Just four months after Sharp (SHCAY) announced plans for a new mega-factory to make flat-panel TVs, the company said Dec. 21 that it had landed a major customer: Toshiba (TOSBF). The deal shows how Sharp President Mikio Katayama hopes to fund a multibillion-dollar push to grab a bigger share of the fast-growing liquid-crystal-display TV market.
The pact between two of Japan's technology giants doesn't end there. Toshiba, one of the world's top semiconductor makers, plans to return the favor by supplying an array of customized TV chips, which handle the growing workload of digital multitasking in high-end flat-screen sets. "One of Sharp's big challenges is in making chips," Katayama said, as Toshiba CEO Atsutoshi Nishida stood by his side. "For Toshiba, it's LCDs."
You could almost hear the relief in their voices, as they explained details of what they dubbed a "long-term" alliance. Investors, who got a whiff of the deal in a report published early in the day by the Japanese financial daily Nikkei, liked it, too. In Tokyo, Sharp's shares rose 2.9% and Toshiba's climbed 2.5%, outstripping the Nikkei 225 stock average's 1.5% uptick.
Benefits for Both Sides
Under the deal, Toshiba gains a reliable source of medium- and large-sized LCDs from one of the most advanced panel makers in the world. (It had been buying panels from two separate joint ventures with other Japanese tech companes.) That's a lifesaver for Toshiba, after its plans to launch a promising new flat-TV technology, known as surface-conduction electron-emitter display (SED), with partner Canon (CAJ) this year hit a snag. After a U.S. court ruled that the two had infringed on a U.S. tech company's patents, Toshiba ultimately handed over control of the venture to Canon.
Meanwhile, Sharp saves itself billions in chip research & development while freeing up cash to spend on state-of-the-art factories that produce the huge sheets of specialized glass needed to make LCD TVs. By 2010, Sharp expects to supply 40% of the panels for Toshiba's Regza line of LCD TVs, and Toshiba will produce half of all chips in Sharp's Aquos TVs. That could boost the companies' estimated $6 billion to $7 billion in business they do with each other annually to more than $21 billion, Katayama said.
Of the two Japanese tech giants, Sharp is by far the bigger and more widely known LCD TV brand. So it's unlikely to jeopardize its own booming TV sales by selling a portion of the high-tech LCD panels it makes at a plant in Kameyama, in western Japan. Sharp might also extend the deal to panels made at a new $3.4 billion plant near Osaka that's slated to be up and running by 2010.
That Katayama and Nishida decided to join forces should come as no surprise. Sharp has been a major supplier of LCDs for Toshiba laptops for more than a decade. As a manager in charge of display technologies in the late 1990s, Katayama first encountered Nishida, who was then leading Toshiba's PC division. "We were meeting once a month," Nishida said. The rapport they built up appears to have been the catalyst for the start of discussions this summer.
But economics was also a key driver in their decision to work together. Both are eager to cash in on the fast-growing LCD TV market. Market researcher DisplaySearch expects LCD TV sales to grow 35% from last year, to $65.2 billion in 2007. By 2011, the figure could close in on $100 billion. But fierce competition is pushing flat-panel TV prices down by 20% to 30% a year. To stay profitable, manufacturers are rushing to churn out giant-screen TVs ranging from 40 inches to 50 inches, where margins are fattest. Only a few of the top brands such as Sharp, Samsung Electronics, Sony (SNE) and Philips (PHG) have the facilities that can make the dazzling high-definition TVs efficiently in those sizes. But they also compete against manufacturers of the rival flat-panel technology, plasma displays. And Matsushita Electric Industrial (MC), the world's largest plasma TV maker, is reportedly preparing to step up LCD TV output in a venture it has run jointly with Hitachi (HIT) and Toshiba. Toshiba and Sharp won't be the only ones looking for ways to get ahead of the competition.