Leadership Ludwig Boltzmann Symposia

JVC KENWOOD Chairman: “Speed is like fresh food” – Revitalization of Japanese industry by JVC KENWOOD Chairman Haruo Kawahara (6th Ludwig Boltzmann Symposium)

JVC Kenwood Chairman Haruo Kawahara: Revitalization of Japanese Industry

(Representative Director and Chairman of the Board of JVC KENWOOD Corporation)

Keynote presented at the 6th Ludwig Boltzmann Symposium on February 20, 2014 at the Embassy of Austria in Tokyo.

Background reading:

JVC KENWOOD Corporation was incorporated on October 1, 2008, and has 20,033 employees as of October 1, 2013.

KENWOOD corporate vision: Creating excitement and peace of mind for the people of the world

KENWOOD overview

Total sales for fiscal year ending March 2013 was YEN 306.6 Billion (approx. US$ 3 Billion).

JVC KENWOOD today has four business divisions:

  • Car Electronics (CE): 33% of total sales
    • car navigation systems
    • car audio systems
    • CD/DVD drive mechanisms
    • optical pick-ups
  • Professional Systems (PS): 30%
    • digital land mobile radio
    • amateur radio
    • security cameras
    • professional video cameras
    • emergency broadcasting equipment
  • Optical & Audio (O&A): 22%
    • action camera
    • home audio systems
    • all-in one tower design audio systems
    • camcorder with wifi
    • 4K projektor
    • headphones
  • Entertainment Software (SE): 13%
    • Victor Entertainment Group
    • Teichiku Entertainment

Issues of the electrical industry of Japan:

  • 1970s: overwhelmed with vertical integration and self-sufficiency
  • 1980s: appreciation of the yen (1985 Plaza Accord)
  • 1990s: collapse of the Bubble (1991), relocation of production to Asia, three excesses:
    • debt
    • facility
    • employment
  • 2000s: lost 20 years

Going forward, Japan has the option of growth under new business models, or continue to stagnate with matured industries

While there is dramatic global market expansion in many business areas in the global electrical industry, e.g. for Lithium Ion Batteries, DVDs, Car navigation units, DRAM, Japan’s market shares are falling in most sectors. For example, Japanese market shares for LCD, DVD players, Lithium Ion batteries, or car navigation units have fallen from almost 100% global market share 5-10 years ago to 10%-20% today.

Restructuring mature industry can generate more economic benefit than innovating a new industry:

  • large established market, although low growth
  • reduced number of players in the market following consolidation

Revitalization of JVCKENWOOD

  • the current main business as the core – not new business
  • speed, like “fresh food”
  • eliminate hidden waste and loss costs
  • eliminate vested rights

Kenwood in 2002 was in a disastrous condition:

  • net income (loss): YEN -27 Billion (= US$ -270 million) losses
  • debt: YEN 110 Billion (= US$ 1.1 billion)
  • accumulated losses: YEN 45 Billion (= US$ 450 million)
  • net worth: YEN -17 Billion (= US$ -170 million)

Restructuring by March 2003:

  1. Financial restructuring: Dept/equity swap. Moved from YEN 17 billion negative net worth to positive within 6 months
  2. Business restructuring: focus on core business. Terminated cellular phone business.
  3. Cost restructuring: 30% cost reduction. Closed 3 factories. Voluntary retirement.
  4. Management restructuring: management consolidation. Eliminate huge wastes and losses in subsidiaries.

Restructuring in FY2003 achieved a V-shape recovery. Net income margin was improved from -8% in FY3/2002 to 2%-4% in recent years.

In mature markets, growth is achieved through M&A, reducing the number of players in the market. As the top player in the market, profitable growth improved:

Main four players in the car electronics after-market before Kenwood-JVC merger:

  1. Pioneer
  2. Kenwood
  3. Sony
  4. JVC

after the JVCKENWOOD merger, and restructure to minimize losses from the TV business:


JVC and KENWOOD formed a capital and business alliance in July 2007, followed by management integration in October 2008, and a full merger in October 2011. The business portfolio was restructured, and in particular big losses in the TV business were reduced. Fixed costs were reduced by 40% by selling off assets, reduction of production and sales sites, and 25% voluntary retirement.

