Pushing a Low-Cost Strategy: Can Sharp Regain Its Edge?
Foxconn's efforts to revitalize Sharp seem to be paying off as the company tries to reclaim its former glory. Recently, Sharp China informed me that Sharp had formally applied to the Tokyo Stock Exchange at the end of June and is eager to rejoin the First Section of the Tokyo Stock Exchange as quickly as possible. Last August, Sharp was demoted from the First Section to the Second Section due to insolvency, marking a downturn in its fortunes. However, following Foxconn's intervention, Sharp managed a turnaround in the final quarter of last year. Sharp anticipates a profit of 59 billion yen for the fiscal year ending March 31, 2018, which would mark the end of three consecutive years of losses.
Despite these positive developments, the industry remains cautious about Sharp's recovery. Much of Sharp's current financial struggles stem from post-restructuring cost-cutting measures under Dai Zhengwu's leadership, combined with rising LCD panel costs since the second half of last year. Maintaining profitability remains a significant challenge for Sharp.
At Sharp's shareholders' meeting on June 20, President Dai Zhengwu reiterated his commitment to return to the First Section by March next year and mentioned submitting an application to the exchange on June 29 or 30. He also noted that he plans to step down as president upon achieving the mid-term business plan. Given Sharp's status as a Japanese company, it might be preferable for a Japanese national to take the helm in the future, though this person doesn't necessarily need to be an internal employee.
Sharp's financial troubles began in earnest last March when its stock was downgraded to the Second Section. That August, Hon Hai Group acquired a 66% stake in Sharp for 388.8 billion yen (~$3.5 billion), injecting much-needed capital to stabilize the company. Terry Goh, the number two executive at Hon Hai, became Sharp's president, tasked with restoring the company.
Under Dai Zhengwu's leadership, Sharp underwent sweeping reforms, focusing on cost-cutting measures and strategic investments. These efforts paid off as Sharp reported a profit of 4.2 billion yen in the last quarter, marking its first profitable period since the third quarter of 2014. However, Sharp's fiscal year 2016 still ended with a loss of 27.1 billion yen. For the current fiscal year, Sharp anticipates a net profit of $359 million, signaling an end to its three-year streak of losses.
According to Zhang Jifeng, Director of the Japanese Economy Research Institute, returning to the First Section carries significant implications for Sharp. It signifies a return to mainstream Japanese corporate status, which requires sustained profitability. Zhang believes that Sharp's operational issues have largely been resolved post-Hon Hai investment, and returning to the First Section would indicate a major recovery.
Balancing Cost-Cutting and Growth
Sharp's previous losses were partly due to excessive investment in its 10th-generation LCD panel factory and internal inefficiencies. Zhang Qifeng remarked, "Japanese companies often lose their edge due to their focus on technology." While Sharp retains strong technological prowess, it has struggled with sluggish decision-making and poor cost control. Foxconn's supply chain expertise has brought new life to Sharp.
Dai Zhengwu implemented structural changes, divesting non-core businesses and streamlining operations. Reports suggest that Sharp's workforce has decreased by over 20% from its peak, with approximately 6,000 voluntary retirements.
Cui Jilong, Senior Research Manager at Ove Cloud Network Black Power Division, attributes Sharp's turnaround to both cost-cutting measures and increased revenue. The latter comes from Sharp's unique position as one of the few companies capable of producing 10th-generation LCD panels, which remain profitable despite falling prices.
Dai Zhengwu has also spearheaded expansion efforts. In March, Sharp and Foxconn jointly invested 61 billion yuan to build a 10.5-generation LCD TV panel factory in Guangzhou, scheduled for completion in 2019. However, the immediate benefits to Sharp may be limited, with risks of overcapacity looming post-2019.
The Low-End Market Approach
Beyond panels, Sharp's TV business has also seen renewed attention. Gou Ming, under Foxconn, initiated the "Tiger Plan," encouraging employees to promote Sharp's home appliances. Consequently, Sharp TVs have transitioned from a "luxury" image to more affordable pricing. Data shows that the average price of Sharp TVs dropped from 6,330 yuan to 3,564 yuan this year, boosting sales significantly.
In the first quarter of 2017, Sharp sold 511,000 units in China, marking a 42.6% year-on-year increase. During the recent "6·18" online shopping festival, Sharp TVs topped sales on Jingdong Mall with over 1 billion yuan in sales.
However, this aggressive pricing strategy has sparked concerns about a potential "price war." Some reports suggest that certain Sharp models utilize INX screens instead of Sharp's original panels. Sharp has chosen not to comment on these claims, but media reports suggest that INX screens meet Sharp's quality standards and are clearly labeled.
Cui Jilong estimates that approximately 20% of Sharp's TV screens are sourced from INX, a panel factory under the Hon Hai Group. Despite consumer preferences for Sharp-branded screens, there's no guarantee of superior quality compared to competitors.
For Sharp, expanding globally necessitates targeting key markets like China. The company is developing 8K technology and offering a diverse product range, including low-cost options. However, Cui Jilong warns that consistently low pricing could harm Sharp's brand image, complicating future efforts to regain premium positioning.
As Sharp continues to navigate these challenges, its ability to balance cost management with sustainable growth will define its future trajectory.
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