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LCD merger plan raises more questions than answers

Sharp's plant in Kameyama, Mie Prefecture, is a leader in small and midsize LCD panel manufacturing.

TOKYO -- As Sharp prepares to unveil its turnaround plan, all eyes are on what the struggling Japanese electronics maker will do with its LCD panel business.

     The operations occupy a complicated place in the company: Liquid crystal display panels helped catapult the brand to superstardom at home, but they also -- in the form of excessive investment -- brought the financial woes that plague the company today.

     According to a Nikkei article published on Jan. 30, the Innovation Network Corporation of Japan is widely seen as the leading candidate for rescuing the Osaka-based electronics company. The report said the public-private fund wants to inject capital into Sharp then spin off the company's LCD panel unit and integrate it with Japan Display, an LCD maker in which INCJ holds a leading stake, by 2018.

     Japan Display was created in 2012 by merging the LCD panel units of Sony, Hitachi and Toshiba.

South Korea's LG Display plans to invest 10 trillion won to build OLED panel plants.

What's in it for us?

But that prospect raises a number of questions, not the least of which is whether such an integration is even possible. The INCJ holds a 35.6% stake in Japan Display, which went public in March 2014, but ordinary investors have shares in the panel maker, too. A merger with Sharp's LCD unit would require more than two-thirds approval from shareholders, and there is no guarantee they would back the idea.

     Japan Display's initial public offering price was 900 yen per share, but a series of downward revisions to earnings have sent its stock price tumbling. On Jan. 29, the stock was trading as low as 275 yen.

     Then there is the question of the appropriateness -- from an investor standpoint -- of realigning Japan's LCD sector by merging two struggling companies. Observers talk about how such a move would help prevent the flow of technologies to foreign rivals, but the INCJ has yet to explain how ordinary investors would benefit. This is tantamount to gross negligence of investor interests.

     Perhaps the biggest question is whether a merger would even make Japan Display more competitive.

     In an interview with The Nikkei online edition in August last year, Fumiaki Sato, a former high-profile analyst for the electronics industry who helped establish Japan Display, attributed the company's deteriorating earnings "largely to a lack of synergies" from the integration. "Toshiba has strengths in manufacturing technology, while Hitachi is strong at finance and accounting and Sony excels at marketing and development," he said. "If they can take full advantage of each of these strengths, [Japan Display] would become a great company."

     However, such a "patchwork" company is often prone to internal rifts and needs a lot of time to generate smooth communication across the board. That was certainly the case at the former Elpida Memory -- created through the integration of the DRAM units of NEC and Hitachi -- and has also been seen at Renesas Electronics, a chipmaker formed through Renesas Technology and NEC Electronics.

     Given such precedents in the semiconductor industry, the addition of Sharp to the mix could add to Japan Display's existing troubles at a time when the company should be focusing on achieving internal harmony and full integration. A merger would give Japan Display 10 domestic factories. Coordinating their operations and deciding which ones to keep and funnel more resources into would probably prove a headache.

Same old story?

The last question has to do with the future of the LCD panel business itself. It is impossible to predict with any certainty which technologies will take off and which ones will fail. That said, OLED, organic light-emitting diode technology is seen as replacing LCD technology for panels. OLED materials have the advantages of being bendable and not requiring backlights.

     South Korea's LG Display has announced plans to spend more than 10 trillion won ($8.23 billion) to build new OLED panel plants. Meanwhile, Apple reportedly plans to use OLED panels for its 2018-model iPhones.

     To catch its South Korean rivals, Japan Display is working hard to establish a new technology for mass-producing OLED panels. It might be better for the Japanese company to commit it resources to developing the new technology instead of being sidetracked by yet another integration.

     In the 1980s, the then-Ministry of International Trade and Industry -- now the Ministry of Economy, Trade and Industry -- launched a national project to develop large computers through a public-private partnership. But information technology went in a different direction than the government was anticipating, with the trend in computers being to go ever smaller.

     To avoid another such misstep, Japan needs to carefully weigh the potential benefits and drawbacks of the INCJ's proposal rather than become caught up in the grandiose notion of reviving the country's LCD panel industry.

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