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Foxconn-Sharp deal reflects acquisition potential in Japan

TOKYO -- Hon Hai Precision Industry's planned acquisition of Sharp is another sign of a growing appetite for Japanese business assets among companies in the rest of Asia. 

     Asian companies are expanding their presence in Japan's acquisition landscape by leveraging new ideas about how to use distressed assets in this country to earn profits.

     The Taiwanese contract manufacturer, also known as Foxconn, is shortly expected to make the formal decision to buy the troubled Japanese electronics maker.

     From a historical viewpoint, Sharp is set to become the second major Japanese manufacturer to be acquired by a foreign business in the postwar period, following Nissan Motor. It could also be, on a price basis, the largest acquisition of a Japanese company by a company from another Asian country.

Outsiders to the rescue

Many Japanese are wondering why Sharp is not being rescued by a group of Japanese companies, as has usually happened in the past. But the reality is that Sharp has only two suitors: Hon Hai and Innovation Network Corporation of Japan, a public-private fund affiliated closely with the Ministry of Economy, Trade and Industry.

     This may be the beginning of similar cases occurring in the coming years in which a struggling Japanese listed company cannot find a domestic buyer for all or part of its operations. 

     Take the consumer electronics industry, for example. Among the eight major Japanese manufacturers in the sector, the seven companies other than Sharp are showing improvement in their earnings. 

     But their white goods businesses are generally in poor shape. Only a few categories of white goods, most notably refrigerators, are generating profits. Refrigerators are a stable profit source for appliances makers because they are relatively big-ticket items that are replaced about every 10 years.

     However, such products do not contribute greatly to manufacturers' global expansion. Japanese makers are likely to face the challenge of divesting operations that are heavily dependent on their domestic market, which opens up the opportunity for companies of other Asian countries to carry a big Japanese brand. 

     In purchasing Sharp, Hon Hai is actually going after three key assets: Sharp's brand as a consumer electronics maker, the company's employees aged 40 and younger and its liquid crystal display technology and production capacity.

     Hon Hai started in the 1970s as a maker of connectors and has grown into the world's leading contract manufacturer of computers, video game consoles, TVs and smartphones. But the Taiwanese maker, by no means a household name despite the huge scale of its operations, doesn't have many products of its own. In short, it has no brand power.

     For Hon Hai, Sharp offers an established brand and competitive technologies it can use to develop and market electronics products in Asian markets.

Seeing opportunity

Hon Hai has some clear ideas about home electric appliances and electronic parts that can be competitive products in Asia. The company also has the ability to crank out huge amounts of products at competitive costs.

     No Japanese electronics makers have such a combination of viable product ideas and production abilities.

     Shiro Tanikawa, chief counselor at Nomura Research Institute and a longtime observer of Japanese industries, has seen similar acquisitions of Japanese assets by other Asian companies.

     Many such cases have occurred in the tourist industry. In Shizuoka Prefecture, for instance, Chinese travel agencies have been snapping up troubled hotels that have failed to find buyers.

     They have bought hotels around Shizuoka airport and brought in throngs of Chinese tourists via chartered flights to stay at those accommodations during several days of visiting tourist spots and shopping in Japan. The hotels, of course, command good views of Mount Fuji. 

     These Chinese travel agents have original ideas about tours in Japan as well as an enormous number of customers, according to Tanikawa. "To them, even hotels that can't find a buyer in Japan must look to be gold mines," he said. 

     This is not necessarily a new phenomenon in Japan's tourist industry, however.

     One notable case happened in Niseko, a famous ski resort on the northernmost island of Hokkaido. As Japan's asset bubble collapsed in the early 1990s, an Australian business bought facilities in the area from major Japanese hotel chains and local companies, and redeveloped them into a resort appealing to tourists from Down Under and the West. Niseko has since gained a spot on the global map of popular ski resorts. 

     Then, a Malaysian company came in and turned a golf course into a leisure complex featuring rope ladders connecting tall trees. Niseko now attracts tourists from all over the world throughout the year.

     If Japanese businesses become more willing to allow foreign companies to buy and revive distressed assets, the country's stagnant economy could benefit from the fresh stimuli it so badly needs. 

     The principal lesson to be gleaned from Sharp's downfall is that there is a limit to Japanese companies, even global ones, being able to detect business opportunities that overseas operators may be able to see. 

     The total value of acquisitions of Japanese companies by foreign businesses came to 1,022.4 billion yen ($8.91 billion) in 2015, double the amount from 2010, according to Recof Data. Asian companies accounted for 236.7 billion yen of the total, nearly four times larger than the figure five years earlier.

     The question is how Japan responds to this data.

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