Funai Electric Company Ltd. Business Information, Profile, and History

Company Perspectives:

The digital revolution continues throughout the world, and in the years ahead we will continue to promote the digital sector and work to attain a secure position for the Funai Group in the global marketplace. The Funai Group will continue to work together to maximize corporate value. We earnestly seek the support and understanding of our shareholders in this ongoing effort.

History of Funai Electric Company Ltd.

Funai Electric Company Ltd. is the unsung hero of the global electronics industry. The Osaka, Japan-based company is the world's leading manufacturer of VCRs and TV/VCR combos and holds a leading position in a number of other key electronics segments, including DVD players, computer printers, and telephones and fax machines. Funai also produces large-screen LCD-based televisions, projectors, and DVD-RW and CD-RW devices, among other products. While the company distributes many of its products under the Funai brand name, a major share of its sales have long come under its brand names, which include Sylvania, Emerson, and Symphonic brands. Yet the company, one of the few fully integrated operations capable of producing nearly all of the parts and components of its products in-house, is also one of the world's leading original equipment manufacturers (OEM) in its product sectors. As such, Funai produces part or all of products sold by Toshiba, Hitachi, Matsushita, Mitsumi, Murata, Alps, Kaga, Rohm, Nichican, Philips, and Lexicon. Funai operates several manufacturing plants in China, as well as facilities in Malaysia and Thailand. The company also operates a number of sales and marketing subsidiaries, including the U.S.-based Funai Corporation. At the turn of the 21st century, the company has made a special target of the mass-market retail channel and has become an important supplier to the Wal-Mart chain. Funai has also begun shifting its product line away from analog technologies to focus its future product development on the digital market. Listed on the Tokyo Stock Exchange, Funai Electric continues to be led by founder Tetsuro Funai.

Pioneering the Consumer Transistor Market in the 1960s

Tetsuro Funai grew up in Kobe, Japan, the son of a manufacturer of sewing machines. At the age of 18, Funai left school and went to work as an apprentice at a rival sewing machine maker before rejoining the family firm in the early 1950s. While one of Funai's brothers led that company, Funai himself went to work as a salesman for the company. That position brought Funai into contact with the United States, as the company began supplying machines for the U.S. retail market.

Funai struck out on his own at the end of the 1950s. By then, the introduction of a new technology, the transistor, had begun to change the face of the electronics market. Funai quickly recognized the importance the transistor would play in developing a whole new home appliance sector and in 1961 founded his own company, Funai Electric Company, based in Osaka City, to begin manufacturing products based on transistor technology. Funai's first products were transistor radios.

From the start, Funai avoided a direct entry into the branded product market, preferring to produce as an OEM supplier before later developing a series of brand names. With Japan's economy still recovering from the devastation of World War II and the heavy reparations of its aftermath, Funai's sales were targeted exclusively at the U.S. market.

As an early entrant, Funai quickly gained a key share of the market and by 1964 opened its second manufacturing plant in Fukayusa-gun (later Fukuyama). The new facility enabled Funai to extend its product range to include popular consumer devices as eight-track tape players. By the end of the decade, the company had established two more manufacturing subsidiaries, Nakagawa Electronics Company, in Naka-gun, in 1968, and Okayama Funai Electric Company, in Tsuyama, in 1969.

Funai's growth slowed however in 1970, as Tetsuro Funai explained to Forbes, "when the work force got infiltrated by Communists." Labor unrest caused by the Communist-inspired labor union forced Funai to end investment in new manufacturing facilities in Japan. Funai continued to seek additional product categories, including a early version of the video recorder in the early 1970s. Yet the company had lost its momentum during a period that saw the rise of Japan's giant electronics manufacturers, including Sony, Toshiba, and Matsushita.

The growth of these groups forced increasing numbers of Japan's smaller electronic makers out of business. Another factor in the transformation of the Japanese appliance sector was the appearance of new retail models. In the past, Japanese appliance sales were typically made through small vendors, which tended to stock a single brand. However, a new form of larger, multi-branded retail appliance store had begun to appear offering lower prices and wider choices. Companies that had relied on small vendors quickly found themselves squeezed out of the market as cheaper imports from Korea and elsewhere began to appear on Japanese store shelves.

