The agony of Japan Inc.

May 25, 2012: 10:40 AM ET

Companies like Apple, IBM and Microsoft once stood in the shadow of much larger and more powerful Japanese electronics giants. Those days are long gone -- and, lately, it looks like they may never come back.

By Kevin Kelleher, contributor

"This country is in a war and some people understand it and some people are siding with the enemy."

sony_headquartersFORTUNE -- Believe it or not, someone once wrote those paranoid words about Japanese corporations. It was only two decades ago, when people fretted – wrongly, if profitably – about the awful and certain specter of Japan eating America's economic lunch.

I found that paranoid quote in Rising Sun, the forgettably terrible 1992 airport novel about American cops foiling Japan Inc. with videotapes (consumer goods almost certainly manufactured by Japan Inc.). But it wasn't only Michael Crichton profiting from such cultural hypochondria. Nonfiction bestsellers in that bygone era included Karel van Wolferen's Enigma of Japanese Power, Clyde Prestowitz's Trading Places, and Pat Choate's Agents of Influence.

They were all bad books, and the only reason to remember them now is to measure the high watermark of innovative power that Japan's electronic giants once touched, albeit briefly, before falling again. And falling hard. There was a time when companies like Apple (AAPL), IBM (IBM) and Microsoft (MSFT) stood in the shadow of Japanese electronic giants like Sony (SNE), Panasonic (PC), Sharp (SHCAY) and Nintendo (NTDOY). But no more.

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What happened? In the U.S., investments by venture capital in emerging Internet technology fostered startups like Google and Facebook into giants. IBM and Apple took bold steps to find new markets – and Microsoft is in the midst of doing the same. It wasn't U.S. trade policy that silenced the Japanophobes, it was the rise of the Internet in general, and the web in particular

Japan's electronics conglomerates never really understood the web, no matter how they tried. They could follow the web, but never for a moment did they ever show that they could lead it into new territory. And the web is all about exploring new territory.

So while there were a number of bestsellers that tried to warn of the rise of Japan Inc., there were few if any that explained what went wrong. There was the bust of the Japanese stock bubble, and the subsequent two decades of deflation. There was the sclerotic tendency of Japanese companies to stubbornly cling – long after they made economic sense - to practices that led to its rise: cross-shareholding, an obscure intimacy with government bureaucrats and a sense that the corporation knew better than the consumer what was best.

Japanese electronics companies thrived in the 80s and early 90s because of a mix of high quality and low prices. Their domestic consumers subsidized the low prices of Japanese electronics goods abroad. But once the Japanese stock bubble burst, it took only a few years for Sony, Panasonic and others to cut back on the R&D budgets that were their lifebood.

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So the first iPod disrupted the Sony Walkman as the must-have portable audio player (the brief, wondrous life of the Sony Discman notwithstanding). Nintendo and Sega (SGAMY) yielded video-game dominance to Electronic Arts (EA) and Activision (ATVI), and later Zynga (ZNGA) and Rubio. Stereos and TVs made bearing the Sony and Panasonic names were supplanted by obscure brands like Vizio, Sonos and Roku.

The damage can be measured in the stocks of these electronics mammoths. Sony, once the most prestigious brand in consumer electronics, has seen its ADRs lose 72% of its value in the past five years. Sharp's has lost 76% of its value, Panasonic's 66% and Nintendo 60%. Olympus (OCPNY), which has been mired in one of the worst financial scandals since Enron, has oddly fared relatively better. Its ADRs are down only 59% in the past five years. So what does that say about its worse-performing peers?

The damage can be explained in the markets that these once-dominant companies have focused on – and avoided. What were Kodak moments are now captured on smartphones, and the standalone camera has become a high-end device for hard-core shutterbugs. Stereo systems have become similarly bifurcated: Either they're portable enough for anywhere-anytime music playing, or they're complex enough to satisfy the extreme audiophile.

And television sets, long the bread and butter of Japan's electronics giants? They are becoming ancillary devices, the hi-def screens for movies and TV programming streamed across the Internet. Yes, the Internet, that Achilles heel of Japanese electronics manufacturers. Consumers are satisfied to watch a ball game on their laptops, or a movie on their phone in the airport.

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The traditional TV set that Japan once specialized in has to get bigger, fancier and more extreme to compete with the smaller, yet more mobile screens. But the real threat is that video is going handheld. And Japan has never had a stronghold in smartphones and laptops. Those markets belong to Apple and Samsung. And even the Internet-connected TV appears ready to defect to Apple.

Then there's the terminology. Sony, Sharp, etc., have always been called electronics companies. If electronics was a sexy name for an industry 30 or 40 years ago, it sounds archaic now: Electricity is a utility, not a novelty. Even the Internet or the web sounds a little dated now, which is why we reach for new terms like the social web or the semantic web. Or even fret over the demise of Silicon Valley.

And Japan's electronics makers? They're even further behind. But it's not because of any revenge of American ingenuity. As the paranoid cop in Crichton's Rising Sun noted, Japan has indeed been in a war. But over the past decade or so, it's been clear Japan's worst enemy is itself.

Kevin Kelleher is a writer in the San Francisco Bay Area. You can follow him on Twitter.

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