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Onkyo, Pioneer tie-up may spur new era for Japan's AV industry

TOKYO -- Onkyo President Munenori Otsuki has a big challenge ahead of him. The young head of the Japanese audio maker took the lead in securing a deal with domestic rival Pioneer to integrate their audiovisual equipment businesses. 

     "I basically make the decision by myself before closing a contract," the president said.

     If he can make his most recent deal work, the tie-up could have major consequences for the Japanese market.

     Combining Pioneer's home audiovisual equipment unit, which enjoys a strong brand image, with Onkyo will result in a new entity with sales of around 80 billion yen ($724 million), roughly twice those of Onkyo. The integration is planned to be completed by March 2015.

Taking the initiative

In late June, Onkyo and Pioneer announced that they would enter talks on a possible integration. Under the original plan for the deal, Hong Kong-based Baring Private Equity Asia was supposed to take a 51% stake in Pioneer's audiovisual subsidiary, while Onkyo would own a minority interest in the business. But on the day of the announcement, Otsuki said, he was left with a vague sense of unease. "Our company should take the initiative in the business, rather than accepting only a minority stake," he recalled thinking.

     Onkyo was established as Osaka Denki Onkyo in 1946 and entered into a capital partnership with Toshiba in 1957. Although the company had built a solid reputation as a mid-grade and high-end audio equipment manufacturer, it fell into financial trouble due to the slump in the domestic audio device market that struck in the latter half of the 1980s. To remain in business, the company invited Naoto Otsuki, a powerful entrepreneur known for his ability to turn around ailing businesses. Munenori Otsuki is his second son.

     With Japan's audiovisual equipment market shrinking, creating an alliance in the industry has been a long-cherished dream of the current Onkyo president, who is now 44 years old.

     Acting on this dream, Otsuki met with one of Pioneer's executives, a negotiating partner for business integration, in late August. Otsuki opened the conversation by saying, "We want to ask your company to revise the initial plan and integrate Pioneer's consumer audiovisual business with ours."

     The Pioneer executive did not seem keen on the proposal at first, but Otsuki had several persuasive points to make. The original plan, he argued, would give the impression that Pioneer had simply sold off its traditional core business. Additionally, Pioneer's home audiovisual know-how would be needed for the car electronics business, on which Pioneer is currently focusing.

     Then fortune smiled. In early September, Pioneer found a buyer for its disc-jockeying equipment unit -- a similar restructuring move to the planned sale of the company's audiovisual equipment business. The DJ deal is said to be valued at 59 billion yen, a much higher amount than previously estimated. This helped to reduce Pioneer's reliance on Baring Private Equity Asia as a key investor.

     When the private equity firm was asked to lower the portion of its ownership in Pioneer's audiovisual unit, it quickly decided to pull out of the original deal, concluding that a modest investment would not produce a significant return.

     Otsuki pursued the integration plan out of his desire to enhance his company's developmental capability. Pioneer has long been a front-runner in developing innovative products, such as the first Japanese-made dynamic speaker unit, the LaserDisc player, car navigation systems and large-screen plasma TVs.

     Onkyo, meanwhile, has been committed to developing high-quality audio products, despite its limited number of R&D personnel. For instance, even if the company wants to create an audio device that can directly download music files with better-than-CD sound quality over the Internet, its engineers are fully occupied with upgrades to existing products. Assigning some of them to develop a new product would provide the impetus for the company to forge ahead. "We are looking to develop a completely different type of product than anything we have produced so far," Otsuki said.

     Pioneer also stands to gain from integrating operations.  "Pioneer's strength lies in marketing and sales, while Onkyo is capable of manufacturing goods at low costs," Pioneer President Susumu Kotani said after a Sept. 16 meeting to explain its business policy. Pioneer outsources about 95% of its home audiovisual device output. An Onkyo executive said, "We are fully confident in our ability to respond to all orders placed for a full range of Pioneer products," if Onkyo uses its current production network, including a Malaysian manufacturing joint venture it owns with Sharp.

     The benefits of production integration go beyond cost cutting.  Onkyo has amassed production know-how over several decades at its factories, which are home to "the soul (of manufacturing)," according to Otsuki. The company's philosophy is to stay focused on manufacturing, even though it is suffering from a lack of development personnel. Engineers who are not happy with the quality of a product they created often rework it immediately.

Stronger together

"Even a trivial mistake can heave a huge impact on sound quality," an Onkyo employee said. Carrying out its own manufacturing activities allows the company to pursue product quality and accumulate technical expertise, setting it apart from contract manufacturing service providers. Producing Pioneer-branded audiovisual equipment at Onkyo's factories would help to ensure that the spirit of Japanese-style manufacturing lives on.

     The planned integration will help to stop the drain of Japanese audiovisual technology out of the country and alleviate concerns that AV products will repeat the failure of plasma TVs to remain competitive amid price wars, according to Hiroshi Nakano, executive vice president of Onkyo.

     The question is whether the deal will be the last shake-up in the AV industry or just the start of further consolidation. Previously, Kenwood merged with Victor Co. of Japan to create JVC Kenwood, but there are still too many audiovisual device manufactures in Japan, according to industry sources.

     Moreover, the audiovisual equipment market is dramatically changing with the emergence of new technology, such as that intended for mobile devices like Apple's iPhone. If these two long-time rivals are able to coexist in harmony, their integration could provide the momentum for an industrywide restructuring.

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