By Nathan Layne
TOKYO, April 25 (Reuters) – Twice during the two years it
took to forge a three-way merger of small display makers in
Japan, investment banker Fumiaki Sato had to talk a company back
to the negotiating table with a blunt message: merge or die.
Hitachi Ltd flirted with an alliance with Taiwan’s
Hon Hai Precision Industry before returning to talks
that culminated in this month’s merger of the small and
medium-sized LCD operations of Hitachi, Sony Corp and
Toshiba Corp into Japan Display.
It was Samsung Electronics’ leap to the next
generation of production technology for mobile display that
finally convinced one of the other companies to return to the
talks, said Sato, a former star technology analyst who now has
his own investment bank. He declined to say which of the other
two companies it was.
“Once information about Samsung started to spread, people in
the company got worried,” Sato told Reuters in a recent
interview. Samsung in 2010 had come out with a new display
screen for mobile devices that was destined to make its Galaxy
smartphone a hit.
“I knew that was my opening and I invited them back in.”
The episode offers insight into the growing sense of crisis
within Japanese boardrooms. “There is less and less resistance
to action,” Sato said at the Tokyo offices of Sangyo Sosei, a
boutique investment bank he co-founded in 2009.
Japan Display, propped up with a 200 billion yen ($2.47
billion) capital injection by the state-backed Innovation
Network Corporation of Japan (INCJ), is being held up as one
model of how to give birth to national champions with enough
scale to compete.
The new company, which aims to supply high-end screens for
Apple’s iPad and other devices, will sit atop the
industry with a 20 percent market share, larger than the
combined shipments of Samsung Mobile and LG Display.
It also marks the first major transaction forged on the
ideas of Sato, who has been preaching the need for mass
consolidation of Japan’s troubled electronics industry since his
days as a top-ranked analyst at Deutsche Securities.
But Sato warns against simply combining troubled operations,
which is why he is against a proposed three-way merger of system
chip producers. He is also worried about a technology drain from
cross-border deals with Taiwanese firms.
“I’ve been saying for years that the big problem is every
company is doing the same thing, dispersing human resources and
capital,” Sato said. “But it’s not about just mashing any
business together. It’s important how you slice up the pieces
and put them together.”
THE CASE FOR CHANGE
The case for consolidation has grown stronger in recent
months.
Sony, Panasonic and Sharp will lose more
than $20 billion combined in the just-ended business year. Their
credit ratings have been cut to within a notch of junk status.
In late February, Elpida Memory, Japan’s last hope for the DRAM
chip market, went bankrupt. NEC Corp, deep in the red,
is urging its labour union to accept drastic wage cuts.
The decline of Japan’s technology industry has been
startling. The combined operating profit margin of the top 8
electronics conglomerates will come to about 2 percent in the
financial year ended in March, down from a peak of nearly 9
percent in 1985 and a fraction of the double-digit returns
delivered by top global competitors Apple, Samsung, Germany’s
Siemens and IBM, Thomson Reuters data shows.
It has long been conventional wisdom that Japanese
conglomerates spread their resources thinly across too many
products, and are too focused on the overcrowded domestic market
where a race to please the world’s most finicky consumers leaves
them with razor-thin margins and over-engineered products that
can’t be sold overseas.
Analysts have also been frustrated by their reluctance to
ditch unprofitable businesses or merge sub-scale operations with
those of their rivals. Even amid the dire earnings outlook, some
are not optimistic about the prospects for big change.
“There is still the same massive value that you could unlock
by trying to improve the situation. But steps the companies have
taken over time are far too incremental when what they really
need is a transformation,” said Jean Philippe Biragnet, head of
consultant Bain & Company’s technology practice for
Asia-Pacific, including Japan.
“So the question is will they act before they are forever
marginalized in the global marketplace.”
MEMORY LOSS
Nowhere has that decline been more pronounced than in
semiconductors, where Japan’s share of the global market has
dwindled to a fifth from half at the height of its bubble
economy in 1989 when it dominated production of memory chips.
Japan’s loss of the memory market, punctuated by Elpida’s
failure, is a good example of the risks of diluting the impact
of investment across a number of producers and the transfer of
technology overseas through alliances.
With those lessons in mind, Japan is out to save its ailing
system chip industry from a similar collapse.
Renesas Electronics, Fujitsu Ltd and
Panasonic have been in talks on combining their system chip
operations with the financial backing of the INCJ, sources with
knowledge of the discussions have said.
Sato said he does not believe a simple merger of those three
units makes sense and has been in talks with chipmakers on an
alternative plan that would use financing from a private fund.
One of the key factors to a successful alliance is securing
overseas customers to break what he views as the curse the three
companies labour under now – their reliance on orders from
Japanese electronics firms.
“I don’t see any meaning in putting together makers who do
everything and whose clients are Japanese,” Sato said.
SAVING JAPAN
Sato said he was equally wary of Sharp’s agreement in March
to sell 11 percent of itself and a near-majority share of its
mainstay Sakai plant in western Japan to Hon Hai, worried it
could eventually lead to a transfer of key technology, even if
that is not explicitly written into the deal.
While not opposed to overseas tie-ups, Sato reckons Japan’s
tech firms should focus on domestic mergers first. He points to
Sony’s tie-up with Samsung in LCD panels, which was widely seen
as helping the South Korean rival significantly bolster its
position in flat TVs, as an example of the risks inherent in
such cross-border deals.
As a stock analyst, Sato built his reputation on an early
call of the IT bubble in 1999 and a consistently bearish view on
the electronics industry and its structural woes. He was Japan’s
top-ranked technology analyst for six years straight from 2000.
His credibility with executives also stems from his seven
years as an engineer at Victor JVC where he developed VHS
technology as part of the team that defeated Sony’s Betamax in
the famous early 1980’s home video standards war.
Knowing both the profit-is-king culture of a western
investment bank and the product-oriented mindset of the Japanese
engineer allows him to act as an effective communicator of the
need to change, Sato said.
“Unless you make changes to the industrial structure it
won’t matter how many great engineers you have or how hard they
work. You won’t win and you won’t make money.”
($1 = 81.0750 Japanese yen)
(Editing by Bill Tarrant and Jon Loades-Carter)