Funai's manufacturing expertise and its focus on export sales enabled the group to survive in the increasingly competitive market. By controlling its own manufacturing--rather than outsourcing for parts and components as did its larger competitors--Funai matched the major groups' market clout with greater responsiveness to its customers' needs. This enabled the company to enter a number of key markets in the early 1980s, especially, the new market for video-cassette recorders. An early entrant, Funai quickly became one of the largest suppliers of VCR systems in the 1980s.

The company had also begun exploring other markets, adding a European manufacturing and sales subsidiary in 1980. Funai quickly became a major OEM producer of appliances for the major European brands. The export market remained the company's sole focus into the mid-1980s. At the same time, the company continued to turn its product development and manufacturing muscle to new products, and, in 1984, made its first preparations for entering the domestic appliance market, registering a new subsidiary, Tokyo Funai Company, later named Funai Sales Company. The company then began developing an entirely new product--an automatic bread baker. Launched in 1987, the Rakuraku Panda, as the machine was called, became one of the year's most success consumer appliance launches, selling more than 100,000 units in its first year alone.

While the bread-making machine quickly inspired competing models, Funai swiftly capitalized on its new name recognition in its home country, bringing to Japan its line of VCRs and other products, which included microwave ovens, telephones, fax machines, satellite antennas, and set-top boxes. By 1988, with domestic sales now representing 10 percent of the group's total--up from zero the year before--Funai began plans to launch a wider array of 30 new products, nearly all of which were specially developed for the Japanese market. In this endeavor, the company was helped by the Japanese consumer's growing passion for all things electronic.

International Manufacturing Group in the 1990s and Beyond

At the end of 1988, the company's sales had reached $103 million. Two years later, the company had already begun projecting sales of more than $250 million, as consumer demand for its core products, especially videocassette recorders, swelled at the end of the decade. By then, Funai had found a solution to its labor problems. In 1989, the company established its first foreign manufacturing subsidiary, Funai Electric Malaysia, taking advantage of that country's lower labor costs.

While Funai's larger competitors clung to the Japanese labor market, Funai turned more and more to the foreign market for its manufacturing needs in the 1990s. The liberalization of the Chinese economy presented a particularly strong opportunity, and in the early years of the 1990s Funai began construction on its first factories in China in order to take advantage of that country's vast labor pool and extremely low wages. In 1992, the company established a new subsidiary, Highsonic Industrial Ltd., in Hong Kong to provide management oversight for the group's mainland production facilities. The first of these began operations in April 1992 in Dong Guan, in the Guand Dong province. By December of that year, the group's second Chinese plant opened, in Chang Ping. Moving closer to its core American market, the company also opened a manufacturing base in Mexico. In 1994, the company added its third Chinese plant, in Zhong Shan, also in Guand Dong province.

Funai not only pioneered the use of foreign manufacturing resources among Japanese companies, it also instituted highly efficient manufacturing techniques, including a Toyota-inspired just-in-time delivery system. These moves helped the company control its costs and thereby maintain a low pricing policy. The company's low prices helped attract a growing number of discount retailers, such as the United States' Sam's Club, which turned to Funai for its VCRs in 1990.

In the meantime, Funai's product offering continued to grow through the 1990s, particularly with the group's entry into OEM manufacturing of notebook and desktop computer systems. The company's computer market focus then came to bear on the printer market, and by the end of the 1990s Funai had become one of the world's leading manufacturers of OEM printer systems.

VCRs nevertheless remained the group's core product into the next decade. By the 2000s, Funai was responsible for producing as much as 30 percent of the VCRs sold around the world. Part of the reason for the group's dominance of the sector was the increasing willingness of major appliance groups to abandon manufacturing of certain products in favor of OEMs like Funai. In this way, the company picked up a new major customer, Philips Electronics, which turned over its Electrovoice and Philips brands to the company. The United States market, supported by a dedicated U.S. sales subsidiary established in 1991, remained the group's core market, especially for its VCR and growing television/VCR combo set sales marketed under the Sylvania and Symphonic brands. Since the late 1980s, however, Funai had begun developing a higher-end line of appliances for the U.S. market which were sold directly under its own name.

