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Bluntly put

22 January 2016 By Quentin Webb

Foxconn would be better off without Sharp. The Taiwanese giant is trying to gatecrash a state-backed rescue of the ailing Japanese electronics firm with its own $5 billion-plus proposal. The target’s display technology would make Foxconn even more indispensable to Apple, for whom it builds iPhones and iPads. But fixing this basket case would be hard. And Sharp’s other businesses are a poor fit.

Foxconn, formally known as Hon Hai Precision Industry, has grown huge assembling other people’s gadgets: its market value is about $33 billion. But profitability is tight: analysts foresee gross margins this year of just 7.2 percent.

Making screens for phones and tablets – a business that Sharp dominates alongside Japan Display, LG and Samsung – would tilt Foxconn towards higher “value-added” businesses, and give it more clout in negotiations with customers. That helps explain why Foxconn boss Terry Gou has been keen on Sharp for years. Yet the $1.9 billion Japanese group is also a money pit which has racked up cumulative net losses of nearly 1 trillion yen ($8.5 billion), on sales of 13.7 trillion, in the five years to last March, Eikon data shows. It is now heading for its third bailout in four years.

So Sharp requires radical action. As a foreign buyer, Guo might find it even harder to slash jobs and close factories as required. The limited overlap with Foxconnn would also make it harder to cut costs. That’s a disadvantage when compared with a plan put forward by state-backed Innovation Network Corporation of Japan, which would involve uniting Sharp’s liquid crystal display business with Japan Display.

Then there’s the question of what Foxconn would do with Sharp’s other businesses, which include phones, appliances, copiers and TVs. An optimist would say these could help Foxconn accelerate away from being a pure contract manufacturer and towards selling more branded goods of its own. But this is hardly the group’s bread and butter – and so it’s not clear why Foxconn would do a better job than Sharp has.

Foxconn’s interest may be academic anyway: Japan dreads technology leaking overseas, and an all-Japanese solution could be just days away. Though Guo might be disappointed, Foxconn’s other shareholders should be relieved.

 

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