TOKYO (Reuters) – When Japan Display Inc. broke ground on a new factory in central Japan in 2015, the future looked bright for one of the world’s best suppliers of LCD (liquid crystal display) panels.
Japan Display Inc’s logo is pictured at its headquarters in Tokyo, Japan, August 9, 2016. REUTERS/Kim Kyung-Hoon
The plant would strengthen the company’s position as the primary screen supplier for Apple Inc if the sales of the iPhone 6 increased. And the US smartphone juggernaut said that it would be for most of the $ 1.5 billion in costs, with Japan Display to pay back with a percentage of the screen of the sale, on the basis of two sources of company.
Four years later, Apple’s shifting of fortune brought Japan Display at the knees and threatens to end in Japan long-term as a leader in the technology of the display.
A slowdown in iPhone sales, in combination with a proliferation of new iPhone models – many of which use a newer organic light-emitting displays (OLED) – left Japan Display’s new factory is running at half capacity.
But it still owes Apple a majority of the construction costs, one of the company sources said. He refused to give the exact amount.
Desperate for capital, Japan Display is looking to an investor group led by China Silkroad Investment of Capital, for a bailout, two sources with direct knowledge of the matter said. The deal would give the Chinese group a controlling stake in exchange for an investment of $500 million to $700 million, the sources said.
The group plans for the construction of an OLED panel factory in China with Japan Display technology, according to these two sources.
The company’s woes show how weak the iPhone sales and a broader slowdown in the smartphone business are the causes of pain in the Asian electronics supply chain.
“In retrospect, the new factory was unnecessary”, says one of the sources with direct knowledge of the bailout talks said. “But the decision was not wrong. Japan Display started to pick up steam thanks to Apple, and Apple wanted the new factory.”
Japan Display not only bet on strong growth in iPhone sales, and that looked particularly appealing, because the Apple is now abandoned strategy of offering a few variations in each product cycle.
“We were all happy to see life from the sale of a single iPhone model, reaching 100 million units,” a source at a different Apple parts supplier said.
“The supply of components for just one model in solid volume is very cost-efficient,” he said. “At the same time, we exposed ourselves to great volatility of the risks.”
Japan Display has built relationships with other smartphone vendors, including Chinese powerhouses Huawei, Xiaomi, and OPPO.
But it is the losses of their orders as revenue growth softens and the Chinese players switch to the domestic panel makers such as BOE Technology and Tianma micro-electronics, which have significantly improved the quality of their screens.
Japan Display supplied almost a third of the Huawei smartphone screens in 2015, but its share had plunged to 4 percent in the third quarter of last year as the Chinese company turned to BOE and Tianma, according to researcher IHS Markit.
Sources in Japan Display, and other Apple suppliers interviewed for the story declined to be identified as they are not authorized to talk to the media. Vendors rarely speak about business with Apple on the plate, because of the strict non-disclosure agreements.
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Japan Display was formed in 2012 by the government-backed merger of the ailing display units of Sony Corp, Toshiba Corp and Hitachi Ltd.
It has power in so-called thin-film transistor technology (TFT), is of crucial importance for creating high-resolution images on LCD and OLED panels. In addition to the Apple company, which accounted for more than half of the revenue of the company for the last four years, it is a top supplier of dashboard panels for major auto component companies such as Continental.
But Japan Display has difficulty to navigate through the rapidly changing display business.
The new LCD factory is still under construction at Apple at the height of Japan’s Display in the autumn of 2015, that the plan was to move quickly away from the LCD to the new OLED technology, two former company officials said. It was too expensive by then to leave the half-completed plant, they said.
Japan Display’s management at the time, led by the former Sanyo Electric executive Mitsuru Homma, promised to start mass production of OLED panels in 2018.
In the meantime, the administration shut down older, unprofitable LCD lines on a shift of resources to OLED, but the main investor, a state-backed fund, blocked the plans for drastic layoffs for fear of public backlash, one of the former officials said.
Unexpectedly weak sales of the iPhone 6s are created of a cash crunch in 2016, and Homma dismissal beginning of the following year, after the company took a $640 million-euro bailout of the state-backed fund.
The new chief executive, Nobuhiro Higashiiriki, said a full shift to OLED. But the company was already behind rivals, notably Samsung Electronics, and still more money is needed for OLED investments. Disappointing sales of the iPhone XR, the only LCD model in Apple’s 2018 line-up, still a blow.
Details are shown on the back of an Apple Iphone 6 on a table in a restaurant in Hanau, Germany, April 10, 2016. REUTERS/Kai Pfaffenbach
“The company now looks exhausted, with many engineers leave,” a former employee said.
Some board members have expressed their concern about the transfer of technology which can track on the proposed Chinese investment, sources familiar with the talks said. But the government investment has patience.
“We have no other option”, says one of the sources of company said, adding that the government has been quiet about the rescue plan. “They can claim that the display technologies are not something Japan should keep and protect, when the Chinese panel makers are ramping up view more plants.”
Reporting by Makiko Yamazaki; additional reporting by Yoshiyasu Shida; Editing by Jonathan Weber