Japan technology: Light switch

At first glance, the latest headlines in the digital panel industry suggest a lapse in logical supply chain causality. Major downstream device manufacturers such as LG Corp, Samsung and Apple are staging ambitious new product roll-outs, yet one of the industry’s leading components suppliers is on the rocks.

The dissonance is explained, however, by the rush to embrace the organic light-emitting diode (OLED), an electroluminescent material that is brighter, thinner, more efficient and more physically flexible than traditional liquid crystal display (LCD) or plasma technology. Japan Display, a sector giant formed by Sony, Toshiba and Hitachi, appears to be missing the OLED wave and scrambling a desperate overhaul of its LCD-focused operations.

“The Japanese have basically decided to stop investing and license the technology to the Taiwanese and the Chinese,” says Ross Young, CEO of US and Japan-based Display Supply Chain Consultants (DSCC). “They’ve just not invested in enough R&D and enough capacity. They’re late in trying to get into production, so they’re behind the curve, and it’s unclear how they’re going to catch up.”

It is hard for a Japanese start-up to build a business relationship with Apple – Masahiko Honma

With Korean heavyweights claiming the pole position in retail-ready TVs and smart phones, Japan’s best route to gaining more exposure to the OLED story is in upstream equipment and materials. According to DSCC, the value of the display equipment market rose 93% year-on-year in the first quarter of 2017 to $4.5 billion. During this period, Canon was the best performing supplier with more than 50% market share in lithography and evaporation tools, OLED’s two biggest sub-segments.  

Nevertheless, Japan Display and its sister company JOLED are the only ones focusing on the intellectual property development that will be critical to exploiting near-term growth in a market tipped to value $32 billion a year by 2020. Both outfits are backed by government-owned investor Innovation Network Corporation of Japan, and as such, hint at the domestic industry’s most reliable path forward. Unlocking the potential of Japanese corporate and academic OLED developers will require more attention from VCs and a better understanding of the various markets in play. 

OLED appeal

OLED technology has generated interest from an end-user marketing standpoint due to strong performance characteristics such as improved clarity and scratch resistance. From a manufacturer’s perspective, it offers a more efficient production profile, including the potential to eliminate one of the panel industry’s most severe supply chain hang-ups: iridium. It is estimated that OLED panel suppliers could reduce costs 10-fold by cutting this rare metal from production processes.

The reason OLED represents a step change in the electronics industry, however, is its form function. The ability to create curved, foldable and roll-able display screens offers smart phone brands a chance to deliver truly consequential innovation. This is set to be the highest-value segment for OLED players, with some two billion units on track to switch from LCD to the new technology across the next few years. For Japan, the early focus on mobile complicates entry into OLED, however, since a local consumer bias for Apple iPhone products leaves little room for participation by third-party entrepreneurs.

“If there were a variety of Android device makers from Japan, there would be more opportunity for Japanese start-ups that supply smart phone hardware such as display,” says Masahiko Honma, founder and general partner at Incubate Fund. “In general, it is hard for a Japanese start-up to build a business relationship with Apple. We need to create tighter relationships and ecosystems between the device makers and suppliers in Japan to increase the hardware innovations happening here.”

Since TVs are not intended to be portable, they are seen as a less compelling platform for foldable screen technology. Further, TV use of OLED technology is currently considered uneconomic, with a large capital outlay resulting in only a slight picture quality improvement. LG has taken an early lead in TV production, but is thought to be advancing the program for purposes of technical experimentation and industry esteem rather than maximizing factory economics.

JOLED’s current technological limitations do not allow it to make phone-sized screens, so it is focusing on the TV market, albeit with a twist. “We are approaching the fields of medical, broadcasting, video production, transportation and monitors for professional use,” says Atsushi Kato, business administration officer at JOLED. “These markets, especially for middle-sized B2B monitors, are our targets because they currently don’t have any OLED products.”

Investors looking toward these areas will benefit from an extended uptake period. Whereas previous boom-and-bust cycles in display equipment have entailed two-year bursts of investment, DSCC expects a sustained run of elevated OLED capital expenditure through 2025. Technical roadblocks and high capital intensity will prolong the proliferation but also offer opportunities for entrepreneurs seeking to iron out kinks in still-emerging fabrication methods. 

Slow movers

There are a smattering of international funds focused on advanced materials such as Canada’s Pangaea Ventures, but the details of OLED lab work are not understood by most VCs. As a result, investors have waited for cues from informed corporates and tagged along where possible.

Kyulux, a spin-out from Kyushu University, demonstrated this effect last year with a $13.5 million round led by Samsung and LG that also included participation from QB Capital, Nippon Venture Capital, DBJ Capital, Mitsui Sumitomo Insurance Venture Capital, and SMBC Venture Capital. The company attributes this result in large part to the international profile of its team – a rarity among Japanese start-ups.

“We just need to find a way in Japan to create the teams to go around the technology and get funding from Japanese VCs, which tend to be a bit risk averse – those are the big bottlenecks,” says Christopher Savoie, Kyulux's CEO. “I hope our eventual success will be a spark that can ignite some of that activity, getting people who are good managers to move to venture companies and attract capital to this space.”

To aggravate matters, these bottlenecks can be mutually perpetuating. Few VC firms have a PhD in material science on staff or an entrepreneur in residence with experience working in chemistry. This situation makes OLED a hard sell for fund managers and chokes a typical channel for injecting cross-border know-how into young companies.

The opportunity gap for venture in Japanese materials-based technology is by no means a uniquely OLED phenomenon. But it can be exacerbated by the difficulty of getting software-focused VCs to take a chance on an arcane hardware space that is already thoroughly penetrated by well-resourced conglomerates. Indeed, despite all the fanfare about OLED revolutionizing the digital panel market, some VCs remain aloof – even questioning the future of the display screen as a concept.

“Displays are getting clearer, some are curved and some will be foldable. It’s going to happen, but it’s not going to be a game changer,” says Emre Yuasa, a principal at Globis Capital Partners. “The game changer is going to be escape-from-screen technology. People are tied to screens every day, but in the future, that will not be the case.”

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• Topics
• North Asia
• Technology
• Early-stage
• Japan
• Venture
• Globis Capital Partners