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.
To fuel its uncertainty, last Thursday (Aug. 9th), Taiwan's Ministry of Economic Affairs, which reviews all outgoing investments, announced that it returned Hon Hai’s application for a regulatory review of its planned purchase of a 10% stake in Sharp on the grounds that the expected investment return on the deal "isn't reasonable enough."
Emile Chang, deputy executive secretary of Taiwan's Investment Commission, reportedly said the Ministry’s move doesn't mean the deal has been rejected. The Investment Commission has asked Hon Hai to submit more information regarding the expected investment returns.
Sharp currently couldn’t be in a much worse position to re-negotiate the deal with Hon Hai.
On Aug. 2nd, Sharp announced that the company is expecting a net loss of 250 billion yen in the current fiscal year, prompting a 28 percent drop in share price, to close at 192 yen, 65 percent below the 550 yen-per-share Foxconn agreed to pay for the stake.
Sharp is also under pressure to slash interest-bearing debt, which ballooned to about 1.25 trillion yen as of the end of June. The scheduled redemption of Sharp's corporate bonds is also expected to put a strain on the company's financing.
While the two companies scramble to salvage the deal, I suggest both parties take a deep breath and agree on the basic principle that drove the two companies to talk in the first place.
Taiwan/Japan vs. Korea?It’s no secret that Hon Hai’s Gou has harbored a naked ambition: build technology prowess at Foxconn that surpasses Korean giant Samsung Electronics. For that, the Taiwan giant needs Sharp.
For Sharp, Hon Hai will free it to spread its wings beyond the domestic market. If Sharp indeed is willing to transfer the company’s advanced, small-to-medium LCD panel technology to a Hon Hai fab in China, currently under construction, the partnership with Sharp should be worth every penny to the Taiwn EMS giant. But if Hon Hai’s true motive is to gobble up Sharp and run it as its subsidiary, Hon Hai is not only losing Sharp’s face but also losing the company’s trust.
This might be the end game for Hon Hai, after all. But if Sharp is really uncomfortable with this alliance, maybe it’s time for the Japanese company to start looking for another investor. Either way, this deal is clearly running out of time.
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