JAPANESE ZOMBIES

The Foxconn-Sharp fallout isn’t just about money—it’s about Japan’s national pride

Yesterday a long-gestating tech deal was finally sealed—only to fall apart again that same day. Japanese consumer electronics maker Sharp announced its board had accepted a buyout offer from iPhone assembler Foxconn for nearly $6 billion. Hours later, Foxconn announced it had put the deal on hold, reportedly due to financial liabilities revealed at the last minute.

The deal, which has been about four years in the making, is important in part because of the boost it would give Foxconn and Apple, its closest partner. But the turmoil surrounding it symbolizes the dilemma faced by Japan’s technology companies.

Once a high point of national pride, Japan’s tech giants, which were industry pioneers in many respects, are struggling to survive in an age when nearly all hardware is “good enough.” The country’s decades-long patriotic quest to build the world’s best chips and screens has hit a plateau, and for some companies the only real saviors might be foreign firms interested in buying them.

Sharp, Sony, Olympus, and other Japanese companies were a product of Japan Inc.—a term used to describe the Japanese government’s efforts to become a world leader in technology that started decades ago. Thanks to government subsidies and investment in R&D, Japan became a global leader in cameras, televisions, and other consumer electronics.

But Japan Inc. started to lose its lead in the industry after the Asian financial crisis of the 1990s, and it has declined further since, particularly in the smartphone era. Korean and Chinese competitors developed components and products that equaled or rivaled what Japan could produce, often at cheaper prices. This competition threw Japan’s tech giants—and the government forces propping them up–into turmoil.

“The entire Japanese consumer electronics industry, and such sub-sectors as solar power, are in crisis, their commercial and financial viability being stressed by fierce global competition and adverse market trends,” Stephen Harner, who served as vice president at Citibank in Tokyo in the 1980s, wrote about the Sharp deal in Forbes earlier this month. “At the same time, many of the companies concerned also possess marvelous, world-beating technologies.”

Sharp exemplifies the fading Japanese tech giant of today. In the 1980s and 1990s, it was one of the largest makers of televisions. Now it is struggling. Television sales are declining, and the company’s Android phones have failed to make an impact among consumers globally. Still, it remains “one of the world’s most innovative display makers,” according to David Hsieh and Yoshio Tamura of research firm IHS Technologies.

But that hasn’t helped Sharp’s financial performance. The company has suffered deep net losses regularly over the past five years.

If Sharp were acquired by Foxconn, a foreign company, the transaction would mark a symbolic end to the reign of Japan Inc. A Foxconn purchase might sting in particular due to the firm’s origins in Taiwan and close ties to China—two staunch economic competitors with Japan. But it makes perfect sense for Foxconn and Sharp, both financially and strategically.

Fittingly, Foxconn’s rival in the bid for Sharp is Innovation Network Corporation of Japan—a public-private partnership between the state and several corporations. The firm is a majority shareholder in Japan Display Technology, which itself was formed by merging the failing LCD units of Sony, Toshiba, and Hitachi.

The partnership’s absorption of Sharp would in essence amount to a government bailout. That would perhaps prove politically convenient. But saving zombie companies could stifle Japan’s global competitiveness in the long run.

“The bigger meaning [of this deal] is that unless Japan Inc. gets its act together in innovation, governance, competitiveness, and efficiency, you may have a new boss,” says William Saito, special advisor to the cabinet office of Japan’s government. “Right now, many companies don’t feel the need for change and are pretty complacent because they somehow get by. To show that they are part of a global economy, hopefully they will wake up and try harder.”

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