For Foxconn, Turning Around Sharp Will Be Tougher Than Takeover

  • Foxconn, Sharp seal agreement with ceremony at Japan plant
  • Foxconn Chairman: “ A harsh environment is a good thing.”

Tai Jeng-wu, vice president of Foxconn Technology Group, left, shakes hands with Billionaire Terry Gou, chairman of Foxconn Technology Group, center, and Kozo Takahashi, president of Sharp Corp., during a news conference in Osaka, Japan, on Saturday, April 2, 2016.

Photographer: Buddhika Weerasinghe/Bloomberg

This weekend, Foxconn Technology Group’s Terry Gou finally had his moment of victory. 

On Saturday, Gou and Sharp Corp. President Kozo Takahashi gathered in front of more than 300 reporters at the Osaka-based company’s Sakai plant, flanked by the flags of Taiwan and Japan. They beamed and shook hands as they finalized a rescue plan for Foxconn and affiliates to take control of Sharp for 389 billion yen ($3.5 billion). It was a rare moment of peace for the hard-charging Gou, who spent four years chasing the Japanese electronics maker and overcame long odds and last-minute pitfalls to win.

Foxconn’s chairman won’t have long to celebrate: The turnaround promises to be even harder than the takeover. With a sprawl of businesses making appliances, solar equipment and flat panels for mobile devices, Sharp is seeing its earnings deteriorate every quarter, yet as part of the rescue deal, Gou pledged to keep the company intact, respect its independence and try to preserve jobs. He will have a hard time keeping those agreements if he wants to reverse Sharp’s fortunes and boost profits by getting more business from customers like Apple Inc.

“The wording of the agreement seems to foreclose deep restructuring opportunities, giving Foxconn a very limited scope of what it can do to turn the company around,” said Alberto Moel, technology analyst at Sanford C. Bernstein & Co. “The company’s incentive structure needs to be revamped, allowing fresh blood to rise to the top. That would require letting some people go.”

Gou, 65, didn’t get get to where he is by tolerating mediocrity. He started his company with a $7,500 loan from his mother in a Taipei suburb and went on to become a billionaire by building super-efficient factories in China to make products for Apple and other technology giants. He takes pride in his humble origins and peppers conversation with aphorisms like “you can’t read a book to learn to swim.”

Sharp has lost more than $10 billion over the past four years. The Japanese company built shiny factories to produce large-size flat panels, only to see demand explode for smaller-screened smartphones and tablets. As LCD prices fell and the Japanese currency rose to post-World War II highs, Sharp faced competition on all sides, especially from Samsung Electronics Co. and other display makers. It had no choice but to turn to its banks for help and look for a buyer.

Gou is betting Foxconn will help Sharp with its manufacturing expertise. The parent of Hon Hai Precision Industry Co. has made its fortune with efficient factories that make everything from iPhones and PlayStations, to GoPros and Kindles. 

He’ll also help Sharp invest in new technology. The Japanese company plans to use Foxconn’s money to pour 200 billion yen into the production of next-generation screens based on OLED, or organic light-emitting diode, technology, which has long promised more vivid images and less battery drain. Another 60 billion yen will be spent to improve yield and increase production of existing LCD operations.

That could help Sharp gain ground against the competition. The market for small and midsize screens is dominated by Samsung Display, which had 24 percent of the market in the first nine months of 2015, according to market researcher IHS. Japan Display and LG Display are the next biggest suppliers, followed by Sharp, at 9 percent.

“I have no illusions about the challenges facing this strategic investment,” Gou said at the signing ceremony, held at Sharp’s Sakai plant in Osaka on Saturday. “The current global business environment is far from favorable, but as long we move with purpose and remain competitive, we should have no fear of a bad economy.”

A key question is whether the deal will open a path to winning more of Apple’s business. Foxconn is a key assembler of iPhones, iPads and other Apple products. Sharp, which was once a major supplier of iPhone displays, was dropped after it struggled to supply the volumes the U.S. company needed.

Apple is interested in using more OLED technology in its gadgets, and as Sharp shifts its focus away from big displays to smaller screens, it may have another shot at becoming a key supplier, bolstered by Foxconn’s manufacturing empire.

“Sharp could benefit from a steady demand for smartphone screens from its new parent,” said Hideki Yasuda, an analyst at Ace Research Institute in Tokyo. “They may also get access to new customers.”

A bigger question hangs over Sharp’s consumer electronics unit, which makes TVs, smartphones and washing machines. Foxconn doesn’t have a lot of experience selling gadgets directly to consumers, and will have to decide whether that’s a business it wants to be in. Still, Sharp is planning to spend 40 billion yen on the division, to add more Web connectivity to its range of products. The same amount of funding will go to Sharp’s most profitable business, which produces multifunction printers and projectors used in companies.

On top of this, Sharp also makes solar panels, LED lighting fixtures, cash registers, air purifiers and electronic components. More than 44,000 people worked at the company at the end of 2015.

Moel, who has been tracking the Sharp saga for the past few years, thinks it will take some time for Foxconn to develop a strategy and set it in motion. “We can expect the first year or so to be a standstill,” he said.

That may be too long. Gou, a relentless negotiator, made sure he had a backup plan in case the deal goes sour. Buried in the announcement of the acquisition was a new clause giving Foxconn the right to buy Sharp’s display business if the deal falls apart anytime before Oct. 5. If that happens, Sharp will give Foxconn, or a third party designated by Foxconn, exclusive negotiation rights for three months to buy the unit.

Tough times won’t scare off Gou; neither will tough decisions. Another one of his favorite aphorisms: “A harsh environment is a good thing.”

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