Breaking Out of the Western Shell

Micron Enters the Japanese Market

Micron Electronics, Inc., is a major PC manufacturer and direct retailer, with over 3,000 employees and annual sales of $1.8 billion. Micron Electronics Japan KK, with headquarters in Makuhari, is a new (1996) and expanding subsidiary of US-based Micron Electronics, Inc.

Manuel De Pena is president and representative director of Micron Electronics Japan KK. A graduate of the University of Texas, De Pena helped start international department at CompuAdd (a computer mail-order company), then worked at Dell Computer for four years. He joined Micron in May 1994 as director of international sales, and was appointed president of Micron Electronics Japan in spring 1996.

interviewed by Wm. Auckerman

What is the relationship between Micron Electronics and the other Micron companies?

Manuel De Pena: Micron Technology is our parent company. Until recently, they owned 79% of Micron Electronics; now it's about 65%, since there was a stock offering of 13.5 million shares made in late January. Other companies under the Micron umbrella include Micron Quantum Devices, Micron Construction (which builds a lot of the fabs and facilities for us), and Micron Displays.

We're the largest of the subsidiaries. In fiscal year '96 (ending August 1996), Micron Technology's total sales were about $3.6 billion. Out of that, we were about $1.8 billion, so approximately 50% of total company revenues. From a profitability standpoint, recently we also account for a large portion of profits, since semiconductors are going down in price. There's been quite a bit of pressure on the profitability of semiconductor sales.

Micron Electronics was formed in April 1995 through a three-way merger. Could you tell us a bit about that?

De Pena: Before the merger there was Zeos International, which was a completely separate organization; there was Micron Computer, which was a 100%-owned subsidiary of Micron Technology; and there was a company by the name of Micron Custom Manufacturing Systems, which was involved in doing contract manufacturing for other manufacturers, such as Cisco, and for the parent company. Now, we're all part of one organization.

It was what is called a "reverse merger." What actually happened was that all three companies merged into Zeos, and then we changed the name from Zeos into Micron Electronics. In essence, we gave the shareholders of Zeos International shares in Micron Electronics. Micron Technology took the biggest part, which at the time was 79%. There was a small float on the market, and about 10% is owned by employees.

Micron Electronics worldwide has over 3,000 employees. How big is the Micron Electronics Japan staff , and how big do you expect to grow?

De Pena: Right now, we're about 50 people; we just got started. We're getting ready to expand into our next section, which will hold about another 100. We're looking to have, by the end of the year, a total of about 150 people, but that all depends... on the impact of our successes as we enter the Japanese market.

Do you market the same products in Japan as in the US, or do you tailor your products to local market?

De Pena: We absolutely tailor the products; all our products are localized. But what's interesting about that is not only do we localize everything to Japan, but we're also offering some of the English systems that customers used to buy directly from the States. We're finding that there is quite a large foreign community I don't mean just American, but a community of businesses and individuals that is interested in products that are not in Japanese. We've adjusted our sales in order to accommodate these customers, and have had quite a few calls for these systems.

Do you also offer bilingual systems?

De Pena: Not at the moment. We feel that there are sufficient third-party products out there that answer those needs. Quite a few products that I've seen in Computing Japan would be easily installable in our systems, such as Neocor's Typhoon, or a Web browser that's used on the English Windows platform but can view the Japanese character set. But if a customer installs both Japanese and English, we'll help them support it either way, help them deal with any issues that come up.

What kind of English-language sales and support do you provide?

De Pena: Currently, almost all of our direct sales staff speak English. We also have people in tech support that speak English. We expect to increase that to make sure that we cover the market.

What is the relationship between Micron Electronics Japan and your US headquarters? How much independence does the Japanese office have in formulating its marketing and business strategies?

De Pena: That's a very good question. We understand that, of all markets, the Japan is the most different from what we're used to dealing with. So even though we're a 100% wholly-owned subsidiary of Micron Electronics, we actually have quite a lot of independence and autonomy.

We have quite a bit of autonomy in deciding the direction, or even looking at a new direction from a marketing and image standpoint. We're heading in a little bit different direction -- I'd say quite a bit different direction -- than what they're doing in the States, which tends to be a little more conservative, more technology centered. We're looking at breaking out of that shell, and being associated more with what a Japanese company would be associated with.

I'm getting ready to go to the US for 10 days; part of that is to go over what marketing strategy we're going to implement here -- and how it impacts the US, more than how the US is going to impact us. I'm very happy at the way things are set up.

Can you comment on your distribution strategies for consumer and corporate markets?

