Myth: Japanese Are Only Good At Incremental Innovation

Japan’s Declining Commercial Innovation, Part II

Source: https://ourworldindata.org/battery-price-decline Notes: The logarithmic vertical scale shows each halving of the lithium-ion battery price per kilowatt-hour through 2018; Bloomberg projects a further decline to $113 by 2025

In dealing with the causes of Japan’s declining trend in commercial innovation, it’s necessary to first dispel a widely-repeated cultural myth: that “the Japanese” are only good at incremental innovation, not big breakthroughs, and that “they” mostly focus on improving existing products rather than developing new ones. This is an updated version of the story so often told in the high-growth era: “the Japanese are good imitators but they’re not creative.”

            Not only is it not accurate about Japan. It’s not even accurate regarding the relationship between creating new products and improving them, incremental versus radical innovation, and between technological brilliance and commercial genius.

Japanese Firsts

Time after time, particularly in the 1960s-80s, Japanese companies have been the first, or among the first, to develop a new product. They developed the first supertanker as well as the first commercially viable Electric Vehicle (the Nissan Leaf), the first Hybrid vehicle (the Toyota Prius), as well as the first laptop computer (Toshiba) and the type of CMOS computer chip needed to make it (Sharp). Three of the key products fighting against climate change were pioneered in Japan via a government-sponsored program launched in the 1970s called “The Sunshine Project.” The latter’s initial impetus was to make Japan less dependent on imported oil following the 1973-74 oil price shock. The three are commercially viable solar panels (Japan was the top producer until 2008); electric vehicles; and the lithium-ion battery (Asahi Keisei and SONY) which makes renewables economically viable.

            As detailed in Chapter Two of my book, The Contest For Japan’s Economic Future, a myriad of electronics products would not exist if not for the technological and commercial brilliance of Japanese firms. In cases like the microwave and transistor radio, entrepreneurial companies sometimes took technologies developed in the US for military or other purposes (the magnetron and the transistor) and created new technology to invent mass-market consumer products that no one else had even envisioned. At times, executives among the supposedly “risk-averse Japanese” “bet the farm” by investing huge amounts of money that could have sent their companies into bankruptcy had their efforts failed. In the 1960s, Sharp developed a new kind of CMOS chip for handheld calculators even though it lacked experience in that field. Why even make such an attempt? Because, explained Hiroshi Inoue, the head of the team, “We were burning. Though we suffered setbacks, the young engineers who suffered them grew up to be the key people who supported Sharp’s integrated circuit group.” This chip made the laptop possible.

            Here’s a partial list: the handheld battery-operated calculator (developed by Sharp in competition with Texas Instruments); various specialized electronic and computer chips that became industry standards, including flash memory chips like NAND (Sharp and Toshiba); the consumer electronic watch (commercialized by Casio and Seiko); the transistor radio (invented by SONY); the video cassette recorder (VCR) for consumers (invented separately by SONY and Panasonic); the single-lens reflex (SLR) camera and then the digital SLR camera (developed by Nikon and Canon); the compact disc (introduced by SONY); the Walkman (invented by SONY); the video camcorder and the CCD chip at its foundation (SONY); liquid crystal display (LCD) screens (developed by Seiko and Sharp); the 1G cell phone network (NTT) and 3G cellphone (NTT Docomo); and flexible endoscopes (Olympus).

            So, if Japanese companies are no longer putting out as many innovative products as they used to, the cause must be something other than some fictitious cultural block in the Japanese technical and commercial imagination.

New Products Vs. “Mere” Improvements

A recent article complained that, since the 1980s, “only” 20% of Japanese commercial innovations involved new products with the rest being improvements to existing products. The first thing to note is that this is a typical ratio, according to Nathan Rosenberg, a top historian of technological development. “According to McGraw-Hill annual surveys over a number of years, the great bulk of R&D (around 80 percent) is devoted to improving products that already exist, rather than to the invention of new products.”

            More fundamentally, disparaging improvements as “merely” incremental misses the process that makes some technologies come to be seen in hindsight as radical breakthroughs. Someone may invent a product or technology that eventually—perhaps decades later—proves to be transformative in its economic impact. Steel, electricity, and the internal combustion engine come to mind. But they become that important because of decades of one incremental improvement after another that steadily lower costs while improving quality and versatility. This not only broadens its uses but also enables other products to do things they could never have done before, e.g., electric-powered machinery made of steel.

