Chapter 5: Japan's Niche Markets 

Japanese conglomerates entered the PV industry with a focus on niche markets—first in satellites and in the 1980s in consumer electronics.  Once these niches became saturated the Japanese government launched the first large residential solar subsidy program, which led to a rapid scale up of PV technology and to Sharp attaining the largest market share of any company before or since.  Japan lost its lead, to fast-moving German, and later Chinese, start-ups.

As niche markets became saturated, MITI created a rooftop subsidy program with a variety of innovative features: up-front rebates, a declining rebate schedule over ten years, and complementary regulations such as net metering.   During that program from 1994-2005 over 200,000 households installed PV systems and Japanese PV producers scaled up to meet that demand.  The leading Japanese firm Sharp increased its production scale by a factor of 200 and by the mid-2000s attained the highest market share any company has had since the early days of the industry.

Japan became a global leader in PV by putting in place all the key innovation components needed to develop a promising technology, commercialize it, create a market for it, and eventually dominate world production of it. 

 

Japanese companies and the national government conducted decades of R&D with a focus on commercial applications from the outset, in the 1950s.  Japanese global conglomerates entered the PV industry as early as those in the U.S. and found a sequence of profitable niche markets—particularly consumer electronics—in which to sell PV. 

 

As niche markets became saturated, MITI created a rooftop subsidy program with a variety of innovative features: up-front rebates, a declining rebate schedule over ten years, and complementary regulations such as net metering.   During that program from 1994-2005 over 200,000 households installed PV systems and Japanese PV producers scaled up to meet that demand.  The leading Japanese firm Sharp increased its production scale by a factor of 200 and by the mid-2000s attained the highest market share any company has had since the early days of the industry. 

 

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Japan’s national innovation system is distinct in the large role for the state.  Government activities were more important for Japan than for any other PV country, even compared to China.  The Japanese government not only funded R&D but determined much of the direction of private sector R&D. Japanese R&D rose just as US R&D was severely cut under Reagan.  It implemented a strong industrial policy that involved creating shared expectations in the industry and also purposively facilitating inter-technology spillovers.  At the center of the Japanese developmental state was the Ministry of International Trade and Industry (MITI).  MITI’s distinct approach was to get involved in an emerging technology area from the beginning.  This early entry was different from the Chinese central government approach, which is to provide support once companies become internationally competitive.  One example is MITI’s involvement in smoothing guidelines, such as net metering, for installations in the early 1990s before a real market existed.

 

Japan’s national innovation system for PV is also distinct in that it involved large multinational conglomerates with a very minor role for start-up businesses.  Consequently, Japan’s governance of PV was highly corporatist—the government developed policy in consultation with large companies with almost no role for citizen engagement or entrepreneurial input where any existed at all.  Contrast this to Germany, another traditionally corporatist political system where PV emerged from the grassroots and start-up companies became global leaders.  This system also promoted R&D consortia, which led to shared expectations among participants, for example about future deployment levels and prices.  It also involved technology roadmaps, a distinguishing characteristic of Japanese industrial policy and also PV development.  Creating shared expectations was effective at inducing firms to make large investments in scale.

Soon after that, Sharp’s growth stalled.  German and later Chinese producers were able to produce at much higher volumes.  Japan’s relinquishing its leadership on solar is surprising given its long history, the level of public commitment and the deep engagement by firms.  But it is not unique; the US and Germany also gave up what seemed like insurmountable leadership positions.  Japan lost its lead due to not anticipating the emergence of the German market, focusing on high quality rather than low cost production, reluctance to enter into long term contracts for silicon feedstock, reallocating production investment to thin film PV, and relinquishing technology development leadership to equipment suppliers.

MITI made intentional efforts to maximizing knowledge flows among technology areas.  Because the players were large   conglomerates, like Sharp and Kyocera, synergies and opportunities for economies of scope seemed large.  MITI pursued this at a national scale.  No other country so explicitly targeted spillover.  It is thus not surprising that Japan is where niche markets mattered most.  Niche markets were crucial when prices had not yet dropped enough to appeal to mass markets.  Niches provided smaller markets with higher willingness to pay allowing PV producers to target real applications, with real customers, and often at prices without subsidies.  Consumer electronics firms were powerful players in Japan’s economy and became interested in PV as a way to differentiate their products.  Japan’s R&D focus on thin film silicon—80% of R&D in the 1980s—was consequential because that form of PV was easily amenable to integrate into watches, calculators, and toys, even if the efficiencies did not improve sufficiently for thin film to serve mass markets.  Ultimately however, niche markets were insufficiently large for firms to expand and target economies of scale.

Perhaps the biggest contribution that Japanese made in policy was by combining Technology Push and Demand Pull.  While technology push in the form of R&D had been strong and consistent since the 1974 Sunshine Project, in the 1990s Japan got serious on the demand side by subsidizing installations and supporting that with net metering regulations.  They initiated a virtuous cycle of technology push and demand pull, which Germany subsequently imitated.  This stimulated the world’s first large scale manufacturing.  Sharp in particular did a major scale up in early 2000s, which was unlike any other firms had ever done.  They showed it could be done by transforming a batch process mom and pop industry to one that used continuous processing and industrial scale.

Japan industrialized PV production with a sequence of R&D, niche markets, creating markets, and enabling scale up.  Japanese solar firms became the largest in the world.  But Japan, and its top firm Sharp, lost its lead after 2005.  Several explanations played a role: not anticipating that Germany’s market would grow so quickly; labor costs in Japan made it uncompetitive; excessive emphasis on quality; slow response to the silicon price spike; and over-investment in thin film. 

Japan also contributed to the rise of Germany and later of China by making novel contributions to PV.  Some of these, like serving new niche markets, improved the technology so that later entrants could adopt designs and production technology that was more advanced.  Others—such as the rooftop subsidy program and demonstrating the cost reducing benefits of scaling up—provided replicable models that could be deployed in other places with different configurations of resources and capabilities.

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© 2019 Greg Nemet