Big Battle over Small Machines

By Alexander L. Taylor III

Like Pac-Man, Japan nibbles away at the U.S. market

These days hardly a week goes by without another entrant into the burgeoning field of personal computers. During the past month. Burroughs and Digital Equipment Corp. announced that they were entering the hot market of microcomputers that generally sell for less than $5.000. Last week Sony, the masterly Japanese manufacturer of color television sets, videotape recorders, audio equipment and other consumer electronics, announced that it is also introducing a new desktop computer. The Sony SMC-70, which will sell for about $3,750 with standard accessories, is slightly more expensive than some of its competitors but produces excellent color graphics.

By itself the Sony machine should not cause serious concern to established firms such as Tandy Corp.'s Radio Shack, Apple Computer and International Business Machines Corp. The SMC-70 is aimed at the office-equipment market, where Sony faces stiff competition, and it will initially be sold only through Sony's 450 video-and office-machine outlets.

Sony's new product, though, highlights the Japanese interest in this estimated $2.4 billion market, which until now has been almost the private property of American firms. After the success of Japanese onslaughts into watches, cameras, calculators and copiers, many computer industry experts are worried. Says Ulric Weil, an industry watcher for the investment bankers Morgan Stanley: "American companies must take the Japanese seriously. Not to do so would be fatal."

As they have so often in the past, Japanese companies have proceeded slowly and cautiously into the personal computer market. As late as 1979, Japan accounted for almost none of the $447 million worth of personal computers sold worldwide. As the industry exploded, however, Japan's presence began to be felt. Last year Japanese manufacturers rang up sales of $210 million. The companies include a number of well-established firms with recognizable brand names in digital watches, stereo equipment and calculators: Canon, Hitachi, Toshiba, Seiko, Sharp and Casio. Nippon Electric Co., the giant electronics firm, is now selling $100 million worth of personal computer equipment in the U.S., and last week it introduced three versions of its latest model.

The Japanese have already won plaudits for the design and manufacturing quality of their machines. Says Marian Murphy, a vice president of ComputerLand, the largest retail computer chain, which has 210 stores in the U.S.: "Their hardware is as good as the American hardware." Experts are particularly impressed by the small handheld and portable computers that Japanese firms are producing.

U.S. manufacturers have usually been considered superior in two areas that are regarded as crucial to success in selling the small machines: distribution and software, the instructions that tell the computer how to perform specific tasks. The Japanese, however, have shrewdly avoided language and cultural problems by designing their computers to use American-made software. Moreover, some Japanese companies now expect to use their considerable experience in selling electronic equipment to both businesses and consumers to offset the current American advantage in marketing.

Japanese firms, with their knack for producing well-made electronics products at a low price, are already overtaking U.S. manufacturers in some segments of the computer market. Japanese-made semiconductors are installed at the heart of many U.S. machines. IBM, Xerox and Hewlett-Packard all distribute Japanese-made Epson printers under their own labels to go with their personal computers. Experts estimate that up to 90% of American-built computers are now sold with either Japanese printers or monitors.

Japan is also quickly moving to pioneer its own technological advances. Sharp has developed a flat computer display screen that takes much less space than conventional ones. It is being used by Grid Systems of Mountain View, Calif., in its new Compass computer, which sells for $8,150. Sony has introduced a device that can store nearly twice as much computer information in about half the space that is now required. Japan is also reputed to have a lead in the development of more futuristic improvements like videodisc storage, which will vastly enlarge the capacity of personal computers.

Despite Japan's formidable track record in marketing to the U.S. consumer, American computer executives are downplaying the Japanese challenge. Says Radio Shack Vice President Jon Shirley: "They don't understand office automation, small business computing or have a clear grasp of the applications these machines are used for." Adds another top industry official: "I don't think the Japanese have ever faced this kind of competition in a particular market. We've got a very, very strong industry with extensive distribution, software support and computer experience."

U.S. computer firms, though, should not forget how they lost their dominant position in the Japanese market. As recently as 1979, U.S. companies controlled some 90% of personal computer sales in Japan. Their market share is now about 20%. Says David Crockett of Dataquest, a California-based firm that monitors the industry: "The U.S. companies don't seem to be doing their homework the way the Japanese are. The Americans feel they know the answers. It's an extremely serious situation." A little more than a decade ago, many U.S. executives in the automobile and consumer electronics industries dismissed the Japanese competition--and then saw their markets begin to slip away.

--By Alexander L. Taylor III.

Reported by Michael Moritz/San Francisco and Bruce van Voorst/New York

With reporting by Michael Moritz, BRUCE VAN VOORST

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