Sharp's TVs face voracious competition.

Photographer: Kiyoshi Ota/Bloomberg

Time for Japan to Cut Off Sharp

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Sorry, but can anyone provide a good reason why Sharp should still be in business?

As Japan Inc. icons go, the beleaguered tech giant counts as borderline royalty. Founded in 1912, the year Emperor Meiji, whose reforms transformed Japan from feudal state to capitalist power, died, Sharp was among the core engines of the nation's global ambitions. In 1964, Japanese reveled in Sharp's introduction of the first transistor calculator just in time for the Tokyo Olympics -- the nation's post-World War II return to the global stage. In 1997, the Osaka-based star gave the world the first commercial camera phone, inspiring Steve Jobs in California.

QuickTake Abenomics

Now, it's hard to figure out a business in which Sharp can really excel. In 2012, when the company should've been celebrating its 100th anniversary, executives were releasing the company's worst financial results ever (nearly $5 billion of losses). Despite a slew of cosmetic tweaks since then -- raising equity from the public, selling off stakes in businesses and, in June 2013, naming a new president, Kozo Takahashi -- the bleeding has not stopped. Sharp is forecasting a $251 million loss in the 12 months ending March as its Aquos TVs struggle to compete against China, Korea and Japanese rivals like Sony.

Display panels show little promise given this voracious competition. Sharp says it's banking on selling smartphone panels to China's handset makers. Yet mainland suppliers can make high-quality ones at lower prices. On Thursday, the company denied reports it's selling off its loss-making solar panel business.

That begs the question why not. As I say, why is Sharp still with us? Banks bailed out the company in 2012, only to lose $8 billion over the next two years. In a more conventional market economy, the company would've gone bust by now -- or at least been acquired. “Sharp’s core business is as bad as it could get,” analyst Atul Goyal of Jefferies Group told Bloomberg News. 

Sooner or later, Japan has got to get serious about letting zombie companies like Sharp die. That would be terrible news for its 50,000 workers -- and a political headache for Prime Minister Shinzo Abe, who is already struggling to halt declines in Japanese wages. But Sharp's woes epitomize much of what's still wrong with Japanese business culture. It might be worth more as a sacrificial lamb than as a perpetually struggling enterprise.

Since its heyday, Sharp has over-expanded, lost track of core competencies and grown complacent thanks to ready support from banks. While executives get most of the blame, Tokyo deserves some, too. In 2009, the Ministry of Economy, Trade and Industry of Japan, or METI, helped set up the Innovation Network Corp. of Japan to boost the nation's entrepreneurial capital and competitiveness. Instead, the partly taxpayer-funded entity largely became a bailout mechanism for failed projects. INCJ conjured up Japan Display out of assets from other prominent names -- Sony, Toshiba and Hitachi -- and then steered lots of the iPhone business to the new company. That took food right off Sharp's plate. The company suddenly faced yet another competitor, one with ready cash from INCJ's investment and a 2014 initial public offering.

Sharp has remained alive mostly because of the cozy web of cross-shareholdings that bind the company and its creditors. The company's management declared this week that it was considering “drastic reform,” including cutting executive pay by as much as 20 percent (a tired Japan Inc. maneuver that makes great headlines, but changes nothing). In fact, the strategy looks to be a familiar one -- hitting up the bankers again.

Takahashi is reportedly chatting with Mitsubishi UFJ Financial and Mizuho Financial. Options may include a debt-for-equity swap. (On Friday, the Nikkei reported that Sharp is also angling for $250 million from Japan Industrial Solutions, a turnaround fund partly held by Japan's megabanks.) Sharp has some serious leverage; its bankers are stuck with more than $3 billion of Sharp debt. Takahashi's opening line to his financiers could be: If you cut us off, you'll get hurt, too.

Where have we heard this before? Tokyo has found itself in this same predicament countless times over the last two decades. Continuing to prop up complacent companies takes the onus off executives to create new products and wealth that generate jobs and higher incomes. It deadens the creative destruction that chastens stagnant industries -- like Japanese tech -- and makes way for innovative and new ones. It's time to break this cycle. Sharp is a great place to start.

(Updates with possible aid from Japan Industrial Solutions in ninth paragraph.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Willie Pesek at wpesek@bloomberg.net

To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net