This structural reform was completed in the FY3/2001, and led to another V-shaped recovery, and to profitable growth under the new medium term business plan.

The JVC-KENWOOD merger led to big jumps in market share in many markets, and thus to very much improved profitability.

How can Japan become competitive again?

Why did Japan’s mass production type electronics fail? Answer: Japanese management failed to deal with globalization and digitalization.

Other factors that contributed to Japan’s failure are vertical integration, technology leakage from exporting production facilities, insufficient added value compared to the high Japanese labor costs, and lack of money for investment, because Japanese companies largely relied on bank loans instead of equity.

Japan’s heavy electrical industry on the other hand is competitive – why?

  1. Creative know-how in the heavy electrical industry is in human brains, therefore more difficult to leak to competitors under Japan’s employment circumstances.
  2. huge capital investment is needed, and almost fully depreciated in Japan. Therefore the depreciation costs exceeds HR costs.

How can Japan become competitive again?

Japan needs to accelerate growth strategies in those areas, where Japan has competitive advantage, and where Japanese industries can differentiate themselves. Examples are industrial areas which depend on a long-term improvements and advanced technologies, and techniques of craftsmen, and in next generation technologies.

JVC KENWOOD takes action to innovate

  • JVCKENWOOD invested in a venture capital fund: the WiL Fund I, LP to reinforce alliances with potential ventures in Japan and overseas
  • JVCKENWOOD invested in ZMP Inc. to promote car telematics and car auto-control
Haruo Kawahara, Chairman of JVCKenwood
Haruo Kawahara, Chairman of JVCKenwood
Haruo Kawahara, Chairman of JVCKenwood
Haruo Kawahara, Chairman of JVCKenwood

Copyright (c) 2014 Eurotechnology Japan KK All Rights Reserved

Economics M&A

EU Japan investment stock totals about EURO 230 billion and is expected to increase

EU Japan investment stock is expected to increase with the future Economic Partnership Agreement

European direct investments into Japan, European acquisitions in Japan

EU investments in Japan have been relatively constant around EURO 80 billion. There has been a marked reduction in EU investment in Japan in 2006 due to the withdrawal of Vodafone from Japan with the sale of Vodafone KK to Softbank for approx. EURO 12 billion (find details of the Vodafone-SoftBank M&A transaction here). This reduction of EU investment stock in Japan is clearly visible in the graphics below in 2006 and 2007.

For a listing of major European direct investments and acquisitions into Japan, consult The EU to Japan Direct Investments Register.

Japanese direct investment in Europe, Japanese acquisitions in Europe

Japanese investments in EU are steadily increasing, as Japanese companies are seeking to grow business outside Japan’s saturated market, and as Japanese companies acquire European companies for market access, technology and global business footprint. In 2012 the total investment stock of Japanese companies in the EU-27 has reached around EURO 150 billion.

For a listing of major Japanese direct investments and acquisitions into Europe, consult The Japan to Europe Direct Investments Register.

Copyright 2014 Eurotechnology Japan KK All Rights Reserved

Economics Finance M&A

EU Japan investment and acquisition flow and M&A

EU Japan investment flow is mainly from Japan to Europe and totals about EURO 10 billion per year

Investment flow between EU and Japan shows strong impact from the Lehmann shock economic downturn, and was very quiet between 2008 and 2010. In recent years, mainly Japanese investments to Europe have picked up, and currently about EURO 10 billion per year flow from Japan to Europe, Japanese companies acquiring European companies to globalize and also to pick up known-how and technologies.

Investment flow from EU to Japan remains at relatively low levels around EURO 1 billion annually, while investments by Japanese companies in the EU are on the order of EURO 10 billion per year currently.

Japan to Europe direct investment register:

Investment flow recently is almost one way from Japan into Europe.

For an overview of M&A transactions by Japanese companies in Europe, consult the Japan to Europe direct investment register.

Europe to Japan direct investment register:

For an overview of M&A transactions by European companies in Japan, consult the Europe to Japan direct investment register.

EU Japan investment flow is mainly from Japan to Europe and totals about EURO 10 billion per year

With the expected Economic Partnership Agreement (EPA) we expect investment flows to increase in both directions.

The pressure to globalize, and saturation of Japan’s markets drives Japanese corporations to invest in Europe, therefore we expect the future Economic Partnership Agreement between Japan and EU to stimulate further Japanese investments in Europe more than in the Europe -> Japan direction.

