Twice during the two years it took to forge a three-way merger of small display makers in Japan, investment banker Fumiaki Sato had to talk a company back to the negotiating table with a blunt message: merge or die.
Hitachi Ltd flirted with an alliance with Taiwan's Hon Hai Precision Industry before returning to talks that culminated in this month's merger of the small and medium-sized LCD operations of Hitachi, Sony Corp and Toshiba Corp into Japan Display.
It was Samsung Electronics' leap to the next generation of production technology for mobile display that finally convinced one of the other companies to return to the talks, said Sato, a former star technology analyst who now has his own investment bank. He declined to say which of the other two companies it was.
"Once information about Samsung started to spread, people in the company got worried," Sato told Reuters in a recent interview. Samsung in 2010 had come out with a new display screen for mobile devices that was destined to make its Galaxy smartphone a hit.
"I knew that was my opening and I invited them back in."
The episode offers insight into the growing sense of crisis within Japanese boardrooms. "There is less and less resistance to action," Sato said at the Tokyo offices of Sangyo Sosei, a boutique investment bank he co-founded in 2009.
Japan Display, propped up with a 200 billion yen ($2.47 billion) capital injection by the state-backed Innovation Network Corporation of Japan (INCJ), is being held up as one model of how to give birth to national champions with enough scale to compete.
The new company, which aims to supply high-end screens for Apple's iPad and other devices, will sit atop the industry with a 20 percent market share, larger than the combined shipments of Samsung Mobile and LG Display.
It also marks the first major transaction forged on the ideas of Sato, who has been preaching the need for mass consolidation of Japan's troubled electronics industry since his days as a top-ranked analyst at Deutsche Securities.
But Sato warns against simply combining troubled operations, which is why he is against a proposed three-way merger of system chip producers. He is also worried about a technology drain from cross-border deals with Taiwanese firms.
"I've been saying for years that the big problem is every company is doing the same thing, dispersing human resources and capital," Sato said. "But it's not about just mashing any business together. It's important how you slice up the pieces and put them together."
The case for consolidation has grown stronger in recent months. Sony, Panasonic and Sharp will lose more than $20 billion combined in the just-ended business year. Their credit ratings have been cut to within a notch of junk status. In late February, Elpida Memory, Japan's last hope for the DRAM chip market, went bankrupt. NEC Corp, deep in the red, is urging its labour union to accept drastic wage cuts.
The decline of Japan's technology industry has been startling. The combined operating profit margin of the top 8 electronics conglomerates will come to about 2 percent in the financial year ended in March, down from a peak of nearly 9 percent in 1985 and a fraction of the double-digit returns delivered by top global competitors Apple, Samsung, Germany's Siemens and IBM, Thomson Reuters data shows.
It has long been conventional wisdom that Japanese conglomerates spread their resources thinly across too many products, and are too focused on the overcrowded domestic market where a race to please the world's most finicky consumers leaves them with razor-thin margins and over-engineered products that can't be sold overseas.
Analysts have also been frustrated by their reluctance to ditch unprofitable businesses or merge sub-scale operations with those of their rivals. Even amid the dire earnings outlook, some are not optimistic about the prospects for big change.
"There is still the same massive value that you could unlock by trying to improve the situation. But steps the companies have taken over time are far too incremental when what they really need is a transformation," said Jean Philippe Biragnet, head of consultant Bain & Company's technology practice for Asia-Pacific, including Japan.
"So the question is will they act before they are forever marginalized in the global marketplace." Nowhere has that decline been more pronounced than in semiconductors, where Japan's share of the global market has dwindled to a fifth from half at the height of its bubble economy in 1989 when it dominated production of memory chips.
Japan's loss of the memory market, punctuated by Elpida's failure, is a good example of the risks of diluting the impact of investment across a number of producers and the transfer of technology overseas through alliances.
With those lessons in mind, Japan is out to save its ailing system chip industry from a similar collapse. Renesas Electronics, Fujitsu Ltd and Panasonic have been in talks on combining their system chip operations with the financial backing of the INCJ, sources with knowledge of the discussions have said. Sato said he does not believe a simple merger of those three units makes sense and has been in talks with chipmakers on an alternative plan that would use financing from a private fund.
One of the key factors to a successful alliance is securing overseas customers to break what he views as the curse the three companies labour under now - their reliance on orders from Japanese electronics firms.
"I don't see any meaning in putting together makers who do everything and whose clients are Japanese," Sato said.
Sato said he was equally wary of Sharp's agreement in March to sell 11 percent of itself and a near-majority share of its mainstay Sakai plant in western Japan to Hon Hai, worried it could eventually lead to a transfer of key technology, even if that is not explicitly written into the deal.
While not opposed to overseas tie-ups, Sato reckons Japan's tech firms should focus on domestic mergers first. He points to Sony's tie-up with Samsung in LCD panels, which was widely seen as helping the South Korean rival significantly bolster its position in flat TVs, as an example of the risks inherent in such cross-border deals.
As a stock analyst, Sato built his reputation on an early call of the IT bubble in 1999 and a consistently bearish view on the electronics industry and its structural woes. He was Japan's top-ranked technology analyst for six years straight from 2000.
His credibility with executives also stems from his seven years as an engineer at Victor JVC where he developed VHS technology as part of the team that defeated Sony's Betamax in the famous early 1980's home video standards war.
Knowing both the profit-is-king culture of a western investment bank and the product-oriented mindset of the Japanese engineer allows him to act as an effective communicator of the need to change, Sato said.
"Unless you make changes to the industrial structure it won't matter how many great engineers you have or how hard they work. You won't win and you won't make money."
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