Our high tech and consumer electronics supply chain readers may recall that Japan’s Sharp Corp., and specifically its LCD screen business unit has had months of financial struggle. One of the important significant factors related to Sharp is that it serves as one of the four Liquid Crystal Display (LCD) and flat panel screen suppliers to Apple, including screen supplier for the iPhone. Sharp has had a track record of innovation in LCD technology but a rather rocky financial history as well
This week, Reuters is reporting that its informed sources indicate that tie-up talks involving contract manufacturer Hon Hai Precision (aka Foxconn Technology) are now in-progress. The Financial Times also published a similar report. Hon Hai declined any request for comment by Reuters and FT.
Initial talks between Hon Hai and Sharp actually began in 2011, after both firms had established a joint technology partnership. In 2012, there were many business and social media reports indicating that Hon Hai was prepared to take an equity stake in Sharp’s LCD development and factory operations, but with implications that Hon Hai would become Sharp’s largest shareholder and have the ability to assume some strategic management control of Sharp. 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 strategies would cede to Hon Hai. The Hon Hai investment did not occur in 2012, because of Sharp’s deteriorating stock price and the threat of too much outside control.
During that same period, Japan’s Sony Corporation, Toshiba Corporation, and Hitachi Ltd. together merged their money-losing small LCD display operations to form a single company, Japan Display, backed by $2.6 billion of funding from Innovation Network Corp. of Japan, a government backed agency. Japan Display is currently another of the LCD component suppliers to Apple, and the combined operations and infusion of significant new capital likely cemented that relationship.
According to this week’s Reuters report, the latest proposed tie-up would spin-off Sharp’s display unit and possibly includes additional cash injections from other outside entities such as the state-directed Innovation Network Corp.
The two firms continue to jointly operate the advanced large LCD production facility located in Western Japan.
Interesting enough, in 2012, Apple rival Samsung opted to provide a $110 million lifeline investment for Sharp. The deal was reported to provide Samsung with a 3 percent stake, along with gaining access to leading-edge IGZO display and other technology. Business media reports at the time speculated that Samsung’s investment was an attempt to stem Apple’s strategic influence on Sharp.
In late June, Supply Chain Matters called attention to a published report from The Wall Street Journal indicating that Sharp senior management had struck a last-minute deal with the firm’s bankers to provide an additional $1 billion plus lifeline, the second in three years, in exchange for restructuring measures that included exiting the North American television market and a 10 percent workforce reduction. Also noted were the market prices for LCD panels remain in significant decline as other suppliers turn more to China based smartphone manufacturers for revenue needs. The WSJ cited data stemming from market research firm IHS indicating that 5 inch HD smartphone panel components prices have dropped nearly 60 percent from Q1 2013 through mid-year.
This legacy of Sharp represents the perils for being a leading-edge LCD technology provider in today’s high tech and consumer electronics sector. Product OEM’s such as Apple and others demand the latest breakthroughs in technology and more automated manufacturing processes, in return for orders representing 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 constant capital becomes paramount. That may be the legacy of Sharp’s LCD unit.
If this reported tie-up were to occur, it would provide another significant milestone in Hon Hai’s prior strategic plan to move away from a sole focus on the slim margins of contract manufacturing, and more towards a supply chain vertically integrated high-tech and consumer products manufacturer that can control multiple key component supply tiers.