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Can Japan’s Latest Alliance Catch The Wave Of Semiconductor Success?

The global semiconductor business is riding the crest of a strong and sustainable wave, as expected. Undoubtedly, the market’s success played a pivotal role in encouraging Japanese semiconductor companies Fujitsu and Panasonic to finally announce their agreement on the formation of a new, but as yet unnamed, company. 

The Development Bank of Japan (DBJ) will provide about 20.0 billion yen (€140 million) in equity capital and a maximum credit line of 10.0 billion yen (about €70 million). DBJ also will provide risk money through its Fund for Japanese Industrial Competitiveness in the belief the new company will create new value that will in turn make Japan more competitive in system large-scale integration (LSI). For this financial investment and support, DBJ will get 40% of the voting rights. Fujitsu will have 40%, with the remaining 20% going to Panasonic.

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It has taken a year for the three partners to reach this stage. Once they finally clarify all the minutiae, they are expected to sign a final agreement. The full integration and business startup is forecast for the third quarter of fiscal 2014. The new company is expected to employ 3000 people.

Good News And Bad News

So the timing looks good given the optimistic semiconductor market predictions. But one cautionary note has to be mentioned.

In December 2013, we reported that traditionally Japan consumes the most semiconductor materials, which is unsurprising given its significant fab base and packaging operations (see “Chip Makers Head For A Boom Year”). But during the past four years, manufacturers in the region have consolidated many of their fabs and packaging plants. Taiwanese companies in particular have substantially invested in advanced packaging and foundry operations.

During the 2009 downturn, the materials market contracted 22% in Japan, compared to 12% in Taiwan. As a consequence, Taiwan is now competing with Japan and South Korea to see who will consume the most semiconductor materials.

Japanese semiconductor businesses have suffered from high operating costs, particularly those related to research and development and increasing market pressures from international competitors. Also, let’s not forget Elipda’s bankruptcy and subsequent acquisition by Micron and the substantial Japanese government-led bailout of Renesas.

Despite these pessimistic observations, this new business is saying it will generate annual sales of about 150 billion yen (€1 billion). The CEO who will shoulder the responsibility for making that a reality is former Kyocera president Yasuo Nishiguchi.

Teaming Up

This won’t be easy. Fujitsu and Panasonic have openly stated that in recent years, market conditions have rapidly deteriorated and overseas semiconductor manufacturers have risen in prominence.

In light of this situation, Fujitsu and Panasonic both acknowledge that bringing together their respective advanced technologies and customer base is vital to building a competitive business globally. Key to this plan is the venture’s aim at the global development of Japan’s system LSI industry.

Fujitsu and Panasonic have been considering the integration of the system LSI business and associated intellectual property (IP) of Fujitsu’s wholly owned subsidiary, Fujitsu Semiconductor Limited, together with Panasonic’s system LSI business and related IP. Fujitsu and Panasonic will receive shares in the new company equivalent to the value of their respective contributions.

Fujitsu Semiconductor and Panasonic already provide system LSI products and related solutions that include technology in video and networking. The new company will consolidate these resources and aim for an initial public offering within several years of its establishment.

The new company might achieve this by switching to a fabless business model and exploiting high growth areas like cloud computing, big data, and optical networks as well as medical equipment and energy-related products. The company also will invest in key application areas such as high-performance servers and core technologies that support cloud infrastructure like ultra-high-speed networks, visual and imaging solutions, and extremely low-power wireless connectivity solutions.

So everything looks set. The cash is in place, the technologies mesh well, and the global semiconductor market is going to enjoy at least two years of strong trading. It only remains to be seen if this new alliance can catch the wave whilst the market surf is up. That will mean some fast moving engineering and sales strategies from a business venture that has already taken a year to just get itself as far as the beach. 

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