In June 0f last year, Supply Chain Matters provided commentary related to announcements made at the annual meeting of Hon Hai Precision Industry Co., the parent of global contract manufacturer Foxconn International Holdings Ltd.  At the time, Hon Hai Chairmen Terry Gau declared that the company would be a high-tech manufacturer, as opposed to a contract manufacturer.  He further indicated that the company’s long-term direction was to continue to develop more prowess in advanced technology, including strategic opportunities to partner with Japan based technology providers.

Today, the Wall Street Journal is reporting (paid subscription required or free metered view) that Sharp Corp. will sell nearly a 10 percent equity stake to Hon Hai in order to: “… shake up its core-but loss making –liquid crystal display panel operations.” The deal calls for Hon Hai to take a 46.5 percent  stake in Sharp’s LCD production facility in Sakai, western Japan. The Sakai plant is expected to supply displays to Hon Hai and Foxconn later this year. This deal, valued at over $800 million is being reported as the biggest investment ever involving a Taiwan based company in a Japanese technology provider.

Hon Hai already had ownership interest in own LCD unit, Chi Mei Innolux, but the is reported to be saddled with financial losses and technological weakness. As our readers are aware, Hon Hai and Foxconn are the primary contract manufacturing providers to Apple.  Chi Mei is not involved as an LCD supplier to Apple but the WSJ speculates that this equity deal may position Sharp as more of a volume supplier to Apple’s small LCD display needs.  Sharp competes with LCD industry leader Samsung Electronics for LCD displays.

This move can also be viewed a counter to recent LCD supplier agreements involving Japanese producers. In August of 2011, Supply Chain Matters made mention of the formation of Japan Display, a merging of the LCD operations of Sony, Toshiba and Hitachi. That venture was reported to be backed by a $2.6 billion funding from a government backed agency, The Innovation Network Corp. of Japan.  The August announcement was noted to be a response to competitors Sharp, Au Optronics and Samsung who were garnering a healthy share of longer-term supply contracts.

It now appears that Hon Hai and Sharp are positioning for a more strategic supply relationship with Apple and other customers.  In the view of Supply Chain Matters, this deal may also represent another attempt by Hon Hai to vertically integrate high tech and consumer electronics production, including more influence over long-term supply contracts. We also view this deal as another sign of a changing contract manufacturing model as providers move to garner more value-added margin opportunities.

The open question is how Apple and other high volume consumer electronics providers will respond to this latest announcement from Hon Hai and Sharp.

Bob Ferrari