Tetsuro Funai, who turned 70 in the late 1990s, continued to lead the company's day-to-day operations into the new century. In 1999, Funai began preparing for his succession, taking the company public on the Osaka Stock Exchange. The following year, the group's listing was moved to the Tokyo main board. Funai then took his place among Japan's electronic tycoons, as the company he had founded became valued at more than $3 billion.

While Funai's growth was based on analog technology, the company recognized the growing importance of new digital technologies, particularly DVD players and recorders. Thus, the company began developing its competence in digitally based appliances, with a special interest in LCD-based televisions, projectors, and DVD players. By 2002, the company had begun to shift its product mix ahead of a future exit from analog technologies altogether.

Funai also began adapting its supply model as well, extending its focus from the specialized retail appliance channel to broader mass-market retailers. Funai had recognized that the retail market had begun to change in the late 1990s, particularly with the emergence of a smaller number of dominant retailers as exemplified by Wal-Mart. In the late 1990s, Funai succeeded in gaining a placement on Wal-Mart's shelves, but only twice per year.

In 1999, however, Wal-Mart asked Funai if it could deliver one million VCRs in time for a Wal-Mart "Early Bird" promotion. Funai did and bought the Emerson brand name--Emerson itself had gone out of business in 1993--to place on the VCRs. The promotion was a success, with Wal-Mart selling out all one million VCRs in just a matter of hours. That success helped Funai, and, after helping to redevelop Wal-Mart's home electronics department in 2000, the company was named one of Wal-Mart's strategic vendors for six of its products--including its VCRs, televisions, and DVD players--in 2002.

Funai continued adding new products in the new century, forming a partnership, in 2001, with Ricoh to develop and produce a new range of CD-RW and DVD-RW devices. In 2003, the group decided to expand its production of large-screen, LCD-based screens, setting up its first manufacturing subsidiary in Thailand. The new facility was already operational by the end of that year, with its capacity expected to reach 150,000 units per month. Funai's proven record of flexibility and production expertise made it one of the lasting fixtures in the global home appliance industry.

Principal Subsidiaries: Chugoku Funai Electric Company, Ltd.; Funai Electric(H.K) Ltd. Hong(Kong); Zhong Yue Highsonic Electron Company (China); Dong Guan Highsonic Electronic Products Company (China); Dong Guan Jia Xiang Highsonic Electronic Company(China); H.F.T. Industrial Ltd. (Hong Kong); Dong Guan Highsonic Electron Company (Hong Kong); Funai Electric (Malaysia) Sdn. Bhd.; Funai Electric (Europe) GmbH (Germany); Funai Mexico, S.A. De C.V.; Funai Sales Company Ltd. (Japan); F. Enterprise Company Ltd. (Japan); Funai Corporation, Inc. (United States); Funai Electric Trading (Europe) GmbH (Germany); Funai Asia Pte. Ltd. (Singapore); Funai Electric Research Institute Company Ltd. (Japan).

Principal Competitors: Siemens AG; Hyundai Corporation; Electrolux AB; Hitachi High-Technologies Corporation; Pioneer Corporation; Sony Corporation; Sharp Corporation; Sanyo Electric Shekou Ltd.; Samsung Corporation; Thomson S.A.

Chronology

• Key Dates:
• 1961: Tetsuro Funai sets up Funai Electric Company in Osaka, Japan and begins manufacturing transistor radios.
• 1964: Funai opens a second manufacturing plant in Fukayama.
• 1968: The company opens a factory in Naka-gun.
• 1969: A fourth factory is opened in Tsuyama.
• 1980: The company launches a sales and manufacturing subsidiary in Germany.
• 1987: The company launches the Rakuraku Panda bread machine in Japan, marking its entry into the domestic market.
• 1991: A U.S. sales subsidiary is established in New Jersey.
• 1992: The company opens its first two manufacturing plants on the Chinese mainland.
• 1999: Funai goes public on the Osaka Stock Exchange, switching to the Tokyo exchange soon thereafter.
• 2002: Funai becomes a strategic vendor for Wal-Mart's home electronics section.