Engineers' coup pays off with Japan Display listing

TOKYO, March 18 Mon Mar 17, 2014 5:02pm EDT

TOKYO, March 18 (Reuters) - When Japan Display Inc lists on the Tokyo Stock Exchange on Wednesday, it will bring vindication - and $1.6 billion in cash - for a government-backed restructuring effort after other high-stakes attempts to help chipmakers flopped.

Cobbled together from loss-making units at Sony Corp , Toshiba Corp and Hitachi Ltd, Japan Display has emerged as the world's biggest producer of screens for smartphones and tablets, marking a rare success for Japan's industrial policy.

But the deal never would have happened if it were not for a group of working-level engineers who came up with the idea, leaving top executives on the sidelines - and at times in the dark - as their plans took shape, people involved in the process said.

"When the company was launched, we were told it was a miracle," said Koichiro Taniyama, an executive managing director at the government-backed Innovation Network Corp of Japan (INCJ), which invested 200 billion yen ($1.97 billion) for a 70 percent stake when Japan Display was founded two years ago.

"And once the company was launched, we were told, can it really make it to a listing. But here, we've made it."

Japan Display is listing after selling more than $3 billion of shares in Japan's biggest offering in nine months, raising funds to invest in new facilities. The INCJ will reduce its stake to 34.5 percent from 86.7 percent.

Industry and government officials have voiced hope the Japan Display model can be followed to revive other areas of the dormant electronics sector, which is feeling the heat from more nimble rivals such as those in South Korea and Taiwan.

Doubts about Japan Display's prospects initially ran deep after failures at chipmakers Elpida Memory and Renesas Electronics Corp, which were also carved out of Japan's electronics conglomerates over the past decade and a half.

Elpida was bought from bankruptcy protection last year by Micron Technology Inc, while Renesas was taken over by the INCJ in a rescue and restructuring after racking up nearly 650 billion yen in net losses during eight years in the red.

Elpida and Renesas were hamstrung in part by infighting as executives from the conglomerates formed rival factions and fought for advantage, industry officials say.

SECRETS

But the engineers and managers at the display units of Sony, Toshiba and Hitachi, who joined forces with Taniyama and a handful of consultants to push their idea to form Japan Display, managed to avoid such pitfalls.

They "were more devoted to the survival of the display business than they were to remaining a part of those companies," said Keita Nishiyama, head of the economics and industrial policy bureau at the Ministry of Economics, Trade and Industry.

The INCJ, which not only provided funds to Japan Display but was the main intermediary among the three conglomerates, is also widely credited with the success.

"Without the Innovation Network Corp, Japan Display would not have happened," said METI's Nishiyama, who oversaw the creation of the government-backed fund to bolster innovative enterprises in Japan.

Shortly after the fund's founding in mid-2009, Taniyama, a former banker and director at private equity firm Carlyle Group LP's Japan operation, was approached by Fumiaki Sato, a veteran industry analyst, who has long advocated electronics sector consolidation, and an engineer from one of the display units.

Apple Inc's iPhone had been launched the year before, and they feared Japan might be overtaken in the coming smartphone revolution by aggressive, well-funded Taiwanese and Korean rivals.

South Korea's Samsung Electronics Co Ltd had already out manoeuvred Japan in businesses from TVs to memory chips.

Toshiba, Hitachi and Sony were struggling in the wake of the Lehman crisis and were loath to invest in new factories to boost their businesses.

But managers and engineers at the display units were convinced Japan could capitalise on its distinct technological edge in the specialised market for small screens, where fast-evolving gadgets were demanding ever-higher resolutions.

RISKY ENTERPRISE

At the beginning of 2010, Taniyama, Sato, the display executives and several consultants met secretly at the INCJ's Tokyo office to work on their plan, people in attendance said.

They produced a 30-page proposal, which Taniyama took to the head offices of each of the three conglomerates and won their agreement to study the idea further.

Sony later balked, however, unhappy with the valuations offered for its display unit and preoccupied with its own acquisition of Seiko Epson Corp's screen operations. It hoped to keep its display unit in-house.

No sooner had Sony finally relented to the idea of merging the display businesses than Hitachi stopped attending meetings, lured by a more generous offer from Taiwan's Hon Hai Precision Industry Co for its display unit.

Hitachi's top management also eventually yielded, persuaded by the firm's display unit managers and engineers that a three-way tie-up offered the best long-term prospects for their technology to succeed, people directly involved in the process said.

Aside from Japan Display and Renesas, the INCJ has invested primarily in small ventures and projects.

Established to work to a 15-year time limit and with a 2 trillion yen funding limit, mainly government guarantees for lending rather than direct loans, it is able to fill funding gaps left by private-sector investment funds.

"It's clear that the private-sector financial system is not working," said METI's Nishiyama. "It will take some time to fix the overall system, so we started with trying this out in just a few cases."

The problem is that many Japanese firms are wary of private equity, especially foreign private equity. In addition, many private equity firms are not willing to work on the same sort of time horizon as the INCJ, said Tsutomu Noda, managing director and co-Japan representative at AlixPartners Asia LLC, a corporate turnaround consultancy.

"Private equity firms typically want to realise the gain within three to five years, while INCJ has a much longer investment period," he said. "Japanese companies prefer a longer-term view."

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