry remained with Japanese firms. However,Japanese firms have also changed their manufacturing strategy corresponding to environmentchange.
When we overview Japanese manufacturing history, Japanese manufacturing, under pressure
from trade friction and a strong yen, has shifted from its original export focused structure by
relocating its industrial bases, and particularly its production functions, overseas. In the 1960s
and 70s, Japan grew by relying on an export centered, advanced market model of exporting
products made in Japan to affluent markets in Europe and North America. However, thismodel of development induced trade friction with its partners in each industry, withcompetition from Japanese exports causing particularly marked declines in US manufacturing.
The resulting trade friction eventually led to negotiations between the Japanese and US
governments and the adoption of voluntary restraints on exports. Trade friction between Japanand the US occurred repeatedly as Japan’s exports moved from textiles in the 50s, to steel inthe 60s, to color TVs in the 70s, and then to automobiles and semiconductors in the 80s.
Amidst this background of trade friction, the 1985 Plaza Accord was reached to allow thevalue of the yen to appreciate internationally, which resulted in a rapidly strengthening
currency.
Such trade friction and the strong yen spurred Japanese businesses to relocate their production
bases overseas. At the time, advanced markets were still the main target markets for Japanese1firms, resulting in a shift to an “overseas production/advanced market” export model for
Japanese firms. At this time there were two types of overseas production. The first type waslargely motivated by trade friction, and involved building of overseas production bases inlarge markets in Europe and North America for automobiles etc. In contrast, the second typeof relocation was largely a cost motivated strategy spurred by the strong yen, and involved
export to advanced markets of electronics etc. from regions with lower labor costs, including
ASEAN and China.
Currently, Japanese firms are once again under pressure to revise their strategy as new
developments alter market conditions. After the financial crisis of 2008, Japan’s traditional
markets in Europe and North America suffered a rapid contraction in their economies, while
emerging markets like China and India have shown steady growth. In light of these newcircumstances, Japan is switching from the “overseas production/advanced market” model toan “overseas production/emerging market model” as the basis of its growth in the future.
Much of the research has focused on the growth and success factors of East Asian firms
including Japanese or Korean firms. Yet, little research attention has been paid to understandsupply chain network structure among East Asian countries centered on Japan and to explain
how these success factors are related to sustainable competitive advantage of individualglobal firms from these nations.
In this paper our main thesis is (1) that we introduce supply chain network of IT Industry inEast Asia from the viewpoint of Japan’s Core competence, (2) how international
specialization of global supply chain occurs according to product architecture structure.
2. Literature Review
2.1. Technology transfer and Catch-up
Technology transfer is an important concept for a study of international supply chain network
based on catch-up speed. Recently, some Japanese innovation leader firms do not necessarily
reap the real competitive benefits because of their “too rapid innovation transfer” and thus
find it difficult for them to maintain their international competitiveness (Shintaku et al., 2008).
Such “too rapid technology transfer” is not merely an issue with Japanese firms. In the middleof 1980s and the early 1990s U.S.-Japan Trade Conflicts occurred because of “too rapid
innovation transfer” from USA firms to Japanese counterparts. Much research in 1980s has
focused on such “too rapid technology transfer by US firms” or “too swift catch-up by
Japanese firms” (Abernathy & Clark, 1985; Teece, 1986). This particular issue stirred up
American nationalism sentiment in 1980s. In this context, a theory of strategic trade
management is developed (Tyson, 1992).
Next, we introduce the growth process of Japanese firms as a specific example for this. After2