De Pena: Historically, we have mainly focused on the consumer, and what in the United States we would call small business. But with the introduction of new products that are coming up very soon we'll soon be introducing a new line of notebook products into Japan that kind of expands the market that we normally would target. We're introducing a new line of servers, which also expands who we normally would target. And we're introducing a set of client-level type workstations mainly geared toward the corporate market. So what we're really doing is expanding who we reach.

That does not mean that we're going to abandon the consumer. On the contrary, I see us introducing more, and more interesting, products here in the near future.

Is this a similar strategy to what Micron is using in the US?

De Pena: The US is using mainly a small-to-medium business-centric approach. But the Japanese market is still evolving, so we're trying to be as flexible as possible to accommodate the changes here, and not try to copy something that's happening in the US.

Some people would say that it's a mature market, but in reality with the changes, and the shift from the PC98 environment to a Windows 95, Intel-based environment businesses who weren't computerized are shifting how they make decisions. And people who were PC98 before are also changing the way they're implementing the Intel-based products.

How does your pricing in Japan compare with prices in the US?

De Pena: When we first looked at the Japanese market, we thought that it would be possible to price slightly above the US. But recent changes in both the market and the economy are forcing us to price at or below the US level. We're trying to avoid the below, as anyone would.

Are Japanese consumers more demanding in terms of product quality?

De Pena: We do have to be even more cognizant of the quality requirements of the Japanese consumer. Not that in the US our quality is any less, but there is a certain attention to detail that has to be taken into account, things that may not be as important to customers in the US.

The packaging is an example. In the US, the packaging gets pretty banged up just in the process of being shipped. There's no way that I could get a system shipped from the US to here, opened and checked, and then put back into the box. What we've implemented here in Japan is a quality assurance facility that receives all products, does all the testing. Even though the product has been tested in the US, we do one more quality assurance series of tests here in Japan: we test the hardware, the software, make sure all the connections are set right, that cosmetically the product is immaculate. Then we package it in brand new packaging, so that when the customer gets the machine it looks like a brand new product, as they expect.

Do you have plans for setting up a regional assembly plant?

De Pena: Yes, we're looking at that right now. We're checking various locations to see what is the most convenient, most cost-effective. Since Japan is the largest and the primary market we have in Asia, what the proximity to Japan is, and where the hubs of distribution are located from the transportation standpoint are important factors.

What is your 3- to 5-year goal?

De Pena: Our primary goal is to establish ourselves as a company that the Japanese customer would feel comfortable doing business with. Focusing on the direct market makes things a little more... I won't say more difficult, but we're entering an area that is new for Japan. Right now, the direct market is only about 10%. But at the same time, my competitors are fewer.

Within three to five years, we would like to be able to attain a measurable market share. I'd like to be able to tell you "3% to 5% within three to five years," which is what I have said in previous interviews. Anything more than that, I think, would be unrealistic; that's an attainable target. Can we make it? I think we can, but it's going to depend on various factors, such as how the industry changes, how the economy transforms itself....

If we continue to see a very weak yen, it may be a little more difficult than we had anticipated. But, hopefully, with all the infrastructure that we've put in place, if and when we attain that level of growth we'll have the proper support to manage it.

Who are the main competitors for your target customers?

De Pena: Absolutely, our primary competitors are Dell and Gateway. And, to a lesser extent, maybe Epson Direct and Akia.

And how do you differentiate Micron from its competitors in the minds of prospective buyers?

De Pena: One of the challenges is communicating who we are. Those people that know who we are, are probably aware that in the United States last year we won over 100 awards, everything from performance awards, value awards, engineering design awards.... Actually, we've won more awards than all of our competitors combined. So part of what we'll message initially is to let people know where we come from, what is our heritage, what have we done elsewhere.

Part of what we have to do is let the Japanese consumer know what we've done in other areas, and to make them feel more comfortable doing business with us. Once we're able to do that, I think one of the things that will help us distinguish ourselves is to show people we have what we feel is a very high performance, very high value product that our overall package, the combination of product, service, and quality we offer, is a good alternative to Dell and Gateway.

Are you currently selling "packaged" products or build-to-order configurations?

De Pena: Right now, we have mainly packaged products. We have an inventory that we're constantly rotating in Japan, so if you were to call us up about an advertised configuration, we can ship it to you within about three days. But we are moving toward a more assemble-to-order (or custom) configuration model. That extends the lead time, but it gives our customers a greater breadth of choice. But we'll continue to implement both. If there are products we feel are popular configurations, then those products will be available immediately to ship.

What are your own personal objectives for the next 3 to 5 years?

De Pena: I've been so involved with the company's objectives, I've kind of put mine aside.

