Joi Ito's conversation with the living web.

I first started to work with China when we invested in a company that was trying to get a wireless permit in China and I had the opportunity to meet many Chinese officials. Some told me that they thought I made a mistake spending time in the US for the last 18 years and that I should focus on China which will obviously have more influence over Japan than the US. On the other hand, it's not too late.

So, this is a result of many long discussions with Leonard Liu...

First of all, Taiwan will become part of China eventually and we should look at how Taiwan Inc. operates. They bootstrap. They first make displays for calculators, then they made calculators, then PC's and now Quanta makes more laptops (designs them too) than any other company in the world. DVD's because of the popularity of DVD's caused by the lack of copyright regulation in China are mostly produced in China. DVD's are one of the most profitable components of the living room appliance suite. Japan is working hard on high end things like video cameras and might end up in a similar situation to the Americans who invented the TV, but didn't benefit from the business. China will probably make most of the DVD's and TV's and make all of the money.

The risk here for Japan is that Japan is 5 years behind the US and have not been able to take the "shallowing" strategy that US companies such as Compaq and Dell have been able to take. This strategy is to shallow the products and not give up market share. They now outsource almost everything to Taiwan. Japn is going down the deadly path that IBM and GM went down. Japan is trying to go high end. You can't buy a Japan PC under $1200.

On the other hand, Japan is losing competitiveness in manufacturing. Taiwan has 12 inch wafer fabs, Japan doesn't. So Japanese cell phones have cool applications, but deep down inside, they are not that smart and may not be able to compete long term with phones designed by Taiwanese with access to the most advanced semiconductors.

It is obvious that China will learn the Taiwan Inc. business model and will start from the bottom and bootstrap up and take over much of manufacturing from Japan. Japan needs to assume that they will lose manufacturing to China and focus on services, IT and bio, all sectors where we currently suck.

We need to purge the system of banking and government relationships that are causing Japan to be focused on the sector at extreme risk from the Chinese.

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