World War II, Japanese firms attained phenomenal growth through technology import from
US and European firms. The actual number of technological import cases from 1949-1966 is
4,135 (Yamazaki, 2004). 60% of these transfers (2471 cases) are all from USA firms and 448
cases involve those from Germany. In this sense, after World War II Japanese firms depended
their technological innovation mostly through the assistance of USA firms. Japanese firms
devoted themselves to independent research and development based on technology know-howthat has been accumulated over the ten years of post-War technology transfer processes. Such
R & D investment in growth industry contributed to overcome the technological gap between
Japanese and other advanced nations.
Between the latter part of 1950s and the early 1970s, R & D investment by private sector had
shown very high growth in petro-chemical, petro-process, steel, machinery, electrical industry.
Strong capability in heavy chemical industry supported vigorous R & D investment. After the
first Oil Shock in 1970s more R & D investment poured in new cutting edge industry as wellas in the traditional assembly industry (e.g., electrical machinery and automobile). Throughthis process, in 1960s there was a noticeable boom in establishing and expanding centralized
research centers initiated by electrical manufacturers(For example, Nippon Electronic
Company (NEC) in May 1965, Matsushita Co. Research Center in 1962, Toshiba Central
Research Complex in July 1961). In case of chemical industry, Toray was No. 4 among
Japanese firms in terms of its R & D expenditures in 1959 (Yamazaki, 2004).
In brief, Japanese firms experienced high level of growth after 1950s through their rapid
technology important from the US and European counterparts, their joint research withJapanese government and independent centralized R & D centers. It was during analog era,
Japanese firms achieved successful catch-up with Western firms by manufacturing fieldprocess innovation and thus kept their sustainable competitive advantage. Currently, Korean,
Taiwan and Chinese firms around Japan have been trying to achieve same catch-up with
Western and Japanese firms in digital era.
2.2. Product Architecture and Catch-up Speed
Product architecture is deeply associated with catch-up speed in digital era.
Firstly, we consider relationships between product architecture and global supply chain
management. Recently, with the broad range of global SCM, supply chain structures andorganizational systems are becoming increasingly more complex. An effective control
mechanism for global supply chain may be modularity. It was Starr who first conceptualized
the idea of modularity in the context of supply chain in 1965. His main argument is thatmarketing’s role is to make customers assume that they enjoy diverse product offerings in factthat through modularity of product design it is quite possible for customers to enjoy maximum
diverse product choices without too much cost incurred to the firms.
3Modularity is also a strategic practice that effectively organizes and manages complex
products and processes. With it everything is controlled by explicit design rules (Clark andBaldwin, 2000). Modularity is the process of dividing the complex system into
semi-independent subsystems based on certain connection rules (Fujimoto, 2001; 2003).
Modularity is the process state of dividing a complex system into divisible subsystems (Aokiand Ando, 2002).
Besides, modularity requires standardization of component parts and product groups andfacilitates the internal integration of functions within firms. For example, research anddevelopment (R & D) requires efficiency in product design while manufacturing needs to
respond to the marketing that demands flexibility and customization requirements forcustomers. As a result, modularity requires both horizontal and vertical component responses.
In terms of procurement and distribution the total responses of supply chain are expected.
Through modularity product assembly work is simplified and drastic cost reduction ispossible. In this way, global supply chain is enhanced.
However, much of research has focused on the advantages of modularity, while very little
research has ever been conducted in the areas of industry comparison based on two
parameters (1) modular and integral and (2) open and close (Ulrich, 1995; Fujimoto, 2003;
Park et al., 2012). Furthermore, it is more reality to be little research concerning relationships
between product architecture and catch-up speed in digital era.
When we consider global economic history, most of the initial specialization was limited tothe advanced economies that produced the products. However, as product architecture was
becoming turn-key-solution (i.e., modular type in the extreme sense), then the international
specialization between advanced and NIES/BRICs firms was done. Here, NIES/BRICs firms
focused on assembly and manufacturing of modular types of technologies or modular types offinished goods, while advanced economies specialized design & manufacturing in integral
types of technologies.
Any firm may participate in this market for modular products, because the barriers of entry
are low and the speed for technology adaptation is very fast. On the other hand, speed ofintegral technology implementation is quite slow (Fujimoto, 2006). From productarchitecture’s standpoint the patterns of the 21st century international specialization suggest
two types in terms of implementation speed difference in the global market (Shintaku et al.,2008). Strong global supply chain is needed as infrastructure that supports business structure.
The present state of the 21st century international specializations between advanced industrial
nations and NIES/BRICs show that much greater level of global supply chain is being applied
from the product/ process architecture.
Any industry with open modular product/process architecture for its products achieves
relatively rapid catch-up while closed integral architecture requires much longer catch-up
4period. Japanese material industry that is built on Japanese chemical industry still maintains
very strong global competitiveness. Toray (a Japanese chemical firm) accomplished its growththrough technological import from US DuPont. Its catch-up was not so easily attained. Rather,
its independent technological development was possible through a few decades’ accumulated
investment on basic research from 1950s, as we mentioned before. Reverse engineering is notquite feasible in material science or chemical industry and thus technology transfers do notoccur so readily. The technology transfer speed is different by industry. Product architecture
has certain hierarchical intensity. If a firm’s product is more or less finished assembly good,technology transfer is easy. However, if a firm’s product is mostly component parts ormaterials that require basic technology knowhow, then technology transfer is difficult with therequirements of process knowhow and patent restrictions. The representative case is CD/
DVD player and LCD panel, semiconductor with smooth technology transfer. However, little
technology transfer occurs in the areas of light pickup, light film, filter, silicon wafer andliquid panel. Besides these component parts, Japanese firms still maintain technologicaladvantage in the areas of infra-equipment areas of semi-conductor and LCD panels.
From product architecture standpoint, Japanese firms hold technological know-how in theareas of integral products (i.e., having very strong interdependent relationships among
component elements and infra-equipments) while technology know-how of modular products(e.g., DVD players and liquid panels) are mostly transferred to newly industrialized nations.
What is important is that classification of integral-modular product architecture is dynamic,
not static. Product architecture, once determined, is not necessarily permanently fixed; instead,
it changes over time. Such architectural changes make a huge impact on the international
competitive advantage of Japanese firms.
2.3. Research Framework and Focus
In this paper our main thesis is (1) that we introduce supply chain network of IT Industry inEast Asia from the viewpoint of Japan’s Core competence, (2) how international
specialization of global supply chain occurs according to product architecture structure. By
using Japanese chemical firms related to semiconductor and LCD as case examples we
illustrate this main thesis. Fujimoto (2003) classified product architecture into two broad
category: modular/integral and open/closed. The above mentioned industries are different
depending on whether their product development and commercialization is based on digital or
analogue technology. Chinese and Korean electronic industry (started with digital technology)
and Japanese chemical industry (started with analogue technology) are quite different in termsof their processes of modularity. Figure 1 shows difference of catch-up speed by productarchitecture pattern. Open modular architecture is faster than closed integral architecture incatch-up speed. In next section, we will analyze Japan’s position in East Asia’s IT Industry
5and supply chain network based on this framework.
Figure1. Research Framework

