March 27, 2013
By Lucy Birmingham
The tide could be turning for Japan’s distressed electronics industry after two decades of entrenched deflation, faltering innovation and a strong yen eroding exports.
Restructuring is on the rise, partly spurred by the growth-friendly initiatives of Shinzo Abe, the new prime minister. Foreign competitors are beginning to throw lifelines, sometimes by injecting cash in exchange for supply deals, sometimes by buying up unprofitable but technology-rich product divisions to get a toehold in the Japanese market.
The result is that the industry offers not only lessons in failure but opportunity as well, say analysts. “It’s been a kind of perfect storm for the technology sector over the past 20 years,” says David Motozo Rubenstein, a Tokyo-based analyst.
While Japanese companies dominated chipmaking in the 1980s, they have long since lost their crown. South Korean companies dominate dynamic random access memory chips for mobile phones, with a market share of 79 per cent in the fourth quarter last year, according to DramExchange, a Taipei-based spot market.
Innovation has been a big stumbling block. Japan’s low growth through much of the 1990s and 2000s prevented many companies from keeping up with the aggressive spending on research and development pursued by such companies as Apple.
“[Former Apple chief executive] Steve Jobs helped destabilise the Japanese electronics industry in astonishing ways,” says Peter Fuchs, a Tokyo-based analyst and consultant. “Apple torpedoed the game console makers Nintendo and Sony, and to a lesser extent the Japanese digital camera industry.”
Relatively high corporate tax and rigid labour laws have hampered the industry, while the strong yen has been another drag. “Japanese manufacturers’ cost structures tend to be higher than their rivals in Korea, Taiwan, and the US largely due to the strong yen,” says Mr Rubenstein. He noted that Korean manufacturers, in particular, benefited from the steep drop in the won against the yen after the Lehman Brothers crisis.
Miscalculating domestic television demand was the final blow. Electronics makers such as Sharp and Sony had been aiming to capitalise on a government scheme to promote energy-efficient appliances in 2009-2010 and the mandatory switchover to digital terrestrial broadcasting in July 2011.
But after all that, sales kept slipping. “The combination of the two ate up a lot of future demand for flat screen TVs, setting the industry up for a crash in what had been a profitable domestic market,” says Scott Foster, an independent analyst.
From 2009 Sharp found itself stuck with a modern TV factory near Osaka. “Sharp spent about Y430bn on the largest LCD (liquid crystal display) factory in the world,” says Mr Foster.
But it was an investment too far, he says, “perfectly suited to making 60, 70, and 80-inch TVs for outrageous prices that nobody wanted to buy. Koreans were making up to 50-inch TVs and undercutting the Japanese 50 per cent in the US market, the world’s biggest”.
For Sharp, a 3 per cent capital tie-up with Samsung Electronics in March has improved its outlook. Sharp will be receiving Y10.3bn ($109.2m) in cash, keeping creditors a little happier, while the South Korean electronics giant will secure a steady supply of Sharp’s LCD panels.
Sharp’s talks on a similar deal with Taiwanese business partner Hon Hai Precision Industry (also known as Foxconn) faltered after Sharp’s stock price plummeted last year, and Hon Hai asked for a seat on its board of directors.
“Sharp may become a smaller company but I think it will survive as companies globally want diversification of their parts suppliers,” says Frank Packard, Japan representative at Triple A Partners, a boutique investment firm.
The surge in stock prices since Mr Abe took power in December has helped propel Japanese electronics companies to reshuffle their portfolios and divest noncore businesses.
Panasonic is planning to trim its business units by a third after grappling with losses reaching more than Y1.3tn over the past two years.
The company says products such as TVs and mobile phones will be cut. Executives will concentrate instead on higher-margin operations such as welding machinery and beauty appliances.
Streamlining has become a mantra at NEC. The computer company sold its 2.7 per cent stake in Lenovo in September last year for Y18bn to focus on more profitable businesses that include internet data services and corporate computer networks. Hitachi, too, is busily restructuring under new president Hiroaki Nakanishi, who is looking to sell or spin off unprofitable businesses to focus on infrastructure, energy and IT solutions.
Others are eyeing new business areas such as water and air purification devices and products for an ageing society. Rising stock prices can be a great boost to confidence, whatever the industry.
“The mood has changed since [Mr Abe returned to the] leadership,” says Taisuke Sasanuma, a Tokyo-based representative for Advantage Partners, the private equity firm that has agreed a deal with Panasonic to buy its Sanyo digital camera business,” he says. “The Japanese economy is growing so it’s very good timing for foreign investors to put more money in.”