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Hon Hai Invests in Sharp’s Gen 10 – Joining to Compete with Samsung and LG

Sharp has been suffering from low capacity utilization at its Gen 10 fab in Sakai, due to a lack of panel orders and strong competition from other TV brands in the worldwide TV marketplace. Now Hon Hai (also known as Foxconn) in Taiwan will invest JPY 66.4 billion, (US$0.8 billion) as joint venture capital into Sharp. Hon Hai will own 46.5% of the Gen 10 (now a subsidiary called Sharp Display Product). Meanwhile, Sharp will outsource more LCD TV OEM assembly business to Foxconn.

Sharp needs support to improve its financial situation and find a solution for its Gen 10 capacity. Two years ago, Sony – the original joint venture partner with Sharp in Gen 10 – decided not to increase its share in the Gen 10 fab. Sharp has been seeking investment partners in its Gen10 for some time, and it is believed that Sharp has talked with Foxconn, TPV, and CEC in China, among others.

Hon Hai is taking an important step to enlarge its LCD TV OEM business and strengthen its position against Korean counterparts, especially Samsung and LG, in the worldwide TV market. Samsung and LG, who focus on in-house production, are not Foxconn’s target customers, but as leading brands, they have been pressuring other TV brands like Sony, Sharp, Toshiba and Panasonic. With the panel support from Sharp Gen 10, Foxconn will strengthen its LCD TV business, especially in products such as 40”W, 60”W and 70”W.

This is not the first time Sharp and Hon Hai have come together. In July, 2011, they created a strategic alliance in LCD TV panel technology, with a license to Foxconn and its LCD affiliate Chimei Innolux, particularly in wide view angle and high transmittance processes. Sharp also planned to buy some mainstream 32”W and above LCD TV panels from Chimei Innolux while it refocused its Gen 8 for high-end mobile PC panels, and Gen 10 for 60” and above ultra-high resolution panels. However, Sharp has suffered from over capacity at its Gen 10 fab, despite its world-class product and process technology. Falling panel prices and the burden of Gen 10 depreciation cost have weighed on Sharp’s financials.

Other aspects and impacts of the deal include:

  • After the capital injection, Sharp’s Gen 10 (also known Sharp Display Product Company) will have the following shareholders: Sharp 46.5%, Hon Hai 46.5%, Sony 7%. Foxconn has been playing an important LCD module assembly house for Sharp until now and will expand its LCD TV OEM business with Sharp.
  • According to Display Search’s report, Sharp’s Gen 10’s glass substrate input is about 35K/M in Q1’12 and the major products are 40”W (15%), 60”W (44%) and 70”W (41%). Sharp and Foxconn will run the Gen 10 together as a company and Foxconn will equally share its capacity. Foxconn will be able to access to a wide variety of sizes, including 40”W, 60”W and 70”W, which are not currently supplied by Chimei Innolux.
  • Both companies plan to leverage its economic scale for LCD TV panel and LCD TV set production. This may mean more pressure for component suppliers but also good chance for the cost reduction.
  • Foxconn is planning to make 9.5M LCD TVs in 2012, including 8M for Sony and 1.5M for Sharp. Foxconn acquired Sony’s global LCD TV assembly lines a few years ago and provides manufacturing for Sony. With Sharp’s panel capacity and technologies, Foxconn will certainly expand its OEM business.
  • The alliance between Foxconn and Sharp also moves Sharp towards external customers – reportedly they have been hard to do business with – which is much of their historic problem. Certainly their past key customers (Philips and Sony) shifted to other sources. Foxconn is likely to bring other customers, in particular Vizio, in all likelihood to guarantee that their investment is fully utilized.
  • Furthermore, Sharp may also license its “Sharp” brand to Foxconn, instead of or in addition to contract manufacturing, Foxconn may also design and sell its own products with the Sharp brand worldwide.
  • Foxconn is currently the largest system integrator for Apple’s products like iPad and iPhone. Sharp is one of the important panel suppliers for iPad and iPhone as well. The alliance may not only relate to the LCD TV panel business but also Apple’s business.
  • Besides the Gen 10 capacity, it’s possibly that Sharp will transfer other technologies to Foxconn, including the high resolution low temperature polysilicon (LTPS), oxide TFT, color filter and advanced processes. Foxconn is currently building a Gen 6 LTPS fab in China for high resolution mobile phone panels, and may require more technical support from Sharp.

Samsung and LG Electronics are the world’s No.1 and No.2 LCD TV brand with 18.8% and 12.1% shares in 2011, respectively, according to DisplaySearch reports. Meanwhile, LG Display and Samsung LCD accounted for 27.9% and 24% in large area TFT LCD shipment in 2011, respectively. In other words, strong Korean competitors are putting pressure on Taiwanese and Japanese companies, from both the panel and finished goods perspectives. This alliance can be seen as a competitive reaction to this competition.

However, the challenges remain. As we reported, Samsung and LG enjoy many competitive advantages in both LCD TV panels and sets. Samsung TV has been established a very solid vertical integration system with the BMS (Backlight-Module-System) business model and it’s recent product launch in North America of the direct type LED backlight LCD TV has been successfully proving its strength in economic scale and vertical integration. Meanwhile, LG Display continues to lead in many aspects like wide view angle technologies, 3D panels, high resolution and economic scale. The road ahead for the Foxconn and Sharp alliance will certainly involve facing strong competition from Korea.

  • ICG25114

    Very informative. The alliance has to develop a global brand in the consumer business area with whice it could effectively compete with Samsung and LG. Unfortunately Sharp or Aquo is not that strong a brand in the global scene, and as such unless the alliance could develop a good global brand, it will sill remains as a global EMS supplier of the global consumer brand like Apple which in turn will bite the biggest portion of profits in the VC of the cross-border vertical integration SC system among Sharp, Foxconn and Apple.

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