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Japanese companies switch to ‘software-driven’ business models

  • December 28, 2021
  • , Nikkei Asia , 3:03 p.m.
  • English Press

Sugimoto Takashi, senior staff writer


TOKYO — New approaches to software are driving a wave of change with the potential to overturn conventional wisdom in manufacturing. How well will Japanese industry be able to respond to “software-defined everything” (SDx), the software-driven transformation of all kinds of goods and services?


Woven City, a futuristic city being constructed by Toyota Motor, sits not far from Mount Fuji, boasting a marvelous view of the mountain’s glistening white peak.


The full scope of the project has not been made public, but a promotional video shows self-driving cars coming and going as airborne drones whiz about. Akio Toyoda, the president of Toyota Motor, described the project as a “test course for future mobility.” But it was the head of Woven Planet, the subsidiary entrusted with building the city of the future, who spoke more like a carmaker.


CEO James Kuffner, joining an event held near the site in October, talked about what they would be able to do when people, things and information were connected through a software platform.  Woven City is a place for them to test that, he added.


The company is trying to create software-driven mobility in the city of the future. The project will expand the “software first” approach to auto manufacturing, according to Kuffner. Using a technique called “digital twin,” which utilizes virtual space, design efficiency can be greatly enhanced through a massive number of simulations — more than can be tried out in the real world. Constantly connected to a network, it is a literal example of Toyota’s method of kaizen, or continuous improvement. The city of the future is leading in this kind of advanced auto manufacturing.



In software-defined vehicles (SDV), the software creates much of the value of the car. It has been said that the auto industry is undergoing a once-in-a-century transformation. This is often discussed in terms of “CASE” (connected, autonomous, shared and services, and electrified), but SDV can be said to be the essential value transformation that goes even further.


U.S.-based Tesla brought the concept of software updates to autos, but the effort to switch to software development for car manufacturing itself has only just begun. Toyota is facing this challenge head on. Although stock markets have been focused on the company’s Dec. 14 announcement about its switch to electric vehicles, it is clear that Toyota is trying to win the competition over the intrinsic value of autos beyond just electrification.


The shift in strategy at Toyota, at the top of the huge auto industry, will have a major impact on the pyramid of parts suppliers and other businesses. First among them is Hon Hai Precision Industry, better known as Foxconn, in Taiwan.


If autos’ value shifts from hardware to software, then hardware will become commoditized. If so, it can be standardized across the industry. With this in mind, an EV consortium called MIH was created, with more than 2,000 companies joining in its first year. The group is trying to bring the iPhone model of a horizontal division of labor to the automobile industry, which has developed based on the finesse of matching as many as 30,000 parts per vehicle.


Apple, the company that turned Hon Hai into a giant, is also planning to enter the auto market. The company has not released details, but its Project Titan, which began about five years ago, is reaching the stage of practical application.


What would Apple bring to the auto industry? The iPhone could provide a clue. In 2007, the late Steve Jobs introduced the iPhone to the world, saying it would “reinvent the phone.”


While many were enthralled with the near perfection of the hardware, the world would later learn that Jobs’ real goal was not to create a beautiful device. Jobs distributed iPhones around the world to take advantage of the huge app economy created by the mobile internet.


So is Apple trying to compete with Toyota and others in the number of EVs sold? The answer need not be said: Apple views software as the source of value for major industries.


The term “software-defined” has been used in the information technology industry since the early 2010s. For networks, the term is “software-defined networking” (SDN). For storage, the term is “software-defined storage” (SDS).


Many of them use a technology called “virtualization,” which integrates multiple hardware devices with software. The technology was pioneered by VMware in Silicon Valley and has spread around the world.


When Rakuten Group entered the carrier market in 2020 to provide cellphone service, it succeeded in suddenly lowering prices by replacing some of the general-purpose equipment in telecommunications infrastructure with software. This was largely the result of virtualization technology. Only Rakuten, which had been competing in the internet field, could implement this idea, and the company plans to export the system overseas.


The shift to software-defined is not limited to virtualization. The broader concept of “software-driven” is spreading across industries, propelled by new technologies such as artificial intelligence. This article refers to this broad trend as “SDx.” Toyota’s software-first approach to auto manufacturing is a good example of the trend, but it is not limited to the auto industry.


In a field system that Japanese industrial robot maker Fanuc has been developing since 2017, robots and machine tools are connected through a network for greater control and to prevent malfunctions. The basis of such “smart machines” is the technology of “edge-heavy computing,” which involves the immediate processing of large amounts of data on the side of “things” — machines and robots. Fanuc has since rolled out a corresponding application, which has turned factory machinery into a software-driven system.


SDx thinking will force changes not only in products and services, but also in corporate management itself.


Tadashi Yanai, president of Fast Retailing, the company that operates Uniqlo, has set out to transform the company into a “digital customer retail company” — an information, manufacturing and retail business. At the end of the 1980s, the company entered the manufacturing and retailing business, designing its own clothes and outsourcing production to factories with which it had ties. Importantly, the stores were located at the end of a vast supply chain network centered on Asia. The company first thought, “This clothing will sell,” then made the products in Asia and delivered them to customers.


Yanai says this cycle will be reversed — that data will come in from stores and be fed into the supply network in real time to make clothes. The company is shifting to a software-driven management style that utilizes a large amount of data to make clothes.


Hitachi, while selling its top three businesses, Kasei, Densen and Metals, acquired a U.S. systems company for 1 trillion yen ($8.8 billion). The company is shifting to software-driven management with a focus on the network infrastructure Lumada. Considering that the three businesses it sold have little synergy with software, the motivation behind the bold move becomes clear.


Japan’s leading manufacturing company, which got its start with a 5-horsepower induction motor for use in mining, has also turned the corner to software-driven management. It may be only a matter of time before the word seisakusho, meaning manufacturing plant, disappears from the company’s Japanese name.

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