TT-676 -- Electronics Sector Weakness, Who's Next After Sharp? Ebiz news from Japan

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, September 02, 2012, Issue No. 676


- What's New -- Electronics Sector Weakness, Who's Next After Sharp?
- News -- Japan Advisory unfairly targeted?
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- Nara ancient buddha & Izu archery
- News Credits

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Recently all eyes in the business world are transfixed on
Sharp, a bed-rock company that helped the nation grow
prosperous in the last 60 years through its dedication,
technical expertise, and quality control. However, with the
rise of China and South Korea as low-cost manufacturing
centers, although Panasonic, Canon, and others moved
manufacturing off-shore in the 1990's, Sharp vowed to keep
producing in Japan. For a while it seemed like they would
be able to compete, through technical innovation.
Unfortunately reality caught up with their aspirations last
year, and it is now clear that not only is the company just
about bankrupt, but that it has probably been this way for
the last 3-5 years, with business upticks (such as
high-definition TVs) being nothing more than tantalizing
illusions for hopeful investors and banks.

As a result the company now owes about JPY2.5trn (US$31bn)
to the banks and other bond holders, a crushing debt
burden, and its shareholders have seen their holdings
evaporate, with shares slipping from around JPY800 this
time last year to just JPY198 on Friday. Interestingly,
some of the largest shareholders in Sharp are the very same
banks they owe money to (good old-fashioned "Japan Inc"
relationships), and any way you look at it everyone
involved is about to take a financial bath. Indeed, we
suspect that part of the fight Terry Gou of Hon Hai is
having in trying to get Sharp to be reasonable in repricing
its shares is probably that Sharp's banks are baulking at
the huge losses they are going to have to swallow.

As a reminder, Hon Hai agreed to a price of US$800m for a
9.8% stake, which would have valued the company at around
JPY550/share. Now that those shares are trading at less
than 40% of that amount, Mr. Gou must be quite angry. We'd
love to see a copy of the purchase agreement, which appears
to be giving Hon Hai the ability to renegotiate...

[Continued below...]

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[...Article continues]

In the end, and due to an upcoming JPY362bn redemption of
bank loans this year and JPY200bn of bonds maturing in
September next year, plus the fact that Sharp's management
seems unable to slim down their company without external
help, we think the banks will be forced to accept the
situation. Our guess is that Hon Hai will be allowed to
come in for JPY250~JPY300/share, a smallish premium, and
will wind up owing 20% or so of the company. This will
effectively give them control over Sharp and its
technologies -- particularly its components for Apple
iPhone products. This will be a spectacular win for Hon Hai
and a huge loss of face for the Japanese establishment.

The only way we can see Sharp avoiding this scenario is to
go ask a local or foreign investment fund to take a major
share in them, which could then give the fund enough
leverage to start carving up the company and its
substantial assets -- an even more ignominious loss of
face. We have no doubt that there are a number of funds,
Japanese and foreign, salivating over the possibility of
this happening.

Or, as a long-shot bet, we suppose that Apple might want
to step in directly. But given Apple's allergy to doing their
own manufacturing, probably not.

Watching Sharp wriggle on its skewer of debt, we wonder
which company in the electronics sector will be next?

Perhaps one sign of future trouble can be seen in the ink
jet printer sector, an area dominated by the Japanese
thanks to their virtual lock-hold on print head technology
patents. Well, a lock-hold with a couple of notable
exceptions: HP and Lexmark in the USA. From what we can
tell, the biggest player globally in ink jets is probably
HP, which according to a news quote from Gartner has a 45%
global market share. Hard on their heels, though, is Seiko
Epson (market share unknown), then Canon and other
Japanese firms.

As was revealed in various legal tiffs over ink cartridge
recyclers in the early 2000's, the ink jet business is an
important source of profit for these companies. Even today,
HP makes about US$12bn in annual sales from ink jet
cartridges, and they account for about 20% of the company's
overall profit! The dirty secret is that each little packet
of ink carries a profit margin of about 70%.

