Investors in Japanese equities are in shock and awe at the depth and rapidity at which key indicators of Japan's economy and major industries are deteriorating. The Japan Economic Journal's (Nikkei) index of business conditions for December deteriorated 5.5 points to 90.5, representing the sharpest deterioration since the index began in 1973, following another record decline in November.
Automobiles and Electronics Hit Hardest
The December production plunge in key sectors such as automobiles and electronic devices was over 10%, while commercial sales also fell 7.0% as wholesale and retail sales also fell. While the problems of Japan's automobile makers are probably the most reported overseas, sales and earnings at Japan's 8 major electronic firms are also rapidly deteriorating.
Hitachi (6501.T), Panasonic (6752.T), Sony (6758.T), Toshiba (6502.T), Fujitsu (6702.T), NEC (6701.T), Mitsubishi Electric (6503.T) and Sharp (6753.T) now expect to lose a combined JPY1.93 trillion of net income ($21.4 billion) in the fiscal year ending March 31, 2009, which is equal to the losses incurred in March, 2002 following the bursting of the IT bubble--after which these companies had already gone through a period of deep restructuring and, as the popular buzz word says, "selecting and concentrating" their businesses.
The rapidly accumulating losses at these firms is forcing domestic and overseas plant closures, and the loss of some 53,780 jobs to date as sales are expected to plunge anywhere from 10%~15% for the fiscal year, with the drop-off in demand in Q3, Q4 of the fiscal year being simply unlike these companies have ever seen--not in the tech bubble burst, or during the oil shocks of the 1970s.
FY08 Losses announced so far:
Hitachi: net loss JPY700 billion, 11% YoY sales decline
Panasonic: net loss JPY380 billion, 15% sales decline
NEC: net loss JPY290 billion, 9% sales decline
Toshiba: net loss JPY280 billion, 13% sales decline
Sony: net loss JPY150 billion, 13% sales decline
Sharp: net loss JPY100 billion, unk sales decline
Fujitsu: net loss JPY20 billion, 12% sales decline
Mitsubishi Electric: net loss JPY10 billion, 11% sales decline
As these companies see no signs of improvement for the foreseeable future, they have embarked on deep restructuring plans. We think the current recession/depression will lead to further industry consolidation. Panasonic is already in the process of merging its Osaka cousin, Sanyo Electric,
During the financial crisis of the Heisei Malaise, Japan's banking sector underwent massive consolidation and restructuring which pruned the numbers of "major" banks essentially into four megabank groups. Essentially, Japan has too many manufacturers of essentially every major electronic product group. We would not be surprised to see Japan's electronic majors also consolidate into a much smaller number of companies that exist today, as the industry is starting to look like Japan's steel industry in the early 1990s.
The history of Japan's steel industry since the end of Japan's rapid economic growth in the early 1970s has been one of constant downsizing. Since the early 1990s, Northeast Asia's steel industry has undergone a remarkable restructuring process. Notably, the region's steel industry lost over 1 million jobs, and mergers as well as strategic alliances among the region's largest steel makers have proliferated.
Despite substantial restructuring, there are still too many Japanese electronics companies competing in overcrowded markets. There is also a danger that the digital consumer electronics sector will go down the same path as the PC industry, where standardization of technologies and modularization of components led to a plunge in prices, the emergence of very strong competitors in Asia, and the concentration of profits in a few hands. Going forward, they will be faced with joining forces to reduce the amount of domestic competition, and to create national champions to compete against ever stronger overseas competitors.
