Just before the Christmas holiday there was an announcement regarding an additional investment in LCD supplier Japan Display. Its largest shareholder, the government-backed Innovation Network Corp. of Japan is investing an additional $636 million in this supplier, consisting of both convertible bonds and a subordinated loan. Yet another financial infusion from government of Japan interests provides yet another example of the high stakes involved for being a supplier and constant innovator of consumer electronics components.
In late August of 2011, three of Japan’s existing liquid crystal display (LCD) component producers, Sony Corporation, Toshiba Corporation, and Hitachi Ltd. merged their, at the time, money-losing LCD manufacturing operations to form a single company that was named what is today’s Japan Display. Each of the former suppliers could not financially afford to continue to compete with the likes of other industry competitors such as Samsung Electronics and Sharp Corp., who were major suppliers to Apple and some other consumer electronics OEM’s. The new venture was financed primarily by $2.6 billion in funding by The Innovation Network of Japan, a government backed agency with strong industry influences, and subsequently an IPO in 2014.
Today, Japan Display serves as one of the four suppliers of LCD technology for the Apple iPhone product lineup. This includes competing with industry leader Samsung Electronics who is already suppling Organic Light Emitting Diode Display (OLED) screen technology. Japan Display indicates that the latest round of funding will boost its efforts to develop OLED panel capability, the literal next wave of technology innovation in displays. This includes the acquisition of OLED developer Joled, which was formed in 2015 by the merger of the OLED operations of Panasonic and Sony. Plans further call for Japan Display to decrease its current concentration as a technology supplier for mobile devices, and to instead focus on next generation display needs within automobiles, laptops, appliances, and virtual reality devices.
This strategic move is wise from two perspectives.
First, Samsung Electronics remains a dominating industry leader and already provides OLED displays for namesake Samsung smartphones, and is likely to continue to supply Apple’s and other high tech OEM OLED needs as well.
Rival Sharp Corp. was acquired earlier this year by Apple’s prime contract manufacturer Foxconn Technology after a lengthy and endless cycle of capital infusions. The acquisition represented a strategic move by Foxconn toward vertical integration of the value-chain of high tech and consumer electronics devices. A February published commentary in The Economist pointed out that in acquiring Sharp, Chairman Terry Gau had the opportunity to exercise his grand “eleven screens” strategy, which opens the possibility that Foxconn assumes the dominant supplier position of advanced high-tech displays of broader industry products from computers, to automobiles to industrial devices or smart watches. Recognizing that threat, Sharp was also evaluating a counter bid from Innovation Network Corp. of Japan for roughly the same ownership stake. The issue of concern behind this counter option was having Japan based Sharp not come under foreign control.
Foxconn’s presence as a long-term strategic manufacturing and technology implementer for Apple places Sharp’s eventual OLED technology as another preferred supplier option, which had to be on the minds of Japan Display executives. With a move away from sole dependence on mobile smartphones, Foxconn and Japan Display will now compete head-to-head in next generation auto and consumer electronics display needs.
As noted in our prior high tech industry focused blog commentaries, LCD screens account for a considerable amount of cost of goods sold (COGS) complement in smartphones and tablets. Increasingly, electronic displays will cater to the needs for enhanced user interaction, most notably automobiles and other transport or user-centric equipment.
The need for production innovation remains relentless, the cost of capital highly expensive and the competition for favored supplier status is fierce. Another theme is one of nationalism, namely a country’s control of product and process innovation securing a long-term industry and component supply chain presence in that country. Often, display industry supply exceeds demand because of overcapacity, eroding abilities to maintain prices that insure adequate profitability as well as continuous new investment needs. It’s a model permeated by dominant high tech OEM players such as Apple and it continues to extract needs for even more financial investment from suppliers.
The difference in this cycle is the potential for electronic displays to be part of the designs of many other product and equipment areas and to lessen the influence of high tech industry supply chain dominants. The financial and market stakes are high but the opportunities continue.
The open question remains which suppliers eventually dominate.
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