TOKYO - Japan's Sony Corp., Toshiba Corp. and Hitachi Ltd. said on Wednesday they will merge their liquid-crystal display operations using government-backed funding, to better compete with low-cost panels from South Korea and Taiwan.
The merger, to be completed by spring 2012, will create the world's largest maker of small panels used in smartphones and tablet PCs, leapfrogging global leaders Sharp Corp. and Samsung Electronics.
The 90% government-owned Innovation Network Corp of Japan will eventually invest about 200 billion yen ($2.6 billion) in the merged unit, taking a 70% stake, while each of the three companies will take a 10% stake.
An industry shakeup has been overdue in the face of panel price falls along with ever advancing technological demands and volatile output demands.
All three firms have hesitated about investing in a new line to compete against Sharp, which is due to receive a $1 billion investment from Apple Inc.
Sony has been weighed down by chronic losses in its TVs, Toshiba is speeding up plans to shrink its chip business, while Hitachi has been looking to distance itself from the panel business to focus on infrastructure operations.
"We will probably see oversupply (in small LCD panels) in the near future," said Shigeo Sugawara, a senior investment manager at Sompo Japan NipponKoa Asset Management. "It's not a business that will likely provide stable profits in the mid- to long term."
The three firms together controlled 21.5% of the market for small and medium-sized displays last year, larger than Sharp with 14.8% or Samsung Mobile with 11.9%, according to research firm DisplaySearch.
But how the three, which use two different types of display technology, will merge operations is unclear. Nor did the companies' initial announcement include plans for streamlining business overlap.
"The parent companies have found a most convenient buyer for their factories and staff," said Yoshihisa Toyosaki, head of Japanese research firm and consultancy Architect Grand Design.
"The assets of the merged entity will be huge. Without restructuring, there is no way that this company will win against Sharp, or rivals from South Korea, Taiwan, and eventually China."
The three firms will focus on developing next-generation displays, including thinner organic light-emitting diode displays with higher resolution, the three firms said in a joint release.
Hitachi has been in separate talks with Taiwan's Hon Hai Precision Industry, better known as Foxconn Electronics Inc., about a joint venture in LCD panels, sources have said.
Talks with the parent of Chimei Innolux Corp. broke down when Hitachi failed to grab a key contract with Apple, one industry source said.
Ahead of the announcement, well-flagged by media, shares in Sony closed down 1.8%, Toshiba fell 2.4% and Hitachi rose 0.5%. The market benchmark Nikkei average ended flat.