Devices Mergers & Acquisitions

Foxconn to get its hands on Sharp at last

Electronics manufacturing giant Foxconn of Taiwan has been diversifying its business in recent years, and is now looking to add Japan’s venerable but ailing Sharp to its portfolio, a move which could increase the revenues Foxconn gets from its largest customer, Apple.

Apple has an investment in Sharp’s display business, which makes some of the iDevices screens, and has some highly advanced mobile screen technologies. By owning those, Foxconn could have greater control over some of the components it assembles into Apple products, as well as expanding its revenue streams into original equipment rather than just contract manufacturing and assembly.

Foxconn (also known as Hon Hai Precision) has already set up an MVNO business on China Telecom’s network, following China’s decision to permit virtual operators for the first time. And it has been moving to sell devices, sometimes bundled with applications or MVNO services, under its own brand rather than just making them for third parties. These may be white label handsets and tablets for operators or vendors; or direct-to-consumer offerings. For instance, Foxconn was the first customer for Nokia’s N1 tablet reference design, licensing the brand, the design and the intellectual property in order to bring a low cost product quickly to market. And in 2013 it announced an alliance with browser maker Firefox for its mobile software platform.

If the reported ¥600bn ($5.3bn) bid for Sharp turns into an acquisition, Foxconn will be even more deeply embedded into the mobile device ecosystem. The Taiwanese firm is expected to respond to the offer by the end of this month but many expect it to jump at the chance of reviving a deal which was originally mooted in 2012, when a $6bn joint venture was proposed to inject funding into Sharp’s display activities.

That deal fell apart and Sharp has been propped up by various financing restructuring deals with Japanese banks and shareholders; a 2015 bail-out worth about $2bn, as well as industry investments from Qualcomm, Samsung and Apple. The support of those giants shows how, despite all its financial troubles, Sharp remains at the forefront of some kinds of display technology, and that business would remain the crown jewel for Foxconn, although the deal this time is for the whole group. However, it is a little easier to buy now than it would have been a year ago, since Chinese firm Hisense acquired Sharp’s US television unit in July.

Foxconn may face a bidding war with Japan’s Innovation Network Corporation of Japan (INCJ), which is backed by the government and 25 local vendors. It would be unlikely to meet Foxconn’s reported price, but would have the advantage of home ownership, which remains important to the Japanese government.

There is a big gulf between Sharp’s display technology advances and its commercial success – one Foxconn could help to close with its stronger financial position, wide customer base and economies of scale. In October, Sharp issued the latest in a string of  profit warnings, blaming poor sales of handset screens. It downgraded its guidance for the period from September 2015 to March 2016 from an operating profit of ¥10bn to an operating loss of ¥26bn ($215m), blaming “intensified competition” in the small and medium-sized LCD business. It said it would still manage to turn a profit for the full year to end of March, but this would be significantly down on its previous forecast – ¥10bn rather than ¥80bn.

Sharp, like Sony, is in the midst of a three-year restructuring plan, which aims to offload struggling businesses and focus on growth areas. Unfortunately, one of the key areas it identified for growth was mobile LCD displays, which are now under intense pressure from Korean and Chinese rivals.

However, display technology remains one of the key differentiators for mobile device vendors and with more investment, Sharp could return to the top ranks. Apple has supported Sharp in various ways since 2012, reported to include financial injections and guaranteed orders, as it seeks to foster a counterweight to Samsung in its supply chain for RetinaDisplay.

But Sharp’s best technology is in LCD, and reports that Apple will start to switch from LCD to OLED displays for the iPhones and iPads, from this year, have sent further shivers down the spines of Sharp investors. Samsung dominates OLEDs, though Apple is also said to be working with LG and Japan Display, as well as developing inhouse technology.

In December, presumably in response to Apple’s plans, Sharp was said to be negotiating a deal to place its display activities into a joint venture with rival Japan Display, which would involve an $840m investment from INCJ – which, as noted above, could not evolve into a full-scale bid. INCJ also launched Japan Display in 2012. That business combined the small and mid-sized display activities of three of INCJ’s 25 corporate backers – Sony, Hitachi and Toshiba. Japan Display also has a joint venture called Japan OLED, with Sony and Panasonic, which is said to be in talks with Apple and planning mass production from mid-2017.

However, Apple is unlikely to switch to AMOLED overnight – most analysts believe it will launch AMOLED iPads this year but stick with LCD for one or two more iPhone generations. Foxconn itself has recently invested heavily in LCD technology and Sharp would clearly accelerate that process.

The advantage of a Sharp deal over the INCJ plan would be that it would get Sharp out of the increasingly troubled and inter-dependent Japanese electronics industry, allowing it to access funds and customers through a firm which, despite its own challenges, is a major player in Taiwan’s flourishing hi-tech ecosystem, and a partner with many of the largest device makers.

One of the jewels in Sharp’s dowry would be its pioneering IGZO platform, which is being upgraded this year to ‘Super IGZO’. This attracted an investment of up to $120m from Qualcomm in December 2012, including an 18-month pact to “develop and commercialize high quality color, low power MEMS displays incorporating IGZO”, advancing Qualcomm’s long standing interest in MEMS screens. Sharp has pioneered IGZO (Indium Gallium Zinc Oxide) technology, which supports very slim, bezel-less displays, running at ultra-low power (one-fifth of that of a regular LCD, a figure which improve by a further 10-20% with Super IGZO). All this is achieved using existing LCD manufacturing processes.

That was probably also the attraction for Samsung when it paid $112m for a 3% stake in Sharp in  2013 – this, like Qualcomm’s investment, came with a technology collaboration deal. Despite its AMOLED leadership, Samsung is also a significant LCD supplier, and a Sharp competitor in some fields. However, its handset and TV businesses buy screens from third parties as well as Samsung Display and Sharp specializes in some different screen sizes from its Korean investor, as well as IGZO. Samsung’s main agenda in taking a stake seemed to be to secure supplies from Sharp of three large TV panel sizes plus high resolution mobile displays using CGS (the elderly continuous grain silicon technology pioneered by Sharp) and oxide TFT, in which Sharp is a leader. The involvement of Apple, Samsung and Qualcomm will certainly not be a deterrent to Foxconn, which has established relationships with all of them, and is well used to juggling the needs of competing partners and clients.

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