When Sharp announced in March its partnership with Hon Hai,the decision generated a torrent of criticism. Since then, things have gone horribly wrong.
MADISON, Wisc. -- When Sharp Corp. announced in March its partnership with Hon Hai (also known as Foxconn), the world’s largest contract manufacturer, the decision by Japan’s leading LCD maker generated a torrent of criticism among those who still want to believe in Japan’s manufacturing prowess and high-tech superiority. Critics characterized the Sharp-Hon Hai agreement as outright betrayal; Japan was selling its soul to Taiwan.
But others praised Sharp for its boldness. I happen to be one of them.
The deal meant that Sharp had swallowed its pride as one of Japan’s old-line manufacturers, and is now committed to the new normal in the global electronics manufacturing market. It wants to find a new path to survival. I view Sharp as one of the first Japanese companies to have awakened to new realities. Fast forward to August, 2012.
The deal unveiled in March – which Sharp and Hon Hai had already been negotiating for much of the previous year – is nowhere close to closure. So far, Sharp hasn’t seen a dime from Hon Hai.
Instead, over the last 10 days, we’ve been witnessing daily spats between the two companies, with Hon Hai saying that the company didn't need to honor a March 27 agreement to acquire 10% of Sharp at 550 yen per share, while Sharp insisted that the March agreement was still valid.
Originally billed as an historic collaboration between Taiwan and Japan, the agreement has turned into the sort of public theater that nobody in the electronics industry has seen for a long
The latest rift between Sharp and Hon Hai illustrates a disturbing lack of basic communication skills between two Asian companies. But more disconcerting is what seems like the lack of discipline and mutual respect between them.
Sharp, now in major damage-control mode, is saying that the company is "proceeding with various talks to make effective the agreement on a tie-up we signed with Hon Hai in March." While both companies now say that the deal is being re-negotiated (Hon Hai says that the revised deal will be announced at the end of this month), the structure of the new agreement remains far from clear.
What has gone wrong?
But before examining what went wrong between the two companies, let’s recap the initial deal announced by the two companies in March.
Sharp and Hon Hai agreed to Hon Hai’s taking a 9.9 percent stake in Sharp, while the Taiwanese firm's billionaire founder Terry Gou invested his own money into Sharp’s Sakai fab – gaining a 46.5 percent share. The Sakai fab – opened in 2009, capable of handling super-large glass substrates – is considered an important milestone in LCD panel production but it has been struggling with a disappointingly low run rate.
Central to the current disagreement between the two companies is a dramatic slide in Sharp’s stock price.
Hon Hai agreed on March 27 to pay 550 yen per share to acquire a 9.9% stake in Sharp by the end of March 2013. But the Japanese manufacturer's stock later fell to about one-third of the price that the two sides had agreed on.
Hon Hai Chairman Gou reportedly took this revolting development in stride at first, saying he didn't care about short-term losses in Sharp's stock price. But on Aug. 3, he suddenly announced that the two companies had agreed to review the purchase price. Sharp quickly denied agreeing to renegotiate, thus exposing the rift and revealing the shaky ground on which the original agreement now stands.
@WW Thinker: "The on-the-surface 1% profit is not what Hon Hai and Mr Gou actually are making. They have subsidiaries where the real money (lot of it) are being made."
Money made by subsidiaries counts toward the parent's revenues and profits, unless you assume the books are being cooked and money is being concelaed.
Hon Hai may actually be making 1% overall, but so what? Different industries have different business models, and different measures of health.
The supermarket business makes about 1% profit, but supermarkets are going concerns. They may make a penny on the dollar, but they take in a *lot* of dollars, and the measuring sticks to apply are inventory turns and return on assets, not profit margins.
Look at Hon Hai that way and a different picture may emerge.
Rick, please remember one principle that is mostly true (rare exception occasionally but don't expect to see this once every 10 years :): successful business always involve a lot of untold dirty tricks and ethics. The on-the-surface 1% profit is not what Hon Hai and Mr Gou actually are making. They have subsidiaries where the real money (lot of it) are being made. For example, the owners of the DRAM manufacturers in Taiwan have subsidiaries who handle assembly, testing, logistics. They are all making handsome money while the DRAM factories are borrowing money from the banks to operate at loss. If you think about this, Taiwanese learnt all these market innovation created and invented by USA who has been at the fore-front of market economy for the past 50 years. The same kind of market innovation also brought us the collapse in CY2007!
"The problem is, I think, that both companies have reached the point of no return, and yet there is little enthusisam left for each other."
That lack of enthusiasm could be a major stumbling block. The del has changed from being something Shard reluctantly accepted to something a lot like an unfriendly takeover.
Hon Hai may get what it wants and wind up calling the shots, but if it doesn't get the Sharp management and rank and file on board, it may have problems getting value from the investment.
Well put. I agree.
Unfortunately, Sharp is running out of both money and time.
Hon Hai now wants 20 percent of Sharp.
See the other story here:
@Junko: "I am still wracking my brain why Sharp was not able to close the deal when the two companies announced the deal in March."
Easy enough. Money.
The business landscape is littered with the corpses of ventures like this that foundered because the economy changed and the value of one of the parties dropped substantially. the other party says "You aren't worth as much as you were when we made the deal, so we aren't going to pay as much!"
Hon Hai certainly has an interest in getting a piece of Sharp, but they would arguably be getting a lot less for the money if they bought at the originally agreed upon price.
I think the question is whether Sharp needs the deal badly enough to cut the price they are willing to accept.
i came in, just by the Headline, n looking for the new tablets, with photo=realism, n Samsung's new 2 core processor of 2013, , going to be big changes "again" ten inch display GPS, Aps, n low power, n speed. every other portable devise, is going to be Junk , but isn't that the game that is being played here... i am in a good mood, Cheers readers. love this site. Thomas in Vancouver
Yes, that's so true, Rick. The company puts itself in a constant rat race for cheaper labor.
In theory, though, if Foxconn can work out a deal with Sharp, the Taiwan contract manufacturing giant could go up the food chain. Developing advanced displays with its parter... at least, from what I understood, that was Hon Hai's original intention of courting Sharp.
Hon Hai is a funny beast. At one level another great global success of Taiwan, next to TSMC, HTC and Asustek.
At another level, a miserable failure stuck in the 1% profit zone of Taiwan's we-can-make-it-cheaper history, ironically tied like a poorly fed dog to one of the most profitable companies in electronics--Apple.