Foxconn Becomes Sharp's Largest Shareholder

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Latest first.

There is no need to read the rest of (1) or (2).

(1) Daisuke Wakabayashi, Japanese LCD Alliance Frays; Sony won't invest further in Sharp partnership; Roots of a deal with Hon Hai. Wall Street Journal, Mar 29, 2012.

Quote:

"Taiwan Manufacturing giant Hon Hai Precision Industry Co's groundbreaking investment in Sharp Corp signals a new era for Japan's insular electronics industry, but it was a troubled domestic partnership between Sharp and Sony corp that formed the roots of the overseas alliance.

"In 2009, Sony agreed to an initial Y10 billion ($120.2 million0 investment for a 7% stake in a LCD-panel production facility in Western Japan [aspecifically, Sakai City near Osaka]. Additional investments were expected to lift Sony's share to 34%.

"Sony needed a steady supply of screens for its television business, and the tie-up gave it the latest LCD technology. For Sharp, bringing on Sony mitigated some of the risk of its multibillion-dollar investment in Sakai.

"But the venture ran into trouble early. Several months after Sharp started making panels at Sakai in October 2009, the television market began to show signs of life. * * * but [Sakai] production yields--how effeciently a factory is run--were low, people familiar with the matter said. As a result, Sony only got a limited number of panels from Sharp. The screens it did get were more costly than the market price, those people said. * * * But the supply constraints had eased, making it cheaper to buy from other Asian and Japanese panel manufacturers

"When the television market started to slump last year, Sharp was overrun with inventory at Sakai. Last month, sharp said it expected to post the beggiest annual loss in it 99-year history this fiscal year.

(2) Juro Osawa and Daisuke Wakabayashi, Foxconn Buys Into Sharp; Stake of 10% in struggling Japanese firm reflects China's rise in electronics. Wall Street Journal, Mar 28, 2012.

(a) Excerpt in the window of print: Hon Hai builds gadgets for large companies including Apple, Sony and Nintendo.

(b) The last quarter of the report:

"Japanese tech companies have long resisted overtures from foreign competitors even as their stronghold over the world-wide electronics industry unhinged in the past couple of decades.

"At their apex, they were also the embodiment of vertically integrated manufacturing--handling everything from design to production in house, rather than outsource manufacturing like Apple does.

"But the rise of contract manufacturers such as Hon Hai with armies of inexpensive workers allowed companies to focus on designing and marketing products while managing supply chains without the need to open a factory.

"as Japan's electronics industry began to falter in the 1990s, Hapanese companies turned to domestic help. Worried about key technology leaking to Asian rivals, the country's electronics sector consolidated not in the slash-and-burn style of the West but into a web of joint ventures and spinoffs.

"But the losses deepened, and Japanese electronics companies no longer have the breathing room to rescue domestic rivals.

"In 2007, for example, Sharp came to the rescue of domestic rival Pioneer Corp, which was badly in need of capital after its plasma-television business suffered heavy losses.

"When pioneer's situation worsened, Sharp had to write down nearly the entire investment one year after its investment, but remains the largest shareholder with a 9% stake.

(3) Hon Hai/Sharp. Financial Times, Mar 28, 2012 (in The Lex Column).

The full text:

"Why would Hon Hai, also known as Foxconn, makes its biggest bet in Japan yet by buying a 10 per cent stake in flagging television maker Sharp?  Terry Gou, founder and chief executive of Hon Hai, who is even putting up his own cash to fund the deal, is being clever.

"The world's biggest electronics maker (and a main assembler of Apple products) needs Sharp's television technology. The deal gives Hon Hai direct access via an agreed co-management of Sharp's Sakai LCD panel plant. Sure, the factory is operating at half capacity because there is an oversupply of large-sreen displays and demand has been falling. But this is a long-term defensive move for Mr Gou. By making iPhones and iPads, Hon Hai depends on Apple for two-fifths of its sales. In iPhones, however, the Taiwanese company now faces competition from Pegatron, another local electronics maker. Although Hon Hai's relationship with Apple has been driving strong revenue growth, dependence on one client carries risk. And sales growth has been moderating--the compound annual growth rate of Hon Hai's revenues has halved to 20 per cent over the past five years compared with the five years previously.

"Televisions are a good hedge. Hon Hai has already bought most of Sony's TV assembly bysiness and now makes about 6 per cent of its revenue assembling TVs for the Japanese company. Hon Hai also has a stake in Taiwanese TV panel maker Chimei Innolux. But the latter lacks the superior technology of Sharp in panel making. The Sharp deal offers the missing link. and if Apple does decide to launch its much-touted iTV, Hon Hai with its long-term relationship would be well placed. Mr Gou might have paid an 11 per cent premium to yesterday's closing price for his stake in Sharp, but shares in Sharp are at a. 30-month low. The deal makes sense.