In our Supply Chain Matters commentaries related to high tech and consumer electronics focused supply chains, we have often featured commentaries related to Sharp Corp. Sharp is a volume supplier of advanced liquid crystal display (LCD) technology and is one of three strategic suppliers of LCD screens in Apple’s product value-chain. Sharp’s dependence on Apple has been reported to be as much as 20 percent of existing revenues.
This week featured the news that Apple contract manufacturer Foxconn, which assembles the bulk of Apple iPhones has offered approximately $5.3 billion to acquire Sharp. Behind this week’s headline is a rather long history related to Sharp, one that requires some history as well as some takeaways.
LCD screen suppliers have extraordinary challenges. The need for production innovation is relentless, the cost of capital is expensive and yet supply often exceeds demand, eroding abilities to maintain prices that insure adequate profitability as well as new investment needs.
In April of last year, we commented on the perils for being an Apple supplier, and specifically Sharp’s challenges in maintaining a leading-edge focus on screen technology innovation but having a track record of financial challenges including near bankruptcy. The conundrum of Sharp and other Japan-based high-tech component suppliers is that bankruptcy is culturally looked upon as a major failure and embarrassment of senior management, often a career-ending event.
There has been a rather long history of manufacturers, including Apple itself, taking some form of investment in Sharp in order to secure its longer-term financial future. We have tracked this since at least 2012.
By April, The Wall Street Journal reported that Sharp would spin-off a portion of its LCD panel business unit with intent to seek a capital injection from Innovation Network Corp. of Japan, a governmental entity overseen by Japan’s Ministry of Economic Trade and Industry. At that time, banks were holding in excess of $5 billion of Sharp debt, and subsequently these same bankers agreed to provide an additional $1 billion lifeline, the second in three years, in exchange for restructuring measures that included a 10 percent workforce reduction along with other cost reduction measures.
In June, Sharp warned that its financial survival could be at-stake, and that it was pushing its own supply chain for deeper cost reductions. Options being considered were sourcing components from China based suppliers rather than Japan based.
This was also the time when rumors continually surfaced that Hon Hai Precision, the parent of major Apple contract manufacturer Foxconn, was also considering an equity investment or outright acquisition of Sharp. Initial talks actually began in 2011 after both firms established a joint technology partnership. However, the one and off again talks involved many cultural implications of whether Hon Hai, a Chinese company would have a majority ownership with access to Sharp’s leading-edge technology. A further implication was that Apple, through its relationship with Hon Hai and Foxconn, was willing to invest in Sharp’s longer term supply, but that component sourcing and selection strategies would cede to Hon Hai.
In August, Reuters , citing its own informed sources, broke the news of Hon Hai’s more formal acquisition talks. According to Reuters as well as a subsequent Financial Times report, the proposed tie-up would spin-off Sharp’s display unit and possibly include additional cash injections from other outside entities such as the state-directed Innovation Network Corp of Japan.
This week’s announcement of Foxconn’s bid raises similar concerns. In its reporting, the WSJ cites a person familiar with the talks as indicating that Sharp is evaluating a counter bid from Innovation Network Corp. of Japan for roughly half of Foxconn’s bid. The issue of concern remains having Sharp come under foreign control. Innovation Network already has controlling stake in the remnants of three other Japan based LCD producers.
The pressure has reportedly now shifted to Sharp’s bankers and creditors to make a decision. Sharp and its lenders are expected to make a final decision by early February.
From our lens, this long legacy of Sharp represents the perils for being a leading-edge LCD technology provider in today’s high tech and consumer electronics sector. As we opined in August, high tech OEM’s such as Apple and others demand the latest breakthroughs in innovative technology and more automated manufacturing processes, in return for orders representing significant volume scale. However, in a technology area where multiple suppliers fiercely compete for the same high-volume OEM business, and a cutthroat environment where severe amplitudes of supply and demand imbalances force prices to dive quickly, the need for adequate profitability to fund constant capital becomes paramount. Added to this environment are business cultural challenges where innovation control is a rather big deal in insuring a country’s manufacturing presence.
The takeaway for strategic sourcing professionals and C-level executives is an understanding that supplier relationships continue to be not solely driven by needs for innovation and reduced cost, but by business cultural forces that sometimes run a course. Supplier management and supply risk require broad-based perspectives and deeper knowledge of business nuances and the sensitivities of risk. It cannot be solely one-dimensional and Apple’s sourcing teams are often balancing such forces and nuances.
The legacy of Sharp’s LCD unit will eventually run its course and in the end, provide business case study learning on strategic supplier management and how business cultural norms often move at a different pace.
Copyright 2016. The Supply Chain Matters® blog and The Ferrari Consulting and Research Group.