3. Japan’s Position in East Asia’s IT Industry and Supply Chain Network
3.1 Changes in global strategy for Japanese manufacturers
3.1.1 Trends in Japanese exports and exchange rates
Here, we introduce trends in Japanese exports and exchange rates to look at changes in global
strategy for Japanese manufacturers. The following Figure 2 exhibits trends in Japanese
exports and the yen/dollar exchange rate from 1970 to 2010. The data exhibit two noteworthy
points. The first is that while Japanese exports have grown steadily over the long term,
exports experienced unusual stagnation from 1996 to 2002. Somewhat surprisingly, even after
the strong yen arrived in 1985, exports expanded in dollar terms. Second, during the favorable
economic conditions from 2003 to 2008, exports continued to grow rapidly even thoughoverseas production increased. Surprisingly, exports nearly doubled over 10 years from$386.3 billion in 1998 to a record high of $775.9 billion in 2008.Although exports fell to$580.8 billion in 2009 after the North American and European markets declined in 2008, 2010
saw exports climb once more to nearly the level of 2008. In 2011, however, after effects fromthe Tohoku Earthquake in the spring and the floods in Thailand in the fall are likely to reduce
exports.
6

Figure 2. Trends in Japanese Exports and Exchange Rates

Based on this shift toward overseas production, it is easy to understand why exports werestagnant in the second half of the 90s, but it becomes unclear why growth in exports returned
again in the 2000s. Various industrial bases both domestic and overseas suggest that Japanesefirms have struggled to adapt to changing circumstances from 1996 to 2002, In the following
section, we explain Japan’s changing export model in the 2000s using trade related statistics.
3.1.2 Increased exports to Asia, and a shift to export of intermediate goods
Figure 2 shows the regional distribution of Japan’s exports over the past 10 years. Japan’smajor export destinations have undergone dramatic change compared to the 1980s, as
economic and trade patterns have altered. The US share of Japan’s exports has declined
precipitously from 30 percent in 1999 to 16 percent in 2009, while the EU’s share has
declined from 18 percent to 13 percent. In contrast, China’s share of Japan’s exports jumped
dramatically from 11 percent to 24 percent, while Korea's and Taiwan’s share showed slightincreases to 8 percent and 6 percent respectively.
Such changes in Japan’s export destinations were reflected in Japan’s trade balance. Japan’s
global trade surplus reached a peak of $110 billion in 2004, before declining thereafter. Its
trade surplus with the US prior to the financial crisis reached a peak in 2006 before declining.
Nonetheless, Japan maintained a trade surplus of $20 billion even as the financial crisis hit in2008, and total trade showed a steady recovery trend after 2009. The consistent surplus intrade with Asia reached $75 billion in 2007, and experienced virtually no decrease even in
2009, when the world struggled with the financial crisis.
7

Figure 3. Share of Japan’s Export Destinations by Country/Region

The change in export destinations came simultaneously with a change in the main items
exported. Previously, durable consumer goods accounted for 30-35 percent of exports to thelargest export destination, which had been the US. This continues to be the case with
automobiles. Presently, however, Japan’s largest export market is China, and in this market,
durable consumer goods account for only 5 percent of exports, while industrial use materials
account for 35 percent, and capital goods account for 50 percent; a structure that has remained
consistent over the past 10 years. Japan maintains the same export structure with Korea,
Taiwan, and ASEAN. Exports to the whole of East Asia consist of approximately 85 percent
intermediate goods, including capital goods and industrial use materials.
Figure 4. Japan’s Trade Balance

