When Kyocera (NYSE:KYO) bought Sanyo (NASDAQ:SANYY)s mobile phone business last week, it left more than one analyst in Tokyo puzzled.
Although the deal created the worlds sixth-biggest mobile phone company, it was essentially a marriage of two weak players in the market - too weak, at the moment, to effectively compete against global giants such as Motorola (NYSE:MOT) and Nokia.
The Japanese electronics sector is finally consolidating, following years of stagnation that has created a yawning gap between strong players in the industry and their weaker peers. But the pace of consolidation and the curious terms surrounding certain alliances have left observers scratching their heads.
Hitachi (NYSE:HIT), one of Japans most sprawling companies with nearly 100 subsidiaries, last month effectively pulled out of liquid crystal display panel production, announcing the sale of its loss-making LCD panel subsidiary to Canon (NYSE:CAJ) and its stake in IPS Alpha - another LCD panel business - to Matsushita (NYSE:MC).
Toshiba and Sharp announced a similar agreement, in which Sharp said it would provide the integrated electronics company with LCD flat panel displays.
Analysts say the deals are positive for the industry, in that they eliminate over-supply in the LCD panel sector - a pressing issue that has contributed to price declines for flat-panel TVs over the past few years. But whether strong, cash-rich companies such as Matsushita, Canon and Kyocera should essentially come to the rescue of their weaker peers is another question altogether.
Kota Ezawa, electronics analyst at Nikko Citigroup in Tokyo, says that Matsushitas decision to inject Y300bn ($2.8bn) in capital expenditure into Hitachis LCD business was a risky proposition.
"Matsushita should be prioritising...deals to assist overseas growth - one way of using its Y1,000bn in net cash," says Mr Ezawa, who hopes to see more "independent-minded" M&A in the future.
The widening gulf is between successful Japanese manufacturers and their less-profitable peers led to a string of alliances last year, and analysts say that further consolidation is inevitable.
Pioneer (NYSE:PIO), which was once known for its revolutionary audio and visual systems, has incurred losses for three straight years, leading it to form an alliance with rival Sharp to avoid a potential hostile bid.
After fending off a possible private equity bid, JVC, the ailing Japanese electronics maker that is also known for its Victor brand overseas, last year agreed to a capital tie-up with audio equipment maker Kenwood and Sparx Group, a domestic hedge fund.
Even Tom Haga, the chairman and chief executive of Pioneer Electronics USA, sounded a critical note over the companys alliance with Sharp.
"You think Sharp is a more updated company than Pioneer? I dont think so," he says. "We are the same, we are both old Japanese companies. This collaboration does not give us an updated or contemporary way of management at all."
The absence of full-scale M&A in Japans electronics sector is glaring - particularly cross-border deals - and observers question whether domestic tie-ups will enable the countrys manufacturers to regain their competitive edge.
Mr Haga says that the survival of Japanese electronics makers is "a question I have been receiving every day from investors and analysts...we have to realise we have to change. But Japanese companies are part of a nation that is really stuck in old ways."
With the valuations of some weaker electronics companies plummeting, analysts say the time should be ripe for acquisitions.
But thanks to the flurry of partnerships, cross-shareholdings are once again rising, protecting them from potential hostile suitors.
In the fiscal year ending March 31, the percentage of all listed companies that engaged in cross-shareholdings rose to 12 per cent - the first increase in 17 years, according to Kengo Nishiyama, a strategist at Nomura Research Institute.
Mr Ezawa says that years of success at many of these companies make it difficult for them to be controlled by another company. "This kind of specific mentality in Japan still exists...its a big problem that prevents competitiveness," he says. "These companies have spent the past 10 years doing the same thing. Japan is losing out to global competition."
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