Secret Weapon Of Japan's Semiconductor Revival

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While there are many cases of Japanese companies having failed in overseas mergers and acquisitions (M&A), Renesas Electronics, a semiconductor manufacturer, has been able to recover from a state of de facto nationalization and strengthen its position through successive large-scale mergers and acquisitions of hundreds of billions of yen. The company is led by Hideri Shibata, who has been an executive for more than 10 years.

Renesas' net profit for the fiscal year ended December 2023 increased by 31% year-on-year to a record high of 337 billion yen. The stock price has risen more than 10 times from the low point in 2013 when Shibata joined, and at one point recovered to 3,000 yen in June this year, setting a new high since the company was established in 2010.

Against the backdrop of the artificial intelligence (AI) boom, semiconductor-related stocks led by Nvidia of the U.S. have performed well globally, and Renesas' stock has also been driven by this trend. However, 10 years ago, the company was still in a state of chronic losses and on the verge of bankruptcy.

Shibata (51) recalled in an interview at his Tokyo headquarters in June that when he joined Renesas in 2013, the company was "really close to going out of business, so the goal was to try to recover and become independent," but the company has since improved.

Get on a Growth Track

Japan's semiconductor industry had an overwhelming global market share in the 1980s, but has been declining since then. Renesas was formed in 2010 by merging the semiconductor divisions of Mitsubishi Electric, Hitachi Manufacturing, and NEC, but its performance deteriorated rapidly due to the shrinking of the mobile phone market and the impact of the Great East Japan Earthquake on its major factories. In 2013, Renesas received a bailout investment from a consortium centered on the Industrial Innovation Organization (INCJ), which was established with more than 90% of the capital invested by the government, and INCJ became the largest shareholder with 69% of the shares, and Renesas was effectively nationalized.

Japan's semiconductor industry had an overwhelming global market share in the 1980s, but has been declining since then. Renesas was formed in 2010 by merging the semiconductor divisions of Mitsubishi Electric, Hitachi Manufacturing, and NEC, but its performance deteriorated rapidly due to the shrinking of the mobile phone market and the impact of the Great East Japan Earthquake on its major factories. In 2013, Renesas received a bailout investment from a consortium centered on the Industrial Innovation Organization (INCJ), which was established with more than 90% of the capital invested by the government, and INCJ became the largest shareholder with 69% of the shares, and Renesas was effectively nationalized.

In 2016, Renesas acquired Intersil in the U.S. for approximately 350 billion yen, after which Shibata was promoted from chief financial officer (CFO) to CEO. In 2019, Renesas acquired IDT in the U.S., and in 2021, it acquired analog semiconductor companies such as Dialog in the U.K. In February of this year, Renesas announced the acquisition of software company Altair for about 890 billion yen, and has so far carried out nine mergers and acquisitions with a total value of about 2.6 trillion yen.

Masahiro Wakasugi, an analyst at Bloomberg Information, commented that since the acquisition of IDT, Shibata has appointed executives of the acquired companies as directors of Renesas to promote the globalization of the organization. While large mergers and acquisitions bring great goodwill, they are "not worried" because they are acquiring profitable businesses.

On the other hand, Kazuka Saito, a senior analyst at Iwai Cosmo Securities, pointed out that Renesas' M&A strategy has deviated from the direction of the acquisition of Altair, which makes him a little worried. He believes that the software business should not be able to expand its customer base through cooperation, rather than all owning. Although there are no major problems at the moment, impairment may be necessary if the return on investment is insufficient in the future.

Financially sound

Despite numerous acquisitions, Renesas' financial position remains strong. Interest-bearing liabilities due to mergers and acquisitions decreased to 667.7 billion yen at the end of the previous fiscal year, and the shareholders' equity ratio has continued to improve in recent years, reaching 63% at the end of the previous fiscal year. INCJ gradually sold its holdings as Renesas recovered, and exited completely last year. Last fiscal year, Renesas paid its first dividend since its establishment.

Although the semiconductor market is dominated by NVIDIA's graphics processing units (GPUs), which cost millions of yen per unit, while Renesas' microcontrollers (MCUs) cost only a few tens to hundreds of yen per unit, Renesas has expanded its sales by supplementing its deficiencies through mergers and acquisitions, packaging various products, and proposing performance and cost proposals to customers. Renesas' gross sales margin increased from 30% 10 years ago to 57% in the previous fiscal year.

Masaya Yamazaki, an analyst at Nomura Securities, commented that Shibata focused on structural reforms such as reducing fixed costs during his tenure as CFO, but after becoming CEO, he shifted to balanced management of revenue growth, governance, and investment. "Shibata has grown in different positions," he said.

According to Omdia, a U.K.-based research firm, Renesas has the highest sales among Japanese semiconductor manufacturers, surpassing Sony Group's semiconductor subsidiaries, Sony Semiconductor Solutions and Kioxia Holdings, among others. However, according to the global ranking of automotive semiconductors released by TechInsights in April, Renesas ranked fifth, and the gap with its former rival Infineon Technologies of Germany is widening.

Renesas aims to achieve sales of more than USD 20 billion (approximately 3.2 trillion yen) by 2030 and a six-fold increase in market value compared to 2022. Shibata said this would bring the market capitalization to 16-17 trillion yen. In addition, Shibata aims to become the world's No. 1 company in the field of embedded semiconductors, which are used in devices using a variety of products such as microcontrollers and power supplies. Achieving this ambitious management goal requires strong leadership. Shibata said that his term of office is determined by the board of directors and shareholders, but he believes that "leaders should have a fairly long term."