Renesas Electronics Corp Senior VP Iwamoto shakes hands with TSMC's Speciality Technology, Director Lin at the start of their joint news conference in Tokyo, May 28th, 2012. The leading automotive microcontroller chip maker worldwide, Renesas Electronics Corp. (RNECF), may soon find themselves amidst some serious restructuring, as rumors imply the company has set targets to raise as much as 100 billion yen ($1.28 billion USD) through slimming operations and potentially cutting up to 10,000 jobs. Though different sources are quoting different numbers in regards to just how many jobs will be cut, it seems likely that some of the downsizing will be in the form of selling manufacturing plants or outsourcing directly to Taiwan Semiconductor Manufacturing Co. (NYSE: TSM). Cutting jobs and shedding operations that aren’t creating profit are a reasonable reaction to the growing concerns, particularly from highly invested stakeholders, that RNECF is falling behind in a market that demonstrates consistent growth and opportunity. All that being said, RNECF has noted that media coverage of their restructuring is exaggerated. Either way, RNECF’s bottom line over the past 5 years implies that the decline in Japanese market share alongside a fierce competitive environment has taken a hefty toll, and re-analyzing strategy and structure may be the only real option at this juncture.

RNECF By the Numbers

The chart above is a brief snapshot of the operational struggles that RNECF has been working against over the past 5 fiscal years, highlighting the simple fact that a competitive advantage needs to be isolated operationally in order to capture value. Benchmarking these numbers against other players in the semiconductor and microcontroller market quickly highlights that year on year operating losses is far from the industry standard. From a strictly logical perspective there are two general considerations to make when costs are consistently offsetting revenues: How to raise price points or how to lower production costs? Interestingly enough, the trouble may be a result of losing on both fronts.

Zooming Out: Japanese Market Share

The first eye-catching statistic that needs to be considered in reasoning out where the issue lies is the significant decrease in Japan’s market share within the semiconductor industry world-wide, implying that a broader force is at play than mere internal inefficiency. Jump back to 1988, Japan is dominating in semiconductor sales with a commanding 40% of the global market. Moving forward to 1998 and that has been literally slashed in half, with Japan only left holding 20% of the pie (albeit, a slightly bigger pie). 2011 numbers show Japan is within the 15% ballpark. So what gives?

Theories pertaining to a struggling Japanese economy alongside a variety of natural disasters have been at the media forefront in recent years, but when the consistent decline in market share is taken into account over such a long period of time it may be safe to hypothesize that there is something more consistent at play here. Some clarity can be found when considering the previous logic that the value lost here is either cutting costs or developing a product that can demand higher prices, and the success of other global players hints that there are two clear strategies in this industry.

Invent or Outsource

As the semiconductor industry matured and the demand continued to increase, a significant need for Japanese chipmaker Renesas Electronics Corp's microcontroller is pictured at the company headquarters in Tokyo May 28, 2012 higher complexity and more versatility in technology became of increasing importance. The range of applications for semiconductor tech continued to expand, most recently with the rapid growth in wireless, and keeping ahead in reacting to such a dynamic environment from an innovation standpoint is both difficult and critical to staying competitive. A good example of Japan suffering from this technological arms race historically was portable music (can you even still picture a Sony Walkman?), where Sony started in the lead but failed to keep pace. This is a reoccurring theme that persists today as RNECF struggles towards incorporating 28nm node technologies.

Aside from remaining at the innovative forefront, the importance of keeping costs low through avoiding the pitfalls in domestically producing is of enormous importance in staying price-competitive. Globalization is part of business as we know it today, but it wasn’t always so clear. Leveraging the distinct operational advantages of outsourcing manufacturing was largely overlooked by Japan, detracting from their ability to produce products that offer good functionality at an affordable price. Combine the supply side of globalization with the demand side of a growing consumer group in emerging economies, and the inability to keep prices low enough can become yet more dangerous.

Bottom Line:

From a general standpoint Japan has been struggling in an uphill battle as companies like RNECF try to tread water on the global semiconductor stage, primarily as a result of establishing neither a technological edge nor a cost cutting edge. Outsourcing or innovation hold the keys to future success, and though RNECF claims that a large scale restructuring is more media rumor than confirmed strategy it’s quite possibly the only option left on the table. Shedding operational expenses through leveraging a globalized supply strategy has the potential to free up the necessary income to focus on developing the cutting edge products, and hopefully would help pull them out of the red.