This Apple Supplier Made One Crucial Mistake

(Bloomberg Opinion) -- Japan Display Inc.’s decision to cut staff, reduce pay and take more write-offs was the inevitable result of management’s short-sighted strategy.

. A planned bailout by a consortium of new backers is unlikely to solve its core problems unless key changes are made.

. I argued in February that the company needs new leadership . On Wednesday it announced just that: President and CEO Yoshiyuki Tsukizaki will step down on Sept. 30. JDI will also cut around 26% of its workforce and close a factory.

. It didn’t have to be like this. The company was formed in 2011 when Sony Corp., Hitachi Ltd. and Toshiba Corp. decided to spin off and merge their respective display divisions. It was a good idea. Facing tough competition from South Korea’s Samsung Electronics Co. and LG Display Co., as well as a handful of Taiwanese rivals, banding together was their best defense.

. Having watched the nation’s memory-chip industry die, Innovation Network Corp. of Japan , a government-industry fund, was the merger’s key backer.

. It found success early, landing Apple Inc. as a client and supplying iPhones year after year. R&D spending data indicate that this may have lulled management into a false sense of security.

. Over the past six years, JDI cut R&D while others were raising it. That was a crucial mistake. In 2013 it was a leader in research spending as a percentage of sales. By last year it was a laggard, with its spending ratio less than half the average of peers, according to data compiled by Bloomberg.

. That shortfall mattered. Having efficient and large-scale manufacturing is only half the challenge, and securing a core client is only ever temporary. What the company needed was to make bets on the future by developing next-generation screen technologies. The world was moving away from using liquid-crystal displays in smartphones, and would eventually embrace organic light-emitting diodes.

. When Apple decided to adopt OLED in 2017, after other handset rivals, JDI had nothing to offer. Samsung’s huge technological and manufacturing muscle meant it was the only supplier able to ship enough panels for that year’s iPhone X. And while JDI boosted R&D by almost 40% in the year through March 2018, it seemed to give up on the chase and slashed spending 21% this past year.

. A deal with a consortium of Taiwanese and Chinese investors seems to have dragged out because the Japanese side was loath to dilute its control or make the cost reductions necessary to ensure its future. Now that the cuts have been made, its prospective new shareholders – which include Taiwanese iPhone touch-screen inventor TPK Holding Co. – need to commit to a drastic increase in research spending to ensure its factories can be filled with leading-edge displays.

. If that doesn’t happen, then JDI will be forced to compete solely on price with older technology and against larger rivals in South Korea, Taiwan and China. Such a scenario means another wielding of the knife is likely in another few years.

. To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

. Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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This Apple Supplier Made One Crucial Mistake