8

The destinations for intermediate goods exported to East Asia include Asian factories owned
by Japanese businesses, as well as Korean, Taiwanese, and Chinese manufacturers. For
example, a large number of destinations in southern China show a pattern of “round trip
processing.” First, intermediate goods are exported from Japan to Hong Kong, where they
pass through customs. The intermediate goods are then taken into Japanese owned factories in
Dongguan, Guangdong province. Finished products assembled in Dongguan are then returned
to Hong Kong, and then reexported to destinations like the US. Japanese businesses that haveentered ASEAN show the same pattern of exporting to the European and North American
markets using intermediate goods made in Japan.
Figure 5. Structure of Exports to East Asia by Category

3.2 East Asia’s production network and supply chain structure
3.2.1 East Asia’s production network
Japan’s share of the global semiconductor and liquid crystal display (LCD) industry has beensteadily decreasing from the 1990s. At the same time, Korean and Taiwanese firms haveacquired a large share of the semiconductor and LCD market by expanding production ofthese two items. If one looks only at this phenomenon, it appears that Korean and Taiwanesefirms are engaged in a competitive relationship with Japan in semiconductors and LCDs.
However, as shown in Figure 5, Korea and Taiwan are also both major export destinations forJapan. In 2006, Japanese exports to Korea amounted to $50 billion, while Japanese imports
from Korea were only $27 billion, indicating that Japan has a large surplus in its trade with
Korea. The same situation also applies to Taiwan. Although this trend weakened slightly in2010, the trade relationship has changed little overall. At the same time, trade between
Korea/Taiwan and China has shown extremely rapid growth.
9Figure 6. East Asian Trade Structure (from 2006 to 2010)

What kind of products then, are being exported from Japan to Korea? The most exported
items include steel (Korea took 20 percent of all of Japan’s steel exports in 2006), chemical
products (16 percent), electric measuring instruments (14 percent), precision machinery (12percent), electronics parts (11 percent), and metal processing machinery (10 percent). These
are all production materials, and constitute indispensible parts and manufacturing equipment
for industries in which Korean firms maintain strong international competitiveness.
Korean and other Asian firms are important customers for Japanese parts makers andmanufacturing equipment makers. For example, three countries, consisting of Korea at ¥116.9
billion, Taiwan at ¥280.5 billion, and China at ¥158.3 billion, accounted for 62 percent of allof Japan’s exports of semiconductor and flat panel display manufacturing equipment in 2006.
As shown in Figure 6, this trend remained unchanged in 2010, with 80 percent of exports ofJapanese semiconductor parts going to Asia.
Currently, an international division of labor has emerged in East Asia where production goods
like manufacturing equipment and parts are made in Japan, and exported to Korea and Taiwan,
where they are processed in capital intensive high tech industries. The goods are thenexported once more to China, where labor intensive final assembly is completed.
For example, in the LCD industry as described in more details below, 37 percent of Japanese
exports of deflection plate materials for LCDs in 2004 went to Korea, while 27 percent went
to Taiwan. Share for Japanese manufacturers in LCD parts and flat panel manufacturing
equipment ranges from 60 percent to 100 percent in each category, with sales to Asia far
outpacing domestic sales. Sales of Japanese manufactured large screen flat panels, on theother hand, account for only 15 percent of the global total, while share for Korean and
10Taiwanese firms together accounts for 80 percent. Moreover, some of these panels are
reexported to China, for final assembly in LCD TV plants owned by local Chinese firms aswell as Chinese subsidiaries of Japanese and Korean firms. The end result of leveraging thecomparative advantage of each country has resulted in an East Asian industrial structure
where labor is divided so that production materials are made in Japan, capital and facilities
intensive intermediate goods are made in Korea and Taiwan, and labor intensive finishedgoods are made in China.
Figure 7. Export Destinations for Japanese Semiconductor Parts (2010)

