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Zombie Businesses in the Electronics Industry: Case Studies

In: Excess Capacity and Difficulty of Exit

Author

Listed:
  • Sumio Saruyama

    (Japan Center for Economic Research)

  • Peng Xu

    (Hosei University)

Abstract

In this section, we focus on the misallocation of credit to loss-making electronics business segments in major Japanese electronics companies. We show that Sony wasted its internal funds from profitable finance and entertainment businesses to subsidize its primary loss-making electronics business. Similarly, NEC spent most free cash flow on its main loss-making electronic devices sector. In contrast, Mitsubishi has been promptly cutting off investment in small underperforming business segments and improving its profitability. It is not surprising that the perverse investment in loss-making segments prolongs poor performance. The direct reason is that free cash flow is in excess of investment opportunities in the electronics industry. However, the outside-dominated board does not prevent Sony from deficit segment investment. In addition, foreign institutional investors neither voice nor vote with their feet against inefficient segment investment in Sony and NEC. Exceptionally, Third Point, a U.S. based activist investor fund, exerted pressure, and then Sony spun off its loss-making PC business.

Suggested Citation

  • Sumio Saruyama & Peng Xu, 2021. "Zombie Businesses in the Electronics Industry: Case Studies," SpringerBriefs in Economics, in: Excess Capacity and Difficulty of Exit, chapter 0, pages 13-38, Springer.
    • Handle: RePEc:spr:spbchp:978-981-16-4900-4_2
    DOI: 10.1007/978-981-16-4900-4_2
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