These numbers work similarly for Epson and Canon, and thus
are important sources of revenue. The problem is that the
ink jet market itself is shrinking globally as more and
more consumers keep their data on mobile devices they don't
need printed paper. HP this year said that this move away
from home printing was one of the major sources of pain for
the company and that they think the ink jet industry
declined about 3% this year. Other estimates put the
decline at an even higher pace.

Which ever stats are correct, the fact that all is not well
in the ink jet industry and this has to be of major concern
to Seiko Epson, which earns about 50% of its revenues from
ink jets. Yes, like the other manufacturers, they have
announced a refocusing on the business market as a respite
from the punishment in consumer sales, but nonetheless, its
shares have lost more than 50% of their value since March
this year. Given the announcement just last week that the
Number 5 or 6 global player, Lexmark, is pulling out of the
segment all together, Seiko Epson's shares may blip up
temporarily with the loss of a competitor, but in long-term
we see them sinking even lower.

The reason for our saying this is that Lexmark announced
that they will be selling off their IP to anyone interested
in buying it. Until now the Japanese and HP/Lexmark have
kept Korea's Samsung, China's Ninestar, and other low-cost
manufacturers (such as Hon Hai) out of this high-profit
segment through their rock solid patents. But by buying up
Lexmark's IP, any of these companies will be able to open
the door to a huge share of the global market -- so long
as they stay true to their price-leader strategy in regards
to their ink cartridges. This scenario would wreak havoc on
the existing players, particularly HP and Seiko Epson.

So we'd be shorting Seiko Epson shares for the next few
months, especially if Lexmark goes ahead and sells to the

...The information janitors/


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+++ NEWS

- Sharp deal with Hon Hai gets big setback
- Samsung found not guilty in Tokyo
- Nomura instituting heavy cost cuts
- Daikin buys 2nd biggest competitor
- Japan Advisory unfairly targeted?

=> Sharp deal with Hon Hai gets big setback

With the CEO of Taiwan's Hon Hai leaving Japan suddenly,
the pending investment of JPY700bn into Sharp Corp. now
hangs in the balance. Without the investment, Sharp is
under extreme pressure to put off various bank and creditor
payments and to simply stay in business. S&P as a result
has cut Sharp's credit rating to "junk" status, the worst
rating the company has ever received. The core of the
problem with Hon Hai is Sharp's dramatically falling share
price, caused by the fact that the company lost JPY138bn in
Q1 of this fiscal year, and unfortunately it expects more
such red ink this quarter. (Source: TT commentary from, Sep 1, 2012)

=> Samsung found not guilty in Tokyo

While Samsung lost its court case against Apple in the USA
over copyright infringement of the look and feel of Apple's
mobile devices, here in Japan a judgment went the other
way, and the Tokyo District Court found that Samsung is not
guilty of infringing an Apple claim about music and video
synchronization over the web. ***Ed: Had Apple sued for
design infringements as they did in the States, experts
here are saying they would have lost. There are some other
suits pending here in Tokyo, including a Samsung
counter-suit, so the drama will continue.** (Source: TT
commentary from, Aug 31, 2012)

=> Nomura instituting heavy cost cuts

The new Nomura Holdings CEO, Koji Nagai, is clearly trying
to leave his mark by introducing a high level of cost
cutting to turn the bank around. He announced a second
target of reducing costs by US$1bn over the next two years,
which will mostly affect the investment banking, equities,
and fixed income divisions operating in Europe. In late
2011 Nagai announced a US$1.2bn round of restructuring, and
that was intended to slash about 1,000 jobs, so we expect
that the latest round will increase that number to nearly
2,000 jobs. (Source: TT commentary from, Aug
31, 2012)

