Abstract
In this section, we focus on the misallocation of credit to loss-making electronics business segments in major Japanese electronics companies. We show that Sony wasted its internal funds from profitable finance and entertainment businesses to subsidize its primary loss-making electronics business. Similarly, NEC spent most free cash flow on its main loss-making electronic devices sector. In contrast, Mitsubishi has been promptly cutting off investment in small underperforming business segments and improving its profitability. It is not surprising that the perverse investment in loss-making segments prolongs poor performance. The direct reason is that free cash flow is in excess of investment opportunities in the electronics industry. However, the outside-dominated board does not prevent Sony from deficit segment investment. In addition, foreign institutional investors neither voice nor vote with their feet against inefficient segment investment in Sony and NEC. Exceptionally, Third Point, a U.S. based activist investor fund, exerted pressure, and then Sony spun off its loss-making PC business.
The analyses presented in this chapter are developed on the basis of our works originally written in Japanese as a book chapter of Hosei International Comparative Economic Study Research Series. All remaining errors are our own. Any opinions, findings, or conclusion expressed in this book are those of the authors and do not reflect the views of the Development Bank of Japan or the authors’ affiliations.
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Notes
- 1.
Toyo Keizai Online, December 24, 2014.
- 2.
The tangible fixed asset of Sony was ¥1.4 trillion in 2003–07, ¥1.0 trillion in 2008–12, and ¥750 billion in 2013, respectively, on a period average basis.
- 3.
Sharp downsized its tangible asset from ¥1.1 trillion in 2007 to ¥350 billion in 2015 as it had to sell its asset in a downturn of business performance. Its accumulated net income loss amounted to ¥1.4 trillion during 2011–15, and it incurred impairment losses from facilities that were no longer expected to achieve recovery.
- 4.
It sustained net income loss of ¥398.3 billion throughout 2012–18.
- 5.
Nikkei Veritas, September 4, 2011.
- 6.
Elpida’s behavior affected NEC only through its profit as an equity-method affiliate, not through its asset and investment since NEC’s stake of Elpida was limited to 50%. NEC Electronics was a consolidated company of NEC until 2009.
- 7.
As stated above, when NEC Electronics was merged with Renesas Electronics in 2010, it was out of the scope of NEC’s consolidation. Renesas Electronics’ profit was included in NEC’s earnings according to NEC’s share as equity-method affiliates, but not for asset or investment in 2011 and 2012.
- 8.
By contrast, Fujitsu already outsourced its PC production in the 1990s, and IBM sold its PC business to Lenovo in 2005. Pressured by Third Point, a U.S. activist fund, in 2014 Sony sold off its VAIO computer division to a Japanese investment fund, Japan Industrial Partners as will be stated later.
- 9.
The eight companies here include Hitachi, Toshiba, Mitsubishi Electric, NEC, Fujitsu, Panasonic, Sony, and Sharp.
- 10.
Mitsubishi transferred the related business to Elpida and had no shareholding, which limited its subsequent losses. Conversely, it kept 45% of shares in Renesas Technology and it incurred losses according to its ownership.
- 11.
Nikkei, July 4, 2007.
- 12.
The Wall Street Journal, How a U.S.-Led Group Won Control of a Japanese Bank, Updated March 23, 2000, https://www.wsj.com/articles/SB953768417721976160, September 16.
- 13.
Standard deviation of ROA is a proxy for risk taking.
- 14.
In M&A, the succession of rights and obligations is comprehensively inherited by the company. Therefore, the pre-merger labor contracts must be maintained as they are. In transfer of business, the succession of rights and obligations of the acquired business is the so-called specific succession that requires the consent of individual creditors. In transfer of business, Article 625, paragraph (1) of Civil Code (Act No. 89 in 1896) provides that a company that transfers its business must obtain individual consent from the prospective worker whose existing labor contracts will be specially succeeded by the company that receives the business. For details, see the guidelines on matters to be noted by companies when conducting business transfer or M&A (https://www.mhlw.go.jp/stf/seisakunitsuite/bunya/0000136056.html, in Japanese). It is important to keep in mind that a worker to be succeeded cannot be dismissed solely because he/she has not accepted the succession of his/her labor contracts. According to the Labor Contract Succession Law (https://www.mhlw.go.jp/general/seido/toukatsu/roushi/01a.html, in Japanese), the labor contracts of workers mainly engaged in the business succeeded by the company split will naturally be succeeded to the newly established (absorbing) company by the company split. Unlike transfer of business, no worker consent is required. The succession of the labor contract of the relevant worker should be stated in the split plan (contract) as the rights and obligations to be succeeded, and if it is not stated, if the objection is stated, the contract will be transferred to the new (absorbing) company.
- 15.
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Saruyama, S., Xu, P. (2021). Zombie Businesses in the Electronics Industry: Case Studies. In: Excess Capacity and Difficulty of Exit. SpringerBriefs in Economics(). Springer, Singapore. https://doi.org/10.1007/978-981-16-4900-4_2
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