Source: Trade White Paper 2011
3.2.2 East Asia’s supply chain structure as seen in the LCD industry
As shown in the foregoing, although Japan’s global share in two leading IT products,
semiconductors and liquid crystal displays, has steadily declined since the 1990s, intermediate
goods (production goods) like parts and materials remain a firmly Japanese led industry. The
following will examine East Asia’s IT supply chain to ascertain the roots of competitivenessin the industry.
Previously, the transfer of markets and production bases from advanced countries to emerging
markets was attained via the “flying geese” model (as described by Akamatsu) or the “productlife cycle” model (as described by Vernon). New products were marketed in advanced
countries, with production gradually moving to developing countries as the products reachedmaturity. Recently, however, the time lag between advanced countries and emerging markets
has shortened considerably, and products introduced in advanced countries are rapidly
introduced into emerging markets. This trend is particularly strong in electronics products like
LCD TVs, mobile phones, digital cameras, and optical disk drives (Shintaku, 2006). LCD
TVs typify the trend. Production and marketing began in advanced countries like Japan in
2000, but by 2005, marketing and production had already begun in China, with production by
Chinese companies rapidly increasing. The same dynamic applies in the LCD industry. LCD
panel production began in Japan, before moved moving to Korea and Taiwan, with materials
11and equipment production remaining in Japan. The existing vertical structure of transfer
between advanced and emerging markets was maintained, though greatly accelerated,
resulting in an international division of labor in LCDs. The same pattern is visible in opticaldisks, where optical pickups and chipsets are made in Japan and finished products madeelsewhere, and in mobile phones, where chipsets are made in Japan and completed handset
made elsewhere (Shintaku et al, 2007). Factors that affect the speed of this transfer can betraced to the product and process architecture of the items in question. In other words,
production of products and parts with modular assembly can be rapidly transferred, while
products and parts that require precision finishing will be much slower to move (Shintaku etal, 2008). More specifically, the international division of labor in the LCD industry exhibits
clear variations based on the individual architecture of the finished products, intermediate
components, and parts and materials used.
Originally, Japan had a pattern of cooperation in development of new products between
materials and equipment makers and finished product makers. However, as Japan’s makers offinished products and devices weakened in competitiveness, companies like Samsung
Electronics and LG, who were once little more than customers of Japan’s upstream makers,
made aggressive investments, and by purchasing manufacturing equipments and materials
from Japanese firms, were able to rapidly develop a global reputation. Thereafter, Taiwanesepanel makers also invested aggressively through acquiring technology from withdrawing
Japanese panel makers which were defeated by Korean panel firms. The end result was the
emergence of a competitive structure between Korea, Taiwan, and Japan in the LCD industry.
Korea and Taiwan’s LCD industry grew rapidly from the mid 1990s, while in the background,
Japan’s LCD equipment and parts makers provided massive supplies of parts and materials aswell as equipments. Thus, Japan plays role in providing a foundation that supports the LCD
industry (Shintaku 2006).
While companies like Samsung Electronics and LG Display of Korea, and AUO and CMO of
Taiwan have become leaders of the panel market through their massive investments, they
have almost no competitive advantage in upstream areas like parts and equipments. LCD parts
production is not merely a semi “black boxed” proprietary process, it is also protected bypatents on source technology that are not easy to imitate or evade. In other words, thearchitectural structure of the LCD parts industry is nearly integral, and thus it will not be
possible to catch up over the short term. However, LCD panels, where Korean and Taiwanesefirms have been successful, have a nearly modular architecture where new firms can catch up
in a relatively short time, provided they make massive investments.
The downstream of the LCD industry (i.e. LCD TVs) has a somewhat more complex structure.
Looking at their share of the global market for LCD TVs, Samsung and LG Electronics areleading through their successful vertical integration of TVs and LCD panel production. Sony,12

in contrast, does not engage in panel production, but has succeeded in securing stable panel
supplies through its joint venture with Samsung, S-LCD. However, as LCD TVs are in anindustry where the core parts (i.e. panels) are nearly modular, LCD TVs can be easily
assembled by technologically immature Chinese firms if one does not consider quality issues.
In the Chinese market, for example Chinese makers of LCD TVs have entered the market
using low cost Taiwanese LCD panels. While Korean and Japanese firms are strong in highend LCD TVs, based on their possession of supplies of high quality LCD panels, and theexpertise they accumulated in the cathode ray tube era, competition in low end LCD TVs is
fierce due to the entry of new Chinese firms that compete aggressively on price.
Under these circumstances, the LCD industry can be said to have a three level structure with
upstream parts and materials and equipment makers, midstream makers of intermediate goods(i.e. panels), and downstream television makers. This three level structure has Japanese firms
on the upstream, Korean and Taiwanese firms in the midstream, and Korean, Japanese, andChinese firms competing fiercely in the downstream. In the upstream, Japanese firms have anear monopoly on the parts, materials, and equipment businesses, and constitute the base ofcompetitiveness that supports the IT industry.
Figure 8. Division of labor in the LCD industry