Copyright (c) 2014 Eurotechnology Japan KK All Rights Reserved

Japan's electronics industry Japan's electronics multinationals M&A

TowerJazz to acquire three of Panasonic’s semiconductor fabs (Nikkei headline)

TowerJazz acquires three of Panasonic’s large written off wafer fabs for around US$ 100 million

Massive market entry to Japan for TowerJazz

Nikkei (the world’s biggest business daily, see our J-Media report) reported as their top headline yesterday, that TowerJazz is planning to acquire interests in three of Panasonic’s reportedly largely written-off semiconductor fabs valued at about US$ 100 million.

Nikkei reports that Panasonic plans to spin out three fabs into a separate company, to be owned 51% by TowerJazz and 49% by Panasonic:

  • Uozu-shi in Toyama-ken (富山県魚津市)
  • in Tonami-shi in Toyama-ken (富山県砺波市), and in
  • Myoku-shi in Niigata-ken (新潟県妙高市)

TowerJazz entered Japan’s market by acquiring the Nishiwaki semiconductor fab near Nishiwaki-shi in Hiyogo-ken near Kobe.

TowerJazz is a leading Israel-USA foundry company traded on NASDAQ. TowerJazz in 2011 acquired a semiconductor fab in Nishiwaki-shi in Hiyogo-ken (兵庫県西脇市). The Nishiwaki fab was initially built by a joint-venture between Texas-Instruments and Kobe-Steel, and was later acquired by Micron. TowerJazz acquired the Nishiwaki-fab from Micron in 2011.

We believe that the driver for these transactions are both PUSH and PULL:

  • PUSH:
    • Panasonic’s need for capital
    • Panasonic’s need to withdraw from loss-making operations (Panasonic’s semiconductor operations reported YEN 20500 million (US$ 200 million) operating losses for revenues of YEN 184 billion YEN (US$ 1.8 billion) and need to focus on a smaller number of core businesses
    • need for investments in the semiconductor fabs to upgrade equipment and Panasonic’s difficulties to supply such capital
    • the imperative to globalize management
  • PULL:
    • TowerJazz’ business focus on fab operations, and cooperations with partners
    • TowerJazz’ interest in expanding operations in Japan

Panasonic’s need for decisive restructuring is well-known

Panasonic’s need for decisive restructuring is well-known, we commented many times on CNBC and BBC about Panasonic’s situation, see for example:

Driver: the “Panasonic shock”

In the past Matsushita (Panasonic was previously named after its founder) was nick-named “Matsushita Bank” because of its solid financial situation. However on October 31, 2012, President Kazuhiro Tsuga announced that “Panasonic is an unusual company” referring to Panasonic’s financial predicament: Panasonic had reported YEN 754.2 billion (US$ 7.5 billion) net losses for FY2012 (ending March 31, 2013). At the same time, President Tsuga also announced a program to revive Panasonic. This event is known as the “Panasonic shock”.

You can find detailed analysis of Japan’s electronics sector including Panasonic in our report “Japan’s electronics industries: mono zukuri”.

Driver: the need to globalize Japan’s management

In a recent brainstorming event with the President of Tokyo University, the legendary Masamoto Yashiro asked: “In truth, why Japanese management is not global? What should we do?” and explained some answers.

Moving semiconductor fabs from Panasonic to TowerJazz management or co-management/co-ownership is a good example of how Japanese management can be globalized.

Japan electronics industries – mono zukuri.

Copyright (c) 2013 Eurotechnology Japan KK All Rights Reserved

Japan's electronics industry M&A

Applied Materials and Tokyo Electron plan merger (BBC interview and comments)

Global No. 1 (Applied Materials) and No. 3 (Tokyo Electron) plan merger

Subject to regulatory approval in different jurisdictions

Global No. 1 (Applied Materials) and No. 3 (Tokyo Electron) semiconductor manufacturing equipment makers on September 24, 2013 announced their “merger of equals” – creating a company with a nominal market capitalization of US$ 31.5 Billion, in one of the largest mergers of a Japanese company with a foreign company ever. I was this morning interviewed by BBC to comment – here additional background material and comments.

