Pushing a Low-Cost Strategy: Can Foxconn Revive Sharp?
In recent news, Foxconn is attempting to help Sharp regain its former glory, following losses that the company once faced. The reporter learned from Sharp China that Sharp had formally applied to the Tokyo Stock Exchange at the end of June, aiming to return to the main board as soon as possible. Last August, Sharp was demoted from Tier 1 (equivalent to the main board) to Tier 2 (similar to a smaller board) due to insolvency. Following Foxconn's intervention, Sharp managed to turn things around in the fourth quarter of last year. Sharp anticipates a profit of 59 billion yen for the fiscal year ending March 31, 2018, marking an end to three consecutive years of losses.
However, industry insiders believe that Sharp's crisis isn't entirely resolved yet. Currently, Sharp's losses are primarily due to cost control issues post-Dai Zhengwu's leadership, coupled with rising LCD panel costs since the second half of last year. Despite this, maintaining profitability remains a challenge for Sharp.
At Sharp's shareholders' meeting on June 20, President Dai Zhengwu expressed his intention to return to the main board of the Tokyo Stock Exchange by March next year. He also mentioned plans to submit an application on June 29 or 30. Dai Zhengwu stated that he will step down as president upon Sharp's return to the main board market. Sharp China informed the reporter that an application had indeed been submitted to the Tokyo Stock Exchange at the end of June. Whether Sharp can return to the main board still depends on the Tokyo Stock Exchange's review process.
Last March, Sharp found itselfé™·å…¥losses. On August 1 of the same year, Sharp's stock was downgraded from the main board to the second tier. Following this, Hon Hai Group acquired 66% of Sharp's shares for 388.8 billion yen (approximately US$3.5 billion), pulling Sharp out of its financial troubles through capital increases and share placements.
After Hon Hai's entry, Terry Goh appointed Dai Zhengwu, the second-in-command at Hon Hai, as Sharp's president, with the goal of reviving the company. Since then, Dai Zhengwu has repeatedly expressed his ambition to return Sharp to the main board as soon as possible before the end of the 2018 fiscal year.
Upon assuming office, Dai Zhengwu implemented sweeping reforms at Sharp, introducing strategies like rationalization and investments in promising areas. Sharp returned to profitability after two quarters.
In February this year, Sharp announced its fourth-quarter earnings results, reporting a net profit of 4.2 billion yen (around $37 million) in the quarter, marking Sharp's first profit since the third quarter of 2014. However, Sharp's fiscal year 2016 still incurred a loss of 27.1 billion yen. As of May this year, Sharp expects a net profit of $359 million for FY17. If achieved, this would signal the end of three consecutive years of losses.
Zhang Jifeng, Director of the Economic Department at the Japan Institute of the Chinese Academy of Social Sciences, noted that returning to the main board holds significant meaning for enterprises, representing their status as mainstream Japanese companies with higher thresholds. For Sharp to return to the main board, it must demonstrate profitability and positive prospects. Zhang Jifeng believes that Sharp has addressed its operational issues post-Hon Hai's capital injection and is highly likely to return to the main board. This essentially signals the lifting of Sharp's crisis.
Open Source or Throttle?
Sharp's persistent losses were largely due to overinvestment in its 10th-generation LCD panel factory and poor internal management, leading to excessive staffing and further losses. "Japanese enterprises lose due to winning too much on technology," Zhang Qifeng remarked. Although Sharp's technology remains robust, its business decisions are sluggish, and cost control is lacking. Foxconn, with its strong supply chain management, has injected fresh energy into Sharp.
Under Dai Zhengwu's leadership, Sharp underwent structural adjustments, divesting non-core businesses and streamlining personnel. Reports indicated that the total number of Sharp employees decreased by over 20% from its peak, with about 6,000 employees retiring voluntarily.
Cui Jilong, Senior Research Manager at Ove Cloud Network Black Power Division, noted that Sharp's turnaround is primarily due to two factors. On one hand, cost-cutting measures such as reducing staff and restructuring are "throttling." On the other hand, panel prices have surged since the second half of last year, though they've dropped this year, remaining high. Sharp is the sole company with the capability to produce LCD screens from generations above the 10th line, making it a major source of profit, thus representing "open source."
Dai Zhengwu also proposed "open source" initiatives after taking office. In March this year, Sharp and Foxconn jointly invested 61 billion yuan to establish a 10.5-generation LCD TV panel factory in Guangzhou, scheduled for completion in 2019.
Currently, Foxconn's "Shoubao" Sharp panel factory won't bring immediate benefits but could expose Sharp to overcapacity risks post-2019. With nine 10.5-generation panel factories already on the market, if they all come online smoothly in 2019, Sharp might face excess capacity, posing a significant challenge.
In May this year, Dai Zhengwu confirmed that Sharp and Hon Hai will invest in another panel factory in the U.S. Dong Min, General Manager of Ove Cloud Network Black Power Division, suggested viewing the new Sharp within the context of the entire Innolux-Foxconn-Sharp supply chain. The priority now is realizing the panel factory, particularly the 10th-generation line, ensuring full production and sales to enhance overall efficiency and benefits.
Low-End Route?
Besides panels, Terry Gou also placed great emphasis on the color TV business to boost market value. Gou Ming initiated the "Tianhu Plan" within Foxconn, encouraging employees to promote Sharp's home appliances.
However, it's evident that Sharp's LCD TVs have shifted from their previous "noble" image to lower prices. Data from Ove Cloud Network shows that from the first to the fifteenth week of this year, the average price of Sharp TVs dropped from 6,330 yuan to 3,564 yuan, nearly halving. This price reduction has significantly boosted sales. In the first quarter of 2017, Sharp sold 511,000 units in China, up 42.6% year-over-year. During the recent "6·18" Online Shopping Festival, Sharp TVs ranked first in sales volume on Jingdong Mall, exceeding one billion yuan.
This has sparked questions about Sharp's aggressive price war. Some media outlets noted that certain Sharp models don't use Sharp's original screens but instead use INX screens.
In response, Sharp declined to comment. However, according to media reports, INX refers to Invasive Screen, and the aforementioned INX screens are all customized to Sharp's quality standards and clearly labeled at the merchandise department.
INX is a panel factory under the Hon Hai Group. Cui Jilong mentioned that approximately 20% of Sharp's TV screens come from INX. Chinese consumers tend to trust Sharp screens more, but this doesn't necessarily mean they are of higher quality than other manufacturers' screens.
For Sharp's low-cost strategy, the head of Sharp China told the reporter that to expand global business, the Chinese market is crucial. Sharp is actively developing unique 8K technologies to promote its brand. Additionally, Sharp has introduced a wide range of products, including low-priced ones.
In Cui Jilong's view, Sharp's long-term price cuts are damaging its brand image, indicating unclear brand positioning. Once the high-end image is affected, it becomes harder to return to the premium segment.
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