4. Case Studies
Japan’s core competencies in the IT industry will be considered from here. As shown in the13foregoing, LCD parts are not simply a black boxed proprietary process, but are protected bysource technology patents, and Japanese firms have a near monopoly on the technology. Herewe will consider the core competencies of Japan’s IT industry while introducing thecharacteristics of companies in detail. Japan’s LCD parts makers have secured high operating
profits on sales, high rates of profit, and high share in most of their product lines. In particular,
two Japanese firms supply the entire global supply of TAC and PVA film. In addition,
Japanese firms account for more than 80 percent of the world market in color resist and resist
materials. Characteristically, none of these successful makers deals exclusively in LCD partsand materials (Takeshi, 2006; Fuji Chimera Research Institute, 2006). In fact, in many cases,
LCD parts and materials were developed as a byproduct of other chemical products, as withthe chemical firms supplying materials for LCD film mentioned above. These firms
commercialized their core chemical products before the birth of the LCD, and many of them
maintain high shares in those areas. Many of these firms have high share in those fields. Suchfirms have a long history, and have been tested under difficult business conditions in the past.
These firms recognized LCDs early on as an area with high potential for growth, andunderwent much trial and error in determining how to apply their technology. As a result,while LCD parts and materials are a highly profitable product contributing substantially to therevenues of Japanese chemical firms, they are only one among many diverse applications fortheir products. The following will examine case studies of leading firms in terms of their corecompetencies.
4.1 Kuraray
Kuraray Co., Ltd. is a leading Japanese chemicals firm that began life as a chemicals andtextiles producer. Originally launched to localize production of rayon in 1926, Kuraray now
provides a number of leading products, including synthetic leather, functional plastics,
synthetic textiles, and Velcro. Approximately 60 percent of its sales come from its chemical
products and plastics, including polyvinyl alcohol (POVAL) and ethylene vinyl alcohol
copolymer (EVAL) films. Its share of the global market for the PVA film used in LCDs is 80
percent, while its share of the global market for the EVAL film used in gasoline tanks andfood packaging is 70 percent. Kuraray maintains high competitiveness in new materials(centering on functional plastics), and strong proprietary technology.
Kuraray has a long history of developing significant new applications for its products,
including PVA film for dress shirt bags in 1954, and optical POVAL for sunglasses in 1965.
Its PVA film was adopted as the polarizing film for the world’s first LCD calculators in 1973,
and it has been involved with the LCD industry since it began. It continued to build its
technology in PVA plastic by accumulating high level manufacturing expertise andtechnology in applications development, molecular orientation, and surface processing,14

presenting a formidable challenge to any prospective newcomer to the market.
4.2 Fujifilm and Konica Minolta
Fujifilm and Konica Minolta both began life as photographic film makers. Fujifilm,
established in 1934, is Japan’s leading precision chemicals firm. The firm was launched as aspinoff from Dai Nippon Celluloid in an effort to localize the manufacture of photographic
film. Since then, Fujifilm has produced everything from cameras, digital cameras,
photographic paper for general and X-ray film, to photo systems (including processing
equipment), as well as copiers, office automation devices, medical devices, and cosmetics. In
the 1990s, when the photographic film market contracted drastically, Fujifilm entered otherfields, and leveraged the technology it had acquired in photographic film to expand into LCDs
and healthcare. It now boasts an 80 percent global share for the polarizing film used in LCDs
(TAC film), with the remaining 20 percent held by Konica Minolta holdings. As the firstcompany to develop TAC film, Fujifilm built on its experience by releasing phase difference
film in 1991, and WV film, which expands the viewing angle for LCDs, in 1995. In Februaryof 2005, it established Fujifilm Kyushu to produce Fujitac, a material for LCDs, to cement its
dominance in this area.
TAC film is not only a protective film; it also has applications as a substrate for phasedifference film. Fujifilm was able to leverage its long experience in traditional silver halide
film to coat TAC film with various agents and then apply it as a base technology in otherproducts. Currently, Fujifilm and Konica Minolta together have a global monopoly on the
supply of TAC film. The R&D and manufacturing technology that the two firms accumulated
over a long period of developing and improving silver halide film was able to be leveraged in
new applications like LCDs.
4.3 JSR and Zeon
JSR and Zeon Corporation are leading firms in synthetic rubber. JSR is a Japanese chemical
maker established in 1957 with the goal of localizing production of synthetic rubber. The
company began with government and private financing (the government provided 40 percent
and private businesses 60 percent), of which the forerunner was Japan Synthetic Rubber
Corporation as a statutory company. In 1969 it was entirely privatized, and began pursuing
diversification of its business. Today, it is a player not only in petrochemical products, also in
IT and electronics materials (including materials for semiconductors and LCDs) that are
driving earnings growth. It also has high share in transparent plastics like optical fiber
coatings and optical adhesives, based on its development of plastics with superior opticalproperties.
Zeon was originally the chemicals maker for the Furukawa Group, and was established in
15