            Consider the lithium-ion (L-I) battery, which was invented in 1985 by Japanese chemist Akira Yoshino of the Asahi Kasei company. For this invention, Yoshino was awarded the 2019 Nobel Prize (along with two precursors whose work aided him). In 1991, SONY developed a commercial L-I battery and, in 1994, Panasonic began producing the model at scale. “From there, the battery quickly took hold of the portable devices market, enabling camcorders, laptops, and cell phones to become fully portable. Over the nineties and 2000s, Japanese firms gradually widened lithium ion’s applications into power tools, energy storage, and automotives, slowly displacing legacy batteries.”

            Consider how long it took a series of “incremental” improvements to turn the L-I battery into a transformative weapon against climate change. Back in 1991, the 75 kilowatt-hour (KwH) battery pack powering today’s Tesla Model S would have cost a half-million dollars. Today, it costs about $10,000 and the price is still plunging.

            Consequently, within a few years, an EV will cost no more than a conventional gasoline car even without subsidies. It already costs less to charge an EV than to fuel a car. Such cost reduction is critical to spreading the purchase of EVs beyond affluent first adapters. At around $80 per KwH, an EV would cost the same as a gasoline car. By 2023, the average price of an L-I battery pack was 98% lower than the cost in 1991, just $139 per KwH, (see chart at the top). Bloomberg New Energy Finance projects it will fall to $113 in 2025 and $80 in 2030. Others suggest cost parity with gasoline cars come even earlier.

            Cost is not the only improvement making EVs viable. Currently, the battery in the Model S weighs about 1,200 pounds. In 1991, that battery would have weighed 4,000 pounds. The majority of the energy in an EV would have been needed just to move the battery itself. It took weight reduction to achieve a reasonable driving range.

            At the same time, affordable battery storage is indispensable to the expansion of solar and wind power because it can store the excess electricity produced during the sunny hours of the day and release it for use at night or on rainy days. That means each Kilowatt of solar and wind capacity can deliver a lot more Kilowatt-hours of electricity in a year, and the latter is what we really care about. Batteries plus “smart grids,” another improvement of an existing product, will further multiply the KwH supplied by each dollar invested in renewables.

            What’s most relevant for this post is what has brought down the cost and weight. Half of the entire cost decline over the past three-and-a-half decades came from year after year of “incremental” R&D, mostly in the fields of chemistry and materials science. Economies of scale came in second to R&D. Learning curve effects appear to have come in third.

            As Nathan Rosenberg (cited above) pointed out, “Thus, it is incorrect to think of R&D expenditures as committed to the search for breakthrough innovations of the Schumpeterian type... Their main goal is to improve upon the performance of technologies that have been inherited from the past.” The distinction between radical and incremental innovation is often far less clear-cut than people imagine.

            Today, lots of incremental R&D is being done in Japan and elsewhere on the use of varied materials to improve L-I performance, as well as the creation of a solid-state version of the L-I battery that promises faster charging and a longer driving range. Whether one calls the latter a new product or an improvement of an existing product, it will be a great leap forward in expanding EVs’ share of cars on the road.

Innovation, Company Absorption, and Corporate Strategy

Mass transmission of electric power and thus the development of electric machinery began in the 1880s. But it took four decades before electricity had a measurable impact on US productivity. That’s because productivity leaps required concomitant “corporate reengineering” to exploit electricity’s potential. Said Rosenberg, “The restructuring of a factory, including not only the flow of work on the factory floor but also the larger issues of social reorganization, altered work arrangements, and new patterns of specialization on the part of both workers and management, took decades of experimentation and learning.” The same kind of corporate reengineering is required to take full advantage of digital technologies.

            To lift the economy, technological innovation must be married to corporate ability to use the technology effectively. Ask yourself: why was it Tesla, not Nissan, that changed the world? It was Nissan, after all, that created the first commercially successful EV in 2010, the Nissan Leaf. In fact, until 2020, the Leaf was the world’s top-selling EV. But Nissan failed to make the necessary incremental improvements, including fixing its poor battery life. Moreover, customers who complained about the battery didn’t feel Nissan was responsive. The culprit is not a lack of technological prowess, but a failure of corporate strategy and execution.

            I’ll explore company absorption capacity in Japan in the next installment.

On some days on amazon.co.jp