Sharp's Skinny TVs Make for Fat Profits

Its innovations pace the field, but rival technologies loom

Four years ago, Sharp Corp. CEO and President Katsuhiko Machida predicted that by 2005 his company would stop selling bulky tube televisions in Japan. By then, he boasted, the Osaka-based electronics company would sell only flat-screen TVs based on its leading-edge liquid crystal display technology. At the time, skeptics pointed out that LCDs were suitable only for use in small screens, certainly nothing larger than a PC monitor. "It seemed like a lofty goal," Machida says now. "But we're making it a reality." The numbers tell the story: Last year, Sharp sold a half-million LCD TVs worldwide, and it expects to sell 3.6 million by 2005.

Sharp's big bet on LCD technology has its risks: South Korean and Taiwanese rivals are investing in new production facilities to catch up with the Japanese pioneer. Other Japanese players have either merged their LCD operations or abandoned the market to more price-competitive Asian upstarts. Machida & Co. plan to cede to these rivals the LCD market for PC monitors and other low-profit devices. Instead, Sharp is developing high-end LCDs for cell phones, car navigation systems, and PDAs. In late April, the company announced it will start making ultra-efficient LCDs better suited to mobile devices. As for its own products, Sharp will focus on LCD TVs, where margins are close to 40%, as well as such products as its camera-equipped cell phone, which can zap images from user to user.

Sharp's focus on three key operations--components, home appliances, and information equipment--sets it apart from much larger Japanese tech companies such as Hitachi and Matsushita Electric Industrial, money-losers that are struggling to slim down and refocus. In fact, Sharp outperformed every other major Japanese electronics company in the fiscal year that ended Mar. 31. To be sure, the recession will bite into operating profits, forecast to decline 31% for the year, to $553 million, on sales of $13.6 billion. But earnings are expected to recover in 2002 and beyond. "No other leading Japanese electronics company is as profitable as Sharp right now," says Hitoshi Kuriyama, a senior analyst at Merrill Lynch Japan.

While the gizmo biz is suffering from consumer ennui, everyone agrees that flat-screen TVs are the next big thing in home entertainment. Consumers will be hearing a lot about Sharp's stylish Aquos line of skinny TVs, which range from 13 inches to 30 inches and sell for $675 to $5,000. They're brighter than conventional TVs, hang on the wall, and are better suited as networking devices. "There's no doubt that this will be a big market," says Japanese industry commentator Reiji Asakura, "because the prices of flat-panels are reaching affordable levels."

To keep profits growing, Sharp will have to maintain a technological edge. The company invests 8% of annual sales in research and development. One payoff: a new technology known as continuous grain silicon that allows the manufacture of ultra-thin screens that are three times faster than conventional ones and remain bright in broad daylight. In the future, this technology will be scaled up for screens 60 inches and up. Sharp engineers also are working on LCD tablets and "electronic paper"--screens that can be written on and rolled up. "Samsung and LG study our products and recreate them," says Toshishige Hamano, group general manager in charge of Sharp's LCD business. "But we're confident we'll remain ahead."

With that goal in mind, Sharp is one of the few Japanese companies expanding production at home. In September, it will break ground on a factory (estimated cost: $1.5 billion) for next-generation LCDs 25 inches and over. Once the plant opens in 2004, Sharp expects to handle the entire production process there--at considerable savings. Hamano figures Sharp can make LCD TVs in a little over half the time it takes to build tube TVs. "It doesn't pay to move to China," he adds.

So far, Sharp has trumped rivals. But there are clouds on the horizon, starting with a screen technology called plasma. While plasma displays consume more energy than comparable LCDs, they can be produced in larger sizes. Down the road, LCDs could also be displaced by organic electroluminescence displays, which glow without backlights. Moreover, Sharp must contend with Samsung, which plans to market a 40-inch LCD TV this fall. Retaining a competitive edge will be tough. But for Sharp, staying focused is what it's all about.

By Irene M. Kunii in Tokyo, with Adam Aston in New York

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