More M&A and Manufacturing Industry Restructuring in Japan?

Osaka - Sunday, August 14, 2011




Following the previous article Hitachi and Mitsubishi Heavy Industries Discuss Integration – Why and Its Meaning, the merger that provoked comment and interview by Mitsubishi Heavy Industries top management and his spokesperson as well as discussion online articles by leading Japanese business media, the author would like to explain what Nikkei, the leading Japanese newspaper specialized in economy and business, means by “Japan is facing historical turning point and restructuring of manufacturing industries is to come in the near future”.



1. How are Japanese automobile and electronics industries that have been the “engine” of Japanese economy?



Number of Japanese manufacturing companies in electronics including heavy industries and automobile are far greater than that of other countries, simply because mergers leading to industry restructuring have been extremely rare unlike other countries.



Today there are 8 automobile companies, 12 including companies specialized in trucks. Among 12 companies, there are only 2 that are truly “independent manufacturer” without investment from other company; Toyota and Honda. This is because there has been some restructuring in automobile industry in Japan. Market and business environment has been challenging nowadays and it is not surprising that investments (capital alliances) lead to M&A, similarly to recent M&A of the two Japanese leading iron and steel companies of Nippon Steel and Sumitomo Metal Industries. This would mean further restructuring of the industry.



Electronics is the industry that has been extremely slow in restructuring which is why even today the industry structure remains almost the same as that of just after World War II. There have been crisis such as economic depression attributing to high yen after Plaza Accord and the collapse of the bubble economy. However, electronics companies never thought of strategic alliances and M&A, leading to restructuring of the industry.



2. Why electronics industry restructuring has bee extremely slow in Japan?



It is because the electronics companies benefited from abundant domestic demand supported by businesses of electricity and telecommunications companies. Equipment investment of electricity companies (Tokyo Electric Power Co., Inc = TEPCO etc.) was as much as 4.9 trillion yen at the peak in 1993, and of Nippon Telegraph and Telephone Corporate (NTT), the leader of telecommunications that used to dominate in Japan, was as much as 3 trillion yen at the peak in 1996.



Heavy industries and consumer electronics that rely on businesses of electricity companies and NTT could assure sufficient profit generated from the 8 trillion yen market. This is why Japanese electronics companies could survive without drastic industry restructuring even if they lost the semiconductor competition with South Korea counterparts and suffered from depressions attributing to high yen, the bubble economy collapse and so forth.



3. Can Japanese electronics companies expect to continue benefiting from domestic electricity and telecommunications businesses?



No, they cannot. Equipment investment of electricity companies (TEPCO etc.) has plunged to as low as 2.12 trillion yen in 2010, and of NTT as low as 1.87 in 2010. This means the total equipment investment has become half from that of 1990s. In such a situation, electricity companies and NTT cannot possibly look after/support their “family” of electronics companies.



Liberalization of electricity companies has been slow but it is prominent that abundant investment from TEPCO cannot be expected when TEPCO is responsible for liability obligation of the Fukushima Daiichi nuclear plant accident. Abundant investment from other electricity companies cannot be expected either in the current ambiguous business environment.



Telecommunications companies have been “thrown out in the sea of competition” with liberalization, which is why NTT group was privatized and split in latter 1990s. NTT now handles all mobile terminals including those of the U.S. and South Korea manufacturers to compete and win over competitors such as SoftBank. This has much meaning because it was NTT, not NEC nor Fujitsu that was the “engine” of Japan’s IT industry growth. This is because even NEC and Fujitsu, the leading Japanese　IT companies, have been subcontractors of NTT.



4. How can Japanese electronics companies survive in the future?



It is to convert “the current historical crisis since World War II” to “opportunity to change the old industry structure that has remained the same since World War II”. This is to get out of over-competition in the domestic market to compete in the global market.



Japanese consumer electronics and IT related companies would need to get out from a business environment in which NTT decides various standards and make investments because that would refrain them from generating creativity to compete with the global counterparts including Apple, Google and Sumsung. This means getting out to global market and they would need to do so now.



Japanese heavy industries would need to follow that, too. It might be a little harder for them than consumer electronics and IT related companies under the current structure in which “10 electricity companies dominate” avoiding competition; however, it is quite possible that such a industry structure is to collapses in the near future.



Japanese electronics manufacturers have technologies such as of smart grid, transportation (railway) and water supply, which were highly re-evaluated by other countries although it was barely reported because of nuclear accident news. Despite critical damages by the disaster, railways avoided fatal accidents and social infrastructure such as water and electricity supply and telecommunications recovered in such a short time.



With their world-class technologies, Japanese manufacturers can be competitive again in the global market as long as they get out there. What they need is change in mindset, courage and action.



This may well mean strategic alliance or M&A, leading to restructuring of the industry. The recent news of Panasonic acquisition of Sanyo, Panasonic selling of a part of Sanyo business to Haier, and merger of Hitachi and Mitsubishi Heavy Industries is quite possible to trigger such an industry restructuring.



Although this would mean more global competition, this would also be good for the world because countries, developed and developing, would be able to benefit from the world-class technologies the Japanese companies have.





Resources:-

Restructuring of the Japanese automobile and electronics industries (consumer and heavy industries), has been insufficient since World War II, although companies of such industries have been the “engine” of Japanese economy. This is primarily because they have been benefiting from abundant domestic demand/market supported by electricity and telecommunications businesses. However, such domestic market has become half from 1990s and they are facing historical crisis. They do have world-class technology especially in social infrastructure segment so one possible way for them to survive is to take this opportunity to get out to global market, from which countries could benefit from their technologies. This may well mean more M&A among manufacturers leading to industry restructuring in Japan.