TOKYO -- Japan Display, the government-led venture that combined the liquid crystal display operations of industrial powerhouses Hitachi, Toshiba and Sony, has abandoned its all-Japan playbook and opted to go under foreign ownership.
The decision to receive an injection of up to 80 billion yen ($717 million) in capital from Taiwanese and Chinese investors represents the end of a yearslong attempt by the government to sustain the company -- an effort mired in indecision and a lack of clear vision on how to revive a once-flourishing industry.
Japan Display, also known as JDI, is a major Apple supplier and became the world's top maker of LCDs for smartphones, with a nearly 20% global market share. The would-be national champion was born out of Tokyo's desire to keep Japanese LCD technology out of Chinese hands.
But it became the victim of competition from lower-cost Chinese and South Korean rivals, and its slow decision-making kept it from adapting to the rapid changes in the display industry.
With no prospect of JDI emerging from years of losses, the Ministry of Economy, Trade and Industry has now handed the reins of the company to a Taiwanese-Chinese alliance, the very path it had set out to avoid.
Its situation contrasts with that of Sharp, which declined to join the merger that created Japan Display in 2012 and later, after its own financial troubles, opted to go under the ownership of Taiwanese manufacturer Hon Hai Precision Industry. Sharp is now ramping up investment in next-generation displays.
A government-backed fund -- Innovation Network Corp. of Japan, now INCJ -- took the lead in merging the LCD operations of Hitachi, Toshiba and Sony, which were struggling to compete individually. The fund contributed 200 billion yen in capital and took a 70% voting stake, while the three industrial groups each took a 10% share.
"The smartphone market is growing by 55% annually and tablets are growing 30%," then-CEO Shuichi Otsuka said in an interview with Nikkei in December 2011. "None of our clients have any doubt about future demand," he said.
The age of the smartphone had arrived, and JDI, a specialist in small and midsize screens, became a symbol of Japan's state-led attempts to consolidate domestic industries into bigger, globally competitive players.
Japan Display went public in 2014 and INCJ recovered a healthy 160 billion yen. Emboldened by their early success, the fund decided in December 2016 to provide another 75 billion yen to help Japan Display develop organic light-emitting diode displays -- the industry's next major innovation.
"There are risks," Economy Minister Hiroshige Seko admitted at the time. "But if Japan Display succeeds, it will have a major impact on Japan's industrial complex as a whole."
But this vision collided with rising Chinese and South Korean competition. State-backed Chinese players made massive investments in LCD capacity, turning small and midsize panels into a cheap commodity, while South Korea's Samsung Electronics gained an edge through an early focus on OLED panels.
As a patchwork of three separate LCD makers, Japan Display was unable to make the kind of quick and flexible choices needed to survive in a changing industry. Its board also depended on INCJ and the Ministry of Economy, Trade and Industry to steer and approve every key decision. For example, INCJ's then-leader pushed for the construction of a factory in Ishikawa Prefecture in 2015, which saddled the company with overcapacity.
"Japan Display was slow to cut jobs and consolidate factories out of a desire to meet the government's expectations," a critic said. The company has remained in the red since its stock market debut in 2014.
Things took a turn for the worse in 2017, when annual global smartphone shipments fell for the first time. Japan Display had planned to produce iPhone displays at the new Ishikawa plant, but Apple decided to use OLEDs instead in its premium model launched that year, leaving the display maker with excess capacity.
INCJ began distancing itself from the struggling company around that time, opting for indirect assistance such as guaranteeing debt instead of making direct investments. Japan Display announced layoffs and other structural reforms in August 2017, and logged a record 247.2 billion yen net loss for the fiscal year ended March 2018.
Both the company and its backer INCJ understood that the growth path that they had initially envisioned was impossible to achieve.
By March of this year, several insiders were leaning toward the option of declaring bankruptcy. But this would have cemented the ministry's policies as a failure.
JDI was in effect turning into a "zombie" company, and the government's protracted support was becoming a problem. The ministry had no choice but to forge ahead with negotiations with the Taiwanese-Chinese investor group.
The group consists of Taiwanese electronic component maker TPK Holding, Taiwanese financial group Fubon Group and China's Harvest Fund Management. But though the two sides have now finalized their agreement, the way forward remains uncertain. As a key supplier to Apple, Japan Display needs approval from the Committee on Foreign Investment in the U.S. to receive an investment from the Taiwanese-Chinese consortium.
"I can't say there is zero risk" of CFIUS blocking the deal on national security concerns, said New York-based attorney Hiroshi Sarumida, who specializes in mergers and acquisition at Orrick Herrington & Sutcliffe. "CFIUS has a lot of discretion on the matter."
Display manufacturing "is consistent with the 27 industries considered critical," said Michihiro Nishi, a lawyer with Skadden, Arps, Slate, Meagher & Flom.
There is also the possibility that the U.S. will restrict Japan Display's exports to markets like China, should it conclude the company's products are built based on American technology.
Even if Japan Display clears both hurdles, supply chains in China have been disrupted by the trade war. For example, the U.S. Commerce Department stopped shipments of chipmaking equipment from Applied Materials, Japan Display's partner in OLED production, to China's Fujian Jinhua Integrated Circuit.