Tokyo: Japan’s Sony Corporation, Toshiba Corp and Hitachi Ltd said on Wednesday they will merge their liquid-crystal display (LCD) operations using government-backed funding, to better compete with low-cost panels from South Korea and Taiwan.
The merger, to be completed by spring 2012, will create the world’s largest maker of small panels used in smart phones and tablet personal computers (PC), leapfrogging global leaders Sharp Corp of Japan and Samsung Electronics of South Korea.
The move would help the firms focus on their main operations. However, the 90% government-owned fund could come under fire for using public money to prop up a volatile business in its biggest investment to date.
The Innovation Network Corp of Japan (INCJ) will invest about ¥200 billion ($2.6 billion) in the merged unit, taking a 70% stake, while each of the three companies will take a 10% stake, the three firms said on Wednesday.
An industry shakeup has been overdue in the face of panel price falls along with ever advancing technological demands and volatile output demands.
The three firms together controlled 21.5% of the market for small and medium-sized displays last year, larger than Sharp with 14.8% or Samsung Mobile with 11.9%, according to research firm DisplaySearch.
All three had hesitated about investing in a new line to compete against Sharp, which is due to receive a $1 billion investment from Apple Inc , or South Korean rivals LG Display and Samsung Mobile Display, which have supply agreements with key clients.
Sony has been weighed down by chronic losses in its televisions; Toshiba is speeding up plans to shrink its chip business; while Hitachi has been looking to distance itself from the panel business to focus on infrastructure operations.
“Sharp is especially aggressive, and those who don’t have a strong customer base may struggle, given that only a handful of smart phone and tablet makers are doing well,” said Nam Dae-jong, an analyst at HI Investment & Securities.
With more panel makers shifting focus to small-sized markets to meet demand from smart phone and tablet PC makers, he and other analysts predicted the industry would be oversupplied next year.
“We will probably see oversupply (in small LCD panels) in the near future,” said Shigeo Sugawara, a senior investment manager at Sompo Japan NipponKoa Asset Management. “It’s not a business that will likely provide stable profits in the mid- to long term.”
The INCJ is supervised by Japan’s trade ministry, which had been criticized for not supporting Japan’s chip and display industries in the early 1990s, a failure critics say allowed United States (US) and South Korean firms to take the lead. “The decision reflects a growing sense of crisis in Japan in light of its falling market share in the global chip and display markets,” said a South Korean government official, who declined to be named.
How the three firms, which use two different types of display technology, will merge operations is unclear. The announcement did not include details of how they intended to deal with business overlaps either.
“The parent companies have found a most convenient buyer for their factories and staff,” said Yoshihisa Toyosaki, head of Japanese research firm and consultancy Architect Grand Design. “The assets of the merged entity will be huge. Without restructuring, there is no way that this company will win against Sharp, or rivals from South Korea, Taiwan, and eventually China.”
Past investments by the INCJ, which can invest up to ¥900 billion with mostly government-guaranteed funds, includes a 40% stake in Swiss meter maker Landis+Gyr to support Toshiba’s $2.3 billion acquisition.
The new display company will focus on developing next-generation displays, including thinner organic light-emitting diode displays with higher resolution, the three firms said in a joint release.
Hitachi has been in separate talks with Taiwan’s Hon Hai Precision Industry , better known as Foxconn Electronics Inc, about a joint venture in LCD panels, sources have said. Talks with the parent of Chimei Innolux Corp broke down when Hitachi failed to grab a key contract with Apple, one industry source said.
Ahead of the announcement, well-flagged by media, shares in Sony closed down 1.8%, Toshiba fell 2.4% and Hitachi rose 0.5%. The market benchmark Nikkei average ended flat.