Pushing a Low-Cost Strategy?
Foxconn is attempting to reclaim what Sharp once lost. The reporter learned from Sharp China that Sharp officially applied to the Tokyo Stock Exchange at the end of June and hopes to return to the main board as soon as possible. Last August, Sharp was downgraded 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 a turnaround in the fourth quarter of last year. Sharp anticipates a profit of 59 billion yen for the fiscal year ending March 31, 2018, marking the end of three consecutive years of losses.
However, in the opinion of industry insiders, Sharp's crisis isn't entirely resolved yet. Currently, Sharp's losses stem primarily from cost control issues post-Dai Zhengwu's leadership, and the rise in LCD panel costs since the second half of last year has remained high. Still, maintaining Sharp's ongoing profitability remains a challenge.
Return to the Main Board
At the recent Sharp shareholder meeting on June 20, President Dai Zhengwu stated his goal to return to the main board of the Tokyo Stock Exchange by March next year and plans to apply to the exchange on June 29 or 30. Dai Zhengwu also mentioned that he would step down as president after returning to the main board market.
Sharp China informed this reporter that an application was submitted to the Tokyo Stock Exchange at the end of June. However, when it can return to the first section of the Tokyo Stock Exchange, it still depends on the review process. Dai Zhengwu will take responsibility for stepping down after completing the mid-term business plan. As Sharp is a Japanese company, it would be preferable for a Japanese person to serve as president in the future, although this role doesn’t necessarily need to be filled by someone internal to Sharp.
In March of last year, Sharp fell into a deep financial quagmire. On August 1st, Sharp's stock was downgraded from the main board to a secondary division. Subsequently, Hon Hai Group acquired 66% of Sharp's shares for 388.8 billion yen (approximately $3.5 billion), pulling Sharp out of its inevitable debt.
After Hon Hai's entry, Terry Goh appointed Dai Zhengwu, the number two figure at Hon Hai, as Sharp's president, aiming to revitalize the company. Since then, Dai Zhengwu has repeatedly stated his intention 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 investment in promising areas. Sharp returned to profitability after two quarters.
Sharp reported in its earnings release for the fourth quarter of last year that it achieved a net profit of 4.2 billion yen (about $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. In May this year, Sharp projected a net profit of $359 million for FY17. If achieved, it would signify the end of Sharp's three consecutive years of losses.
"One or two sections hold different meanings for companies. One represents mainstream Japanese companies with relatively high thresholds. If Sharp wants to return to Tier 2, it must first meet profitability requirements. The company must demonstrate good prospects," said Zhang Jifeng, Director of the Economic Research Department at the Chinese Academy of Social Sciences' Japan Institute. He believes that after Hon Hai's capital injection, Sharp has addressed its operational issues and is very likely to return to the first section of the Tokyo Stock Exchange. Essentially, returning to the main board signifies the lifting of Sharp's crisis.
Opening Up or Cutting Costs?
At the time, Sharp's continuous losses were due to overinvestment in its 10th-generation LCD panel factory, coupled with poor internal management, excessive staffing, and other factors, which deepened its loss predicament.
"Japanese companies lose out due to their success in technology." Zhang Qifeng said that while Sharp's technology remains strong, the company's business decisions are slow and cost control is inadequate. Foxconn excels in supply chain management and has injected new vitality into Sharp.
After Dai Zhengwu took office, he made structural adjustments to Sharp, divested non-core businesses, and streamlined staff. Media reports indicated that the total number of Sharp employees decreased by more than 20% from its peak, with about 6,000 voluntary retirements.
According to Cui Jilong, Senior Research Manager at Ove Cloud Network, Sharp's current turnaround from losses stems from two aspects. On one hand, cost-cutting measures such as workforce reductions and business restructuring after Dai Zhengwu's appointment are "cost-cutting."
On the other hand, panel prices have been rising since the second half of last year, though they've fallen this year, they remain high. Sharp is the only company with the capacity to produce LCD screens from 10th-generation lines or higher. In fact, global panel manufacturers are profitable, and this is Sharp's primary source of profit, representing "opening up."
Dai Zhengwu also proposed the "opening up" strategy upon 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, expected to be completed by 2019.
Currently, Foxconn's Sharp panel factory, "Shoubao," cannot immediately benefit Sharp in the short term but will expose it to the risk of overcapacity after mass production in 2019.
“There are already nine 10.5-generation panel factories on the market. If they can all be smoothly operational by 2019 and around 2020, then Sharp may face excess capacity. This poses a significant challenge for Sharp,†said Cui Jilong.
In May this year, Dai Zhengwu confirmed that Sharp and Hon Hai will invest again in a U.S. panel factory. Dong Min, General Manager of Ove Cloud Network, said that to view the new Sharp, it should be placed within the entire industry chain of Innolux-Foxconn-Sharp. The current priority is to realize the panel factory, especially the 10th-generation line, ensuring full production and sales, thereby enhancing the efficiency and benefits of the entire chain.
Low-End Route?
Aside from panels, the color TV business is also an area where Terry Gou places great importance. Gou Ming initiated the "Tian Tiger Plan" within Foxconn, asking Foxconn employees to promote Sharp's home appliances.
However, it is evident that Sharp's LCD TVs have shifted away from their previous "noble" image, with prices continuously declining. According to data provided to our reporter by Ovid Cloud Network, from the first week to the fifteenth week of this year, the average price of Sharp TVs dropped from 6,330 yuan to 3,564 yuan, almost halving.
This pricing strategy has significantly boosted sales. According to data from Ove Cloud Network, in the first quarter of 2017, Sharp sold 511,000 units in China, a year-on-year increase of 42.6%. During the recently concluded "6·18" Online Shopping Festival, Sharp TVs ranked first in sales volume on Jingdong Mall, with sales exceeding one billion yuan.
This has prompted both inside and outside the industry to question Sharp's aggressive price wars. Some media noted that some of Sharp's models don't use Sharp's original production screens but instead use INX screens.
In response to this, Sharp declined to comment. However, according to media reports, Sharp stated that INX refers to the Invasive Screen, and the aforementioned INX screens are all customized according to Sharp's quality standards and clearly marked at the merchandise department.
Innolux is a panel factory under the Hon Hai Group. Cui Jilong said it is understood that approximately 20% of Sharp's TV screens come from Innolux. In fact, Chinese consumers tend to associate Sharp screens with higher quality, but this doesn't necessarily mean Sharp screens are superior to those from other manufacturers.
Regarding Sharp's low-cost strategy, the head of Sharp China told the reporter that to expand global business, the Chinese market is one of the key markets. Sharp actively develops unique 8K technologies to promote the Sharp brand. Additionally, Sharp has launched a wide range of products, including low-priced items.
In Cui Jilong's view, Sharp's long-term reliance on low prices has actually damaged its brand image, indicating unclear brand positioning. When the high-end image is affected, it becomes more challenging to return to the high-end market.
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