One of my main objectives is to learn to speak Japanese. If I'm going to live in Japan, and work in Japan, I have to learn to speak Japanese. And not just because I need it, but because I want to. I'm a guest in this country, so if I meet someone I should feel obliged to at least converse in a light manner in Japanese.

A secondary objective would be to become a little more cognizant, a little more aware, of the way to do business in Japan. I bring a very aggressive Western view of how to do things, and little-by-little I'm learning how to adapt, and what things work best. If I'm going to lead this company for the next three to five years, then I'm going to have to have a good understanding of the best way to do business in Japan.

What are some of the special problems of doing business in Japan?

De Pena: Some of the challenge in running this type of organization is finding qualified people. In an industry that is as new and dynamic as the technology industry, it's difficult convincing a potential employee that working for Micron is something that would enhance not only their career, but their quality of life. I seriously think that if you're happy at the organization where you work, then your overall attitude toward life is much better. And I think we can offer people who work for us that sort of added value; it's something that's hard to put a yen figure on, but I think it's important.

What is your strategy for becoming accepted as Japanese company rather than a "foreign" company?

De Pena: I think just being able to message the Japanese customer properly in a way that is convincing, yet at the same time accommodating, is going to be very important. If we come in with just a Western view of "We're Micron, and this is how we're going to do things," I don't think we're going to get very far. But if people realize that we're offering something that's a little bit different, but that's good or is going to fill a need, and we give them good service... then I think we're going to convince people that we're a good company to do business with.

What are some of the current driving forces in the industry?

De Pena: Obviously, the technology changes are very, very strong. It's very difficult to do anything without really following what Intel does. A lot of the technological innovations and advances that Intel brings to the market are fundamental to keeping the industry alive and vibrant and growing. What Microsoft does is extremely important as well. Right after the introduction of Windows 95 there was this huge resurgence in the Japanese market. Now things are beginning to taper off.

Some people attribute the cooling off to the economy; others say that because there hasn't been any new or compelling technology, either hardware- or software-wise, things haven't happened. I think a combination of both of them has a lot to do with the market and the industry really moving in the right direction. I think you'll see some new products from Intel and Microsoft on the very near horizon that are going to rejuvenate the industry.

Speaking of new products, Micron's Millennia MXE P200 recently won a PC Magazine award. What do you foresee for the future of MMX systems?

De Pena: Yes, we've announced that product in Japan, and it begins shipping this month [February].

We're very excited about the MMX. From our standpoint, the MMX reduces a lot of our support headaches that we've had in the past. The more you can integrate functions into a single unit, the less you're going to have problems with these things integrating with each other talking to each other and working together. What the MMX chip does, in combination with the other hardware that complements it, is that now you have things running at processor speed, you have functions and calls running from the processor. The information is all built into the processor, so it really lends itself to a much more trouble-free product.

The more you add sound cards and other peripherals externally, that aren't specifically linked to the processor, you begin to have conflicts. Having one central point of control really facilitates what the customer gets as well as how we support the customer.

How does the Pentium MMX compare with a "normal" Pentium or Pentium Pro? Is it useful in business applications?

De Pena: I think you'll find that the MMX lends itself to a variety of applications. In the home, it's pretty obvious from the sense of multimedia applications, educational software, and games. From a business standpoint, the MMX technologies also expand what companies can do. Some of the video teleconferencing standards that have recently been introduced now are easier to incorporate and easier to manager because the MMX technologies have been brought into the new products. The fact that things also run quicker reduces some of the throughput time that it normally takes on the network.

Micron offers a five-year power warranty on its computers. Isn't that unusual?

De Pena: It is unusual, because you won't find any other company in the industry that offers this sort of warranty. We felt that it was a way to distinguish ourselves from the competition. Since our parent company, Micron Technology, produces the DRAM that we use in a majority of our systems, we have the highest level of confidence in the product. Now the processor is from Intel, and we have no reservation about the quality or level of product that you get from Intel.

So we felt that by offering a five-year warranty on the memory and processor, we really weren't exposing ourselves to any dangers. On the contrary, we were really ensuring that the customer got a product that they themselves would not have to have any worries about.

Our three -year parts and labor warranty is similar to what other companies offer, except if you'll look at some of the details, we cover some of the things that other companies don't cover, such as the monitor. Most other companies exclude the monitor.

Some pundits have said that Micron's timing of entry into Japanese market is bad, that you're coming in too late.

De Pena: Well, it's all relative. It's the right time for us because we've had to implement a lot of infrastructure investment in order to open up this facility. Had we opened up any earlier, I don't believe that we would have been able to offer our customers the type of service and type of product that they have come to expect from us. It would have been less than ideal for us to be here any sooner. There's a couple of market forces that we wish we could have skipped, such as the weakening of the yen, but we'll adjust, and the economy will adjust.

