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Japan electronics giants struggle to stay on top

Posted: 26 Feb 2009 ?? ?Print Version ?Bookmark and Share

Keywords:Japan electronics market? semiconductor industry? DRAM?

For decades, a handful of companies overwhelmingly dominated post-war Japan's industrial, manufacturing and electronics landscape, helping to turn the country into the second largest economy and making it a respected competitor in the international electronics market.

A new economic landscape is emerging in Japan, however, significantly altering and reducing the role played by the country's leading companies, especially the network of banks, financial institutions, manufacturers and high-tech businessesotherwise known locally as Keiretsuthat drove its post-war expansion.

Only a few years after emerging from a decade-long slump, Japan's economy is again weakening and its high-tech giants are scrambling to accelerate a much needed reorganization operations and reposition themselves for growth in a worsening global market.

Industry sources said these companies might have no options but to refocus on more profitable and stable industrial and heavy machinery businesses and merge the more challenging electronics businesses with local rivals to ensure survival.

Precipitated by years of stagnation in key industry segments, competition from overseas rivals, the emergence of China as a low-cost manufacturing center, and more recently, the global economic turbulence that started in the U.S. real estate and financial sectors, Japan's latest remake of its economy is proving more difficult than the first round, according to industry observers.

Reorganization is a must
In the high-tech sector, Fujitsu, Hitachi, NEC, Mitsubishi and Toshiba appear headed for a dramatic make-over, which analysts expect would result in these once-vertically integrated companies divesting once-core semiconductor, IT and other technology-intensive operations to refocus on higher-margin, less cyclical and less capital intensive businesses.

Over the next years analysts said they expect Japan's five biggest electronic companies to exit businesses which they once dominated internationally with consolidation occurring in product areas like semiconductor, HDD, system LSI, memory and mobile devices, all of which have "erratic cash flows due to their volatile profitability," according to Hiroki Shibata, an analyst at Standard & Poor's in Tokyo.

"The companies focusing on these businesses will need to implement further structural reforms," Shibata added.

The expected reorganization started more than five years ago and even up to 10 years in the case of companies like NEC Corp. but the actions will likely accelerate even faster over the next few years due to pressures from shareholders.

While almost all segments of Japan's economy are having major structural problems, according to economists and industry analysts, the business realignment now taking place throughout the country will likely have significant impact on the electronics sector, they said.

Ripple effect
Some of the changes analysts expect to occur in Japan will have implications for the global market. Already, Japan's leading players are backing out of the troubled memory market although they are yet to completely exit the sector.

Rather than dump the obviously challenged DRAM and NAND memory business, for instance, they have opted for strategic alliances with local rivals, like the 1999 tie up between NEC and Hitachi that resulted in the formation of Elpida Memory Inc., which also absorbed Mitsubishi's DRAM business in 2003.

Other alliances or joint ventures are in the works with the results that Japan may eventually end up with fewer semiconductor players, helping to push the top tier of the industry into a much-expected consolidation in key market segments.

For instance, Panasonic Corp. has agreed to purchase Sanyo Electric Co. in a bid to reduce costs, improve the combined company's competitive position and strengthen its balance sheet.

The December announcement could "trigger a shakeout in the industry that could lead to a significant change in the competitive landscape of the domestic Japanese market," said Shibata.

In a statement announcing their agreement, Panasonic and Sanyo said they "recognize that existing strategies must not only be accelerated but also that drastic action is now required for further strengthening initiatives to achieve potential revenue and profit growth in the global economic recession stemming from the financial crisis as well as in the midst of intensified global competition."

Trailing behind
Increasingly Japan's leading electronic companies are falling behind their international rivals, a development managements at the top five high-tech companies have been grappling with for years and which is now poised to trigger major changes at these enterprises.

While the market position and financial stability of the five biggest Japanese electronic companies differ in some respect, they are all trailing their foreign rivals in profitability with the situation worsening as the global economy weakened dangerously towards the end of 2008.

"The financial strength of Japan's top five electronics conglomerates is weaker than those of their overseas peers," S & P's said in a February report on the country.

"While the cash flow coverage ratios of Japan's five electronics conglomerates remain in the 30 to 40 percent range, those of overseas peers exceed 100 percent with the exceptions of Siemens (about 40 percent.) In a difficult business environment, high financial flexibility is a more important factor to maintain and improve competitiveness," the ratings agency said.

It could be worse. Japan's leading IT companies are blessed with strong heavy electric machinery, industrial machinery and computer software businesses, which provide positive cash flow and require limited capital investments.

Conversely, Fujitsu, Hitachi, Mitsubishi, NEC and Toshiba have been cursed with profit-challenged, high capital expenditure and low profitability semiconductor, telecommunications and associated electronic businesses.

To remain viable businesses, these companies have to either jettison their semiconductor and electronics division or sharply reduce costs in these product areas and seek alliances with local or international rivals, Shibata at S & P said.

"The electronic companies bear a heavy R&D burden as they are required by telecommunication companies to continuously develop new technology," Shibata said. "Conversely, it takes longer for electronic companies to recover their R & D costs. Based on this, believes that Japanese electronic companies, with the exception of those with high market shares, will have even more difficulties in ensuring profits."

- Bolaji Ojo
EE Times





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