=> Daikin buys 2nd biggest competitor

We wonder if Daikin's move to buy up its second biggest
competitor in air conditioning in the USA, Goodman Global,
will invite attention from the anti-trust authorities?
Daikin has said that it will pay US$3.7bn for the US firm.
Apparently Daikin had a chance to buy Goodman in 2004, but
decided to acquire a competing firm, McQuay International,
instead. Unfortunately the McQuay deal did little for
North American sales and so Daikin re-approached Goodman
several years ago and finally consummated the deal last
week. ***Ed: The fund that owned Goodman earned a return of
US$1bn in just 4 years, not a bad return on investment.
This would make an interesting case study for business
schools, actually.** (Source: TT commentary from, Aug 30, 2012)

=> Japan Advisory unfairly targeted?

Although it's a long-shot, former hedge trading maestro Ed
Brogan and his Japan Advisory company have decided to lodge
a complaint against the SESC for its actions against the
trading firm, namely the fines levied against it and more
importantly its loss of licence. The SESC found earlier
this year that Japan Advisory had received an insider tip
about Nippon Sheet Glass, and had executed trades based on
that tip. Japan Advisory is arguing that at the time its
actions were not illegal and the rules were changed after
the event. ***Ed: Considering that Brogan's firm was doing
what many others were, suspension of his licence seems
harsh. Still, if the alleged actions had occurred in the
USA, he would have had a lot more to worry about. At least
here he was able to leave the country and retain his
freedom.** (Source: TT commentary from, Aug
31, 2012)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.


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If you have been considering setting up your own company,
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This is an ideal opportunity to find out what is involved,
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In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to

=> No comments this week.



=> Asuka-dera, Nara
Home to the oldest extant Buddhist statue in Japan

Asuka-dera (Asuka Temple), also known as Hoko-ji, was a
temple complex originally built in 588 by Sogano-Umako (see
Ishibutai kofun), powerful leader of the Soga clan. He was
instrumental in the spread of Buddhism in its early
history in Japan. Originally, the temple was much larger in
size and area, containing three Main Halls. Through the
centuries, however, the temple has suffered fires and
earthquakes that completely destroyed the building
complexes. The current buildings date to the Edo period

The main object of worship at Asuka-dera is the 2.7-meter
high bronze Great Buddha (Shakyamuni), which was built in
609, twenty years after the temple’s founding. It was the
first major work of Kuratsukuri-no-Tori [saddle-maker
Tori], or Tori Busshi [Buddhist statue-maker Tori], a
craftsman with Chinese (some say Korean) historical roots.
He is also credited with creating the Shaka triad at
Horyu-ji Temple.

=> Mount Omuro, Izu
An extinct volcano in Izu with fine views and archers

The Izu Peninsula is famous for its hot springs, provided
with steaming hot water by the region`s volcanic geology.
Mount Fuji is the most famous, but it`s not the only
volcano in the vicinity: close to Ito on the peninsula`s
east coast is Mount Omuro, an extinct volcano that makes
for a pleasant half-day excursion.

At 580m high, Omuro is the highest peak in the area, and
there`s no path: you`re carried to the top in a fun-few
minutes in a rickety-looking (but presumably safe) chair
lift. The first things you find when you get there are a
lookout point and Sancho-Baiten, a small shop where you can
buy snacks and souvenirs. I decided to do my shopping
later, and set off straight away along the circular trail
around the crater rim, which gives a striking, complete
panorama in every direction.

During the year there are a handful of special events to
attract visitors. On New Year`s Day the chairlift starts
running from 5:40am for the first sunrise of the year, and
on the second Sunday of February each year, the dead grass
is burnt off the mountainside to allow the new buds of
spring to peek out. The arc of fire advancing around the
mountain, leaving smoking burnt grass in its wake, is quite
a spectacle.

It`s also possible to enjoy a couple of sporting activities
while you`re there. Down in the crater there`s an archery
range where wannabe Robin Hoods can try their hands, while
the more adventurously inclined can try paragliding from
the trailside.



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