Sharp's Long Range Gamble On Its Innovation Machine

In a cluttered, windowless chamber at Sharp Corp.'s Tokyo Research Laboratories, Yoshiyuki Higashigaki is fashioning films of photosensitive dyes and other organic molecules that can "remember" patterns when exposed to light. Higashigaki's goal: a "smart" film that will function as a self-contained image-processing computer. The material would store, sort, and contrast images projected onto it without help from memory chips, microprocessors, or other conventional hardware. Such films could be used to provide positive identification of everything from handwritten signatures on checks to photographs from a police lineup.

It may take a while--10 or 20 years--before Higashigaki's magical film comes to market. But that's O. K. with Sharp. Long a maverick in consensus-minded Corporate Japan, the $11 billion, diversified electronics company is gaining a reputation for calling the shots right on some very long-range gambles. From liquid-crystal displays mn laptop computers to semiconductor lasers that "read" compact disks to the electroluminescent computer screens aboard America's space shuttle, Sharp has been first with an impressive array of optoelectronic technologies--unique devices that combine optical and electronic functions.

Now, Sharp is preparing for its biggest test yet--a run at such huge rivals as Matsushita Electric, Hitachi, Toshiba, and Sony. President Haruo Tsuji has just embarked on a bold plan to quadruple sales by the year 2000. He aims to shrink Sharp's dependence on low-margin consumer electronics, which since 1985 has already dropped from 66% of total sales to about 50%. At the same time, he hopes to parlay the company's optoelectronics strengths into new office equipment niches, such as filing systems based on erasable optical disks, and a range of high-definition video products.

NO. 1 AT HOME. The trouble is, Sharp's rivals--each four or five times as large--are poised to attack. Sharp is the world's leading producer of advanced LCDs for computers and other gear. Indeed, two decades of effort have made it the No. 1 producer of optoelectronic devices in general, with 14% of the global market, according to Dataquest Inc. But now, Toshiba, Hitachi, NEC, and Matsushita are ramping up LCD production, in which manufacturing costs skyrocket as screen sizes grow. This is eerily similar to what happened in computer memory chips, where the same players proved the advantage that big companies have. So, some analysts question whether a company Sharp's size can weather the coming gut-wrenching cycles of high capital spending and price-slashing.

Sharp's salvation could be its penchant for innovation. Although it got clobbered during an industrywide earnings slump triggered by the strong yen in 1987, it bounced right back. "It was one of the first to recover, thanks to excellent product development," says Daiwa Securities analyst Yoshihide Kondo. In Japan, it has top market share in a wide range of products, from cordless phones to electronic diaries and projection televisions. In America, where it gets $2.2 billion in revenues, it is the leading supplier of fax machines, ahead of Canon Inc. and Murata Mfg. Co. Its worldwide sales last year rose 8%, and its net income surged 15%, to $356 million -- following a 43% jump the previous year. "We've been accumulating opto-electronics knowhow for 21 years," Tsuji says. "It's finally all coming of age." To keep that momentum, Sharp is pumping money into an ambitious research and development program run by one of Japan's top scientists.

It was in 1970 that Sharp targeted LCDs--the lightweight, energy-efficient screens invented at RCA--even as other Japanese electronics companies were piling into cathode-ray tube production for color TVs. Within three years, Sharp created the first desktop calculator using the new technology. Today, it is the world leader in a $1.6 billion LCD industry that's growing 37% a year, according to James Capel Pacific Ltd. in Tokyo.

That gives Sharp a license to print money. As screen quality improves and prices plummet, LCDs will replace bulky cathode-ray tubes in many TVs and computer systems. LCDs are already cropping up in Japan on the first rudimentary wall-hanging televisions and high-definition projection systems, both pioneered by Sharp. And with the latest technology--active-matrix LCDs--the screens boast color and clarity nearly equal to picture tubes.

PIXEL MAGIC. One of the few companies to master this tricky technology, Sharp makes 40% of the world's active-matrix screens. These provide much clearer images than ordinary flat panels because each pixel--the picture elements that make up the image--is switched on and off separately. While other companies are struggling to get commercial yields of 5-inch screens, a single Sharp assembly line in Tochigi, north of Tokyo, is cranking out 30,000 miniature LCD TVs a month, most with 5.6-inch diagonal screens. And Tsuji plans to spend $740 million on new LCD facilities over the next three years--more than any other company. By 1994, he sees Sharp's LCD revenues tripling, to $1.5 billion.