1950 as a maker of vinyl chloride plastic through technology and investment provided by B.F.
Goodrich Chemicals of the US. Currently, its main business includes special synthetic rubberand high function plastic.
Both firms handle butadiene rubber, which uses the C4 fraction as its raw material, andisoprene rubber, which uses the C5 fraction (where “fraction” refers to different outputs
produced during petroleum distillation). By developing new applications for these raw
materials, the firms were able to develop products like optical disk materials, synthetic
fragrances, and water soluble polymers etc. COP plastic was also born out of this process.
COP is a kind of transparent plastic, with lower permeability and superior heat resistance tosimilar transparent polycarbonate or methacrylic. Both companies together have a global
monopoly on the supply of COP film for phase differential film.
The background for development of the new COP plastic stems from both firms’ R&D
expertise in synthesizing products from the C5 fraction. The C5 fraction is a byproductproduced at ethylene plants arising from the separation of ethylene and propylene. C5
furnishes the raw material for isoprene, itself the raw material for synthetic rubber, pentazene,
the raw material for adhesive compounds, and dicyclopentadiene, the raw material for COP.
The proximity of both firms’ manufacturing facilities to their ethylene plants ensured that they
had a stable supply of raw materials for consistent production.
4.4 Toppan Printing and Dai Nippon Printing
Toppan Printing and Dai Nippon Printing both started out as printing firms. Today they havean overwhelming share of the market for semiconductor photo masks, LCD color filters, andantireflective films.
Toppan Printing was launched in 1900 with an engineering team consisting of people from theprinting department at Japan’s Ministry of Finance during the Meiji era. At the time, thecompany’s specialty was high precision printing suitable for use in bonds and securities.
Initial orders focused on cigarette packaging design, and later, securities printing andsemiconductor photo masks.
Toppan Printing’s entry into the color filter business dates back a long time (Izumiya, 2007).
Toppan had already entered the industry by 1971, and by 1985, it commenced production
using the photo lithography method (dyes). From 1987 to 1990, Toppan developed the photo
lithography method (pigment dispersion). With the expertise it built up over this time, Toppan
was eventually able to develop the world’s first spinless coating, an “ultra technology.” Up tothen producing color filters generally used spin coating. But the process, which applies color
resist to the glass substrate while rotating it, had numerous shortcomings that needed
improvement. By developing a spinless coating method that uses slot dying rather thanrotation, Toppan was able to find a new engine for growth.
16Dai Nippon Printing was established in 1876, and in contrast to rival Toppan, was establishedby private citizens to become the challenger in the industry on its strengths in magazine andbook publishing. Dai Nippon has developed an innovative method for producing color filters
using inkjet printing. Dai Nippon dominates the industry in producing color filters withinkjets, a technology widely used for PC printers, for high definition and quality at low cost.
Such efforts to develop a base in printing technologies allowed both Toppan and Dai Nippon
to secure overwhelming share in the market for color filters and anti reflective film, two
critical components for the LCD industry.
4.5 Asahi Glass
Asahi Glass was established in 1907 as part of the Mitsubishi Group, and is the world’s No. 1
maker of glass. Even though it had little technology when it started, Asahi is now No. 1 in theworld in flat glass and automobile glass. In glass panels for plasma displays, the company has
secured an overwhelming 70 percent global share. In glass panels for LCDs it has 25 percentof the global market (second after Corning), demonstrating its strength in the industry(Izumiya, 2007).
Asahi started life as a flat glass company, and since then has always kept up with the times as
demand for glass changed and evolved. In the building construction era, Asahi produced
window glass, while in the automobile era it produced advanced automobile glass. As the PC,
mobile phone, and flat panel TV era arrived, Asahi reinvented itself as a producer of flat panel
high definition glass. By constantly pursuing new products and innovation as demand evolved,
Asahi was able to ensure its preeminent position in the industry.
5. Discussion: Outlook for Japan’s IT industry
Japan’s domestic manufacturing industry has for more than a decade shifted to one based onintermediate goods, and intermediate goods can now be said to be the source of Japan’s
manufacturing competitiveness. However, in recent years, new developments are providing
signs of changes to Japan’s industry.
5.1 Movement of Japanese intermediate goods makers overseas
Japan’s intermediate goods makers maintain strong competitive advantage, and have attained
high profits in exporting their goods to Korea and Taiwan. However, Japanese intermediate
goods makers are increasingly building production bases in Korea and Taiwan for LCD andsemiconductor related goods. As shown in the following table, Japanese LCD parts makers
were already rapidly increasing their presence in Korea by the mid 2000s.
This phenomenon is likely due to changes in the end customers for finished products. For
17example, in the case of Asahi Glass, which entered Korea in 2005, Asahi began considering
an overseas presence in 2003, when it forecast that 30 percent of demand for TFT glass panels
would be in Japan, 40 percent in Korea, and 30 percent in Taiwan. Asahi decided to establish
a production base in Korea due to its forecast that Korea would have growing demand forlarge-scale LCD panels in the future. Asahi established a polishing line as the first stage of its
business development in Korea, and by making the necessary investments in response toexpanding demand for glass panels, they could ensure stable supplies to their customers. In
the future, it is likely that the number of businesses that shift production of intermediate goods
themselves to Korea, Taiwan, and China will increase.
Table1. Current status of Japan’s entry into the Korean parts LCD parts and materials market
Parts
Name
of Investing
Location(time)company
in company
Korea(nationality)
Glass board
Asahi Glass Fine Asahi
Glass Gumi, Gyeonggi (Aug 2005)
TechnoKorea (Japan)
(AFK)
Paju
Electric NEG (Japan)
Paju, Gyeonggi (Jun 2006)
Glass
Schott Kuramoto Schott(Germany) Ochang, Chungcheong (Nov
Glass Processing Kuramoto
2005)
Korea
Manufacturing
Plant (Japan)
Polarizer/polarizing Dongwoo Fine Sumitomo
Sumitomo 100%owned (2002)
film
ChemicalChemical (Japan)
Korea
Nitto Nitto
Denko Pyeongtaek, Gyeonggi (1Q
Optical(Japan)2005)
Color filter
Dongwoo STI
Sumitomo
Pyeongtaek,
Gyeonggi
chemical (Japan) (merger with Toshiba Fine
Chemical 2005)
Backlight
Harrison Toshiba Harrison Toshiba Ochang, Chungcheong (MayLighting Korea
Lighting (Japan)
2004)
Liquid crystal
Chisso Korea
Chisso (Japan)
Pyeongtaek,
Gyeonggi(November 2005)
Source: Homepages from the respective companies
5.2 Expansion of sales of intermediate goods to emerging markets
In 2008, Japan experienced a drastic fall in its trade surplus to $19.8 billion, while
simultaneously maintaining a trade surplus with Asia of $75.5 billion. In 2009, Japan’s tradewith Asia was $68 billion in surplus. Although it is likely that Asian production for export toEurope and North America will decrease as those markets continue to be dormant after thefinancial crisis; exports to Asia, and above all to China, have decreased very little. This is18