Tokyo Electron: excellent results in a very difficult industry
Tokyo Electron: excellent results in a very difficult industry
Applied Materials margins
Applied Materials margins

Summary of the Tokyo Electron & Applied Materials merger:

A new company will be created:

  • combined market capitalization of US$ 31 billion and about 24% market share
  • dual headquarters in Tokyo and Santa Clara, incorporated in The Netherlands
  • Chairman=Tetsuro Higashi (Tokyo Electron)
  • CEO=Gary Dickerson (Applied Materials)
  • CFO=Bob Halliday (Applied Materials)
  • ownership – corresponds almost exactly to the market capitalization ratio:
    • 68% Applied Materials shareholders
    • 32% Tokyo Electron shareholders

Anti-trust approval still outstanding:

Anti-trust authorities in several jurisdictions are likely to examine this planned merger, however it seems likely that there will be no major problems, since the product portfolios of both companies are quite complementary.
Currently Applied Materials has about 14% market share of semiconductor manufacturing equipment and Tokyo electron about 10%, thus about 76% of the market are supplied by competitors.
Of course the “pricing power” of the combined company could increase in certain cases, which could be also a driving force for this merger.

Market shares of IC manufacturing equipment market pre merger

  1. Applied Materials: US$ 5.5 billion (14.4%)
  2. ASML: US$ 4.9 billion (12.8%)
  3. Tokyo Electron: US$ 4.2 billion (11.1%)
  4. Lam Research: US$ 2.8 billion (7.4%)
  5. KLA-Tencor: US$ 2.5 billion (6.5%)

Market shares of IC manufacturing equipment market post merger

  1. Applied Materials + Tokyo Electron: US$ 9.7 billion (25.5%)
  2. ASML: US$ 4.9 billion (12.8%)
  3. Lam Research: US$ 2.8 billion (7.4%)
  4. KLA-Tencor: US$ 2.5 billion (6.5%)

“Merger of equals” – really?:

Yes and no. Ownership of the merged company is split between shareholders of Applied Materials (68%) and Tokyo Electron (32%) according to current market capitalization ratio, and both CEO and CFO will be from Applied Materials. This is a clear message to Japanese corporations that market capitalization does matter dramatically. As we have shown in previous posts, the market capitalization of Japanese electronics companies today is dramatically low (considering revenue size, the glorious past and future potential) – so in any similar merger “of equals” even Japanese electronics giants could be the junior partner. This point was also addressed in a recent presentation by Hiroshi Mikitani. These sensitive issues were extremely skillfully and successfully handled by Renault and Nissan. Carlos Ghosn has said in this context that he believes a full acquisition would not have been successful.

“One of the largest mergers between a Japanese and a foreign company” – if executed and successful

There is some confusion on this point in the news articles that I have seen. The current market capitalization of Tokyo Electron is approx. US$ 10.07 billion.

By far the largest acquisition of a Japanese company by a foreign company was the acquisition of the Japan Telecom Group by Vodafone. Since this acquisition was done (and later undone) by a large number of separate transactions, it is difficult to put a specific size on this acquisition. Our estimation is that this acquisition was on the order of US$ 20 billion or higher – and was not successful longterm, some reasons are outlined here.

Large scale acquisitions of Japanese companies by foreign companies include:

  • Japan Telecom Group acquisition by Vodafone (undone: now part of SoftBank)
  • Nikko Cordial acquisition by Citigroup (undone: now SMBC-Nikko)
  • Japan Leasing acquired by GE
  • Nissan Motor partnership with Renault (minority stake, not acquisition)

Applied Materials and Tokyo Electron – Tax:

Tokyo Electron + Applied Materials plan a joint holding company in The Netherlands. One reason is to have a neutral location following the spirit of “merger of equals”, but tax also plays a role:

  • Projected tax rate for new holding company on profits in The Netherlands: 17%
  • Current tax rate on profits for Applied Materials: 28%
  • Current tax rate on profits for Tokyo Electron: 37%

Applied Materials and Tokyo Electron – Cultural issues:

Not to be underestimated. In our view success of this merger is not guaranteed at all, and will depend to some extent to skillful management of the bridging cultural issues.

Our report on Japan’s electronics industries – mono zukuri:

pdf file, approx. 235 pages, 100 figures

Copyright (c) 2013 Eurotechnology Japan KK All Rights Reserved