Pushing a Low-Cost Strategy?
Foxconn is attempting to reclaim what Sharp once lost. The reporter learned from Sharp China that Sharp has formally 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 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 a turnaround in the fourth quarter of last year. Sharp anticipates a profit of 59 billion yen for the 2017 fiscal year (ending March 31, 2018), marking the end of Sharp's three consecutive years of losses.
However, in the eyes of industry insiders, Sharp's crisis hasn't been entirely resolved. Currently, Sharp's losses are primarily due to cost control issues post-Dai Zhengwu's tenure, and the rise in LCD panel prices since the second half of last year has remained high. Yet, Sharp's sustained profitability remains a test.
Return to the Main Board
At Sharp's shareholders' meeting on June 20, President Dai Zhengwu stated his intention to return to the main board of the Tokyo Stock Exchange by March next year and plans to submit an application to the exchange on June 29 or 30. Dai Zhengwu also mentioned that he will step down as president after returning to the main board market.
Sharp China informed this reporter that Sharp submitted an application to the Tokyo Stock Exchange at the end of June. However, whether it can return to Tier 1 of the exchange still depends on the review by the Tokyo Stock Exchange. Dai Zhengwu will resign after completing the mid-term business plan. As Sharp is a Japanese company, it would be preferable for a Japanese person to take the position of president in the future, though the president doesn’t necessarily have to be an internal employee of Sharp.
In March of last year, Sharp fell into a financial quagmire. On August 1st, Sharp's stock was downgraded from Tier 1 to Tier 2. Subsequently, Hon Hai Group acquired 66% of Sharp's shares for 388.8 billion yen (approximately US$3.5 billion), pulling Sharp out of its inevitable debt through capital increases and share placements.
After Hon Hai's entry, Terry Goh appointed Dai Zhengwu, the No.2 figure at Hon Hai, as Sharp's president and attempted to revive the company. Since then, Dai Zhengwu has repeatedly stated his goal of returning Sharp to the main board as soon as possible before the end of the 2018 fiscal year.
Upon taking office, Dai Zhengwu implemented sweeping reforms at Sharp and proposed strategies such as rationalization and investment in promising areas. Sharp achieved losses in two quarters.
In February this year, Sharp announced in its fourth-quarter earnings report that it achieved 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 reported a loss of 27.1 billion yen. In May this year, Sharp expects a net profit of $359 million in FY17. If successful, it would mean Sharp ends its three consecutive years of losses.
"One or two tiers have completely different implications for enterprises," Zhang Jifeng, director of the Economic Department at the Japanese Research Institute of the Chinese Academy of Social Sciences, told this reporter. He believes that after Hon Hai's capital injection, Sharp has solved its operational problems and is very likely to return to Tier 1 of the Tokyo Stock Exchange. Essentially, returning to Tier 1 signifies that Sharp's crisis has been lifted.
Open Source or Throttling?
At that time, Sharp incurred continuous losses due to excessive investment in its 10th-generation LCD panel factory, combined with poor internal operations, overstaffing, and other factors, plunging deeper into the quagmire of losses.
"Japanese companies lose out due to their obsession with technology," Zhang Qifeng said, noting that while Sharp's technology remains strong, the company's business decisions are sluggish and cost control is inadequate. Foxconn excels in supply chain management and has injected new vitality into Sharp.
After Dai Zhengwu took office, he implemented structural adjustments at Sharp, divesting non-core businesses and streamlining personnel. Media reports indicated that the total number of Sharp employees decreased by more than 20% from the peak, with about 6,000 voluntary retirements.
According to Cui Jilong, senior research manager at Ove Cloud Network Black Power Division, Sharp's current turnaround from losses stems from two main areas. On one hand, Dai Zhengwu's cost-cutting measures, such as reducing staff and restructuring businesses, represent "throttling."
On the other hand, panel prices have surged since the second half of last year, although they have fallen this year, they remain high. Sharp is the only company with the capability to produce LCD screens above the 10th-generation line. In reality, global panel manufacturers are profiting, and this is Sharp's primary source of profit, representing "open source."
Dai Zhengwu also proposed the "open source" move 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, expected to be completed by 2019.
Currently, Foxconn's Sharp panel factory, Shoubao, cannot bring immediate benefits to Sharp in the short term but will face overcapacity risks after mass production begins in 2019.
“There are already nine 10.5-generation panel factories on the market. If they can all operate smoothly starting in 2019 and around 2020, then Sharp may face excess capacity. This will pose 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 Owen Cloud Network Black Power Division, said that to view the new Sharp, it should be placed within the entire supply chain of Innolux-Foxconn-Sharp. The current priority is to realize the panel factory, particularly the 10th-generation line, achieving full production and full sales, thereby enhancing the efficiency and benefits of the entire chain.
Low-End Route?
Besides panels, the color TV business is another area where Terry Gou places great importance. Gou Ming initiated the "Tiger Plan" within Foxconn, encouraging 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 and prices have continued to decline. According to data provided 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, nearly halving.
This pricing strategy has significantly boosted sales. Data from Ove Cloud Network shows that in the first quarter of 2017, Sharp sold 511,000 units in China, up 42.6% year-on-year. During the recent "6·18" Online Shopping Festival, Sharp TVs ranked first in sales volume on Jingdong Mall, exceeding one billion yuan in sales.
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 do not 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 these 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 are more inclined to believe in the quality of Sharp screens, but a Sharp screen does not necessarily mean it is of higher quality than 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 that its brand positioning is unclear. When the high-end image is affected, it becomes more challenging to return to the high end.
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