And I think there will still be other entrants to the market. People say that we're the last, or we're late, but this is an industry that doesn't have any allegiances to who comes in first or last. Any company that offers consumers the right product and good quality, reliability, and service can be successful. I think Akia is a perfect example of that.

And how are you letting the Japanese consumer know that Micron is here?

De Pena: We're looking at a variety of ways to message our customers. Obviously one, and we call it our core messaging, is through computer publications. There's quite a lot of computer magazines in Japan; the last count I saw was over 160 computer magazines. But there is a core set of publications that are very, very good. Your own publication notwithstanding, there are DOS/V, Nikkei Byte, Nikkei Personal Computing, ASCII, several of the Softbank publications, PC Week, the new PC Computing. We're also looking at newspapers, and television is not out of the question. It's really a matter of what is the best medium to reach our customers.

As we continue to go along, we'll continuously monitor what our customers tell us is the best way to reach them. Since we are a direct marketer, we are in constant contact with our customers, and they tell us what they like, what they don't like.

Do you use the Web for sales?

De Pena: In the US, yes. The only thing we don't have right now and I'm sure that will change in the near future is what you would call Internet commerce. We're still evaluating the security issues that a lot of our customers have.

How has the PC marketplace changed in past few years, and how has Micron responded to those changes?

De Pena: In the States, I think that users have become more educated, and more savvy with regards to what they buy. In the initial phases of this industry, people weren't really sure. They had a certain amount of money, and they bought what they felt they could get. But the second or third time around, people are saying, "These are the type of things I really need to watch out for. Maybe the size of the disk is not as important as the performance of the processor, or the amount of memory that I have, or the feel of my keyboard."

I think, even in Japan, you'll find that as people in their businesses, in their homes, become more educated on how to use computers, they're becoming more and more demanding. They're also learning what it is they want and don't want. And that has been a big advantage to us, because we're able to change as quickly as the industry, or as quickly as our customers want us to change.

Another big advantage that has resulted from this is that, in the States, the reason that we have had such a fast rise to recognition is that in the US magazines tend to do comparative analyses of products rather than individual analysis of a product. In other words, in Japan they'll look at a product and generally, if it functions and does what it needs to do, there is no reason not to say that it is a good product. In the States, I think magazines go one step beyond that. They say, "This is a good product, but here's another one that is just a little bit better, and here's why it's better." And we think that if our product is compared with those of the competitors, we're going to come out ahead.

What will be tomorrow's mainline data storage technology?

De Pena: The one we're looking at next is DVD [digital versatile disc]. Not just because people are talking about it, but in reality that seems to be the next technology that holds the most promise. The cost of DVD is reasonable, and it's going to drop as more and more companies adopt the standard. The problem is that today there really is no standard; there's about three of them. We're still trying to figure out which one is going to be the standard, but I feel that DVD is the next storage technology that people will be getting excited about.

I view floppies as more of a convenience than a necessity. With everything coming on a CD-ROM now, I really don't have a preference over whether its a floppy, or an MO, or an L-120; there is no one product that is dominating.

We're still open; we like to follow standards. We don't want our customers to make an investment and then be caught up in something that they're not going to be able to have support for. We tend to go with established standards.

What changes do you expect in the Japanese market in the next few years?

De Pena: That's a tough one. I think the direct sales model is an area that is going to grow quite a bit as Japanese consumers become more experienced, more educated, more discerning in what they buy.

Overall in the Japanese industry, I think you're going to see as has been the trend a reduction in the importance of the NEC PC98 standard. I'm not telling you anything new, but I think you'll find that the whole Intel/IBM-compatible product is going to gain more and more momentum. Windows has had a big impact on that. Obviously, you can run Windows on an NEC PC98, but it's really not native; there's quite a substantial amount of rework that has to be done to the Windows software to work properly with the PC98.

Other than that, I think we're going to start to see smaller, more powerful machines. I see, in the very near future, that software and technology that was first introduced in the US and then in Japan is going to be introduced simultaneously. It just doesn't make sense anymore to have a lag in what you introduce in one market over another.

Which company do you consider the one to watch? Who is Japan's current market trendsetter?

De Pena: We've watched what Fujitsu has done, if only because it has been so reckless. Fujitsu has made such a great market impact in such a short time.

And we continue to watch what they do, because they're really responsible for the current pricing direction. Obviously, it's quite good for the consumer, and to a lesser extent for "direct" companies such as ours, but such "shocks," as they call them here in Japan, can be difficult on the industry. It sometimes takes time to adjust.