In the meantime, a farsighted bet on another optoelectronic technology is paying off. Long before Sony and Philips dreamed up the compact disk player, Sharp developed and commercialized technology to produce laser diodes. These are tiny semiconductor crystals that release a beam of laser light when stimulated by an electric current. Sharp has nearly half the world market for laser diodes, which are used in optical disk drives for computers, laser printers, CD players, and videodisk players. Although its sales of printers and other office equipment top $1 billion, Sharp hasn't been able to unseat rivals such as Canon in laser printers. But its engineers hope to leapfrog them with new products that combine the functions of laser printers, fax machines, and optical recording systems.

While advanced components have taken the lion's share of its R&D and plant investment, Sharp was never content to be a mere parts supplier. It has a rare 50-50 balance of consumer and industrial products, though its new goal is bringing consumer electronics down to 33%. By contrast, Sony is 70% dependent on consumer products. And NEC Corp., which raked in $26 billion last year from chips, computers, and telecommunications, has never had a consumer hit.

In research, likewise, Sharp's strategy is to avoid heavily trodden paths. "We're not interested in making the same things everyone else makes," says Tsuji. A nonconformist, he prefers Chinese tea to Japanese sake and is one of the few CEOs in Japan who rarely picks up a golf club. (He plays tennis.)

That antiherd instinct surfaces nearly every time Japan's electronics companies are obliged to rally together. Sharp refused to contribute a pavilion to the International Osaka Expo in 1970. Instead, it pumped money into a new R&D lab. It also spurned gaudy international expos in 1985 and 1990, each time committing healthy sums to new labs instead.

Today, Sharp's hopes for 21st century products rest on 18 R&D centers in Japan, Europe, and the U. S., which are supported by a $700 million R&D budget. To run its R&D programs, in 1985 it lured electronics engineer Shoei Kataoka away from the Ministry of International Trade & Industry's prestigious Electrotechnical Laboratory in Tsukuba, where he was chief of electronic device research. A giant in the field of magnetic sensors, Kataoka guided Sharp to a $ 1 million investment in a research center in Oxford, England. He recruited Charles Clive Bradley, former science adviser to Margaret Thatcher, to run the lab. Bradley's mission is to develop optical computers -- a new species of number-cruncher in which relatively slow electronic signals will be replaced by speedy pulses of light.

GOING SOLAR. The company also was one of the first to jump into solar research. Sharp's latest ultrathin single-crystal silicon solar cell technology--for use in outer space--has impressed U. S. scientists. It's "far superior to anything we have over here," says Dennis J. Flood, chief of photovoltaics at NASA's Lewis Research Center in Cleveland.

Still, a nonconformist attitude and a willingness to take technological risks won't insulate Sharp. Toshiba has committed nearly as much money to color active-matrix displays. And Matsushita Electric Industrial Co. has plunged into miniature, super-dense LCD screens used for projection-HDTV systems. Last summer, Matsushita researchers crammed the 1.2 million pixels needed for HDTV onto liquid-crystal panels measuring just 2.8 inches--about half the size of Sharp's smallest units. These LCDs form the core of a much bulkier projector. So a smaller screen enables engineers to reduce the size of the projector. "Unless Sharp can bring the screen size down, its system will be too large to go into homes," says Masahiro Kosaka, director of Matsushita's display technology lab.

Competition for LCD televisions and advanced laptop computers will be brutal. Sharp wants to supply vast quantities of high-quality, 10-inch diagonal color screens for wall-hanging TVs or notebook computers. Though analysts say Sharp and Hitachi get better yields, most producers get perhaps one usable product at that size for every 10 made. That's a problem in a business that needs high volume to push prices down.

Even so, most analysts are bullish. "Sharp has the advantage of an early start and good patent protection," says Barry Dargan, head of research at James Capel. And with no picture tube business to support, it can concentrate on thin screens. "In the 21st century," says Kosaka, "flat panels will be bigger than the entire chip industry, and Sharp is determined to be No. 1." It will be no fun taking on the titans. But if Tsuji can make good on his target, Sharp's size handicap will be strictly temporary.

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