likely because exported intermediate goods were used for products released in the local
market.
In fact, after the financial crisis, the majority of Japanese businesses were focusing theirresources in pursuing emerging markets like China. Sales in China have become an urgent
issue for Japanese home electronics and automobile firms. Moreover, such sales to expanding
local markets are set to increase in the future, while trade with local businesses will expand.
In other words, Japanese businesses are not only trading intermediate goods with Korean andTaiwanese firms, they are also looking to expand their business by increasing trade with
Chinese and Indian firms.
5.3 Intensifying competition in the intermediate goods business
Up to now, Japan has maintained a large share in sales of intermediate goods in East Asia.
Recently, however, Japan’s share has been decreasing. In the electrical machinery area,
ASEAN, China, Korea, and Taiwan have started to appear as exporters of intermediate goods.

Processor
MemoryCommunications

Powermanagement
Wirelessconnectivity
VideoInterface

Table 2. iPhone 4 supply chain structure
Parts
Supplier
Core processor
Samsung A4
DRAM
Samsung
Flash memory
Toshiba 16G byte
Baseband
Infineon HSDA/ HSUPA/ WCDMA/EDGE
ReceiverInfineon GSM/ EDGE
MemoryIntel NOR-Type FM, ELPIDA DDR
PWU module
Murata SAW Module
Main
power Dialog
management
Wi-Fi, Bluetooth Broadcom
GPS
Broadcom
Display
Toshiba Mobile Display
Touch Screen
Wintek/ TPKElectronic
Asahi Kasei Electronics
compass
Accelerometer
STMicro
gyro

Cost

Price
10.75
13.80
27.00
11.72
2.33
2.70
8.25
2.03
7.80
1.75
28.50
10.00
0.70
6.40
$187.51

Source: HIS iSuppli
In the case of Korea, the existing trade structure involves Korean firms using Japaneseintermediate goods to produce LCD TVs etc. Now, however, Chinese firms are doing the19same, and Korean firms are faced with the prospect of losing their role between Japan and
China. Korean firms are thus aiming to follow Japanese firms in converting their domestic
manufacturing to intermediate goods.
In fact, Korean firms have experienced remarkable growth in electronic parts like ceramic
condensers. Looking at Apple’s iPhone and iPad, though the core components are still madein Japan, many of the parts are made in Korea. The future international division of labor,
where Taiwanese manufacturers build products out of Korean, Taiwanese, and US parts, andwith American firms handling sales, is visible in products like the iPhone 4 and iPad.
Japanese firms will thus come under new pressure to reinvent their unique position in the new
East Asia production network.
In this paper our main, we introduced supply chain network of IT Industry in East Asia fromthe viewpoint of Japan’s Core competence. Furthermore we analyzed how international
specialization of global supply chain occurs according to product architecture structure. East
Asian firms have caught up Japanese firms in open modular industry, while Japaneseindustrial competitive advantage has remained in closed integral architecture.
In an increasingly volatile global market environment, no country’s competitive position
remains permanently fixed. Thus, Japan’s changing position in IT industrial network in
relation to the dynamic global competitors--particularly those from Korea and China--areworthy of continuous research and careful examinations.
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