Japan’s Niche Markets
Chapter 4
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, the Ministry of International Trade and Industry (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.
From electronics to rooftops
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.
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.
Japan’s innovation system
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.
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.
Ministry of International Trade and Industry
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.
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.