Japan Should Teach Tech Companies to Fish

(Bloomberg Gadfly) -- Japan Display Inc. will soon learn whether it's the lucky recipient of a 50 billion yen ($477 million) fish.

Government-backed Innovation Network Corp. of Japan, or INCJ, has been mulling since at least August whether or not to give the screen maker new lines of credit and loan guarantees. Details will come next month, Yomiuri reported this weekend,

JDI is one of the country's two remaining flat-panel makers (Sharp is the other), and needs money to pay off debts and expand as it struggles to keep up with South Korean behemoths Samsung Electronics Co. and LG Display Co. Absent a government-backed loan, it seems likely JDI could be relegated to the growing pile of defunct Japanese component makers.

I'm a free marketeer, but I'm going out on a limb to advocate that JDI should get the loan. Naturally, there are conditions. If this is merely free money, then the government would be as well-served donating it to a casino.

Since it's government cash, the government can and should use it as a policy tool.

INCJ is supposed to be "a unique public-private partnership aimed at promoting innovation and enhancing the value of businesses in Japan." Building factories to manufacture next-generation organic light-emitting diodes is the obvious destination for new cash. In fact, it's too obvious.

Spending money to expand capacity only makes sense when there's an industry shortage and you have a unique technology or first-mover advantage. In OLED, Japan Display has neither. Samsung is already the leader in that field, with everyone else rushing into a technology that makes smartphone, computer and TV displays brighter and more energy-efficient.

While current capacity isn't enough to meet future needs, JDI adding raw manufacturing volume will just make the company an also-ran in a commodity business, turning out products with somebody else's technology. We've seen that play out in LCDs and memory chips for more than a decade.

This time, government money could be used actually to promote the "I" in INCJ. Capacity doesn't equal innovation, but R&D does. And here, Japan Display is falling short. More cash is going into mundane sales and other expenses than is going into developing technologies.

Spending on factories might help JDI win contracts from major clients such as Apple Inc. that are looking for capacity in the short-term, but it won't make the company innovative or strong enough to hold onto those orders when prices fall or technology moves on.

Building core competence would not only keep business, but give JDI pricing power when clients try to squeeze the company. After years of Apple's testy relationship with Samsung, there's a reason why it struggles to wean itself off the South Korean supplier-cum-competitor.

Japan wants to remain relevant in global electronics. To do so, it needs to expend more of its energy on innovative, must-have technologies.

To avoid starvation, the government shouldn't be giving away fish, but investing in nets and lines so that its companies can keep catching them.

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

To contact the author of this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.