Hon Hai and Sharp Ties Create Multi-advantages for EMS Giant

Hon Hai Group, the world's biggest EMS (electronic manufacturing service) provider by output headquartered in Taiwan, recently bought a majority stake in Sharp of Japan, as headlined in a news report in Taipei on March 27, whose move aims to better compete against Korean rivals with 10th generation fabrication lines in the short term, as well as acquire any technological advantages owned by the Japanese maker of home appliances as TVs.

The Taiwanese EMS decided to invest US$800 million to acquire an 11% stake in Sharp to be the major shareholder, also enabling access to the latter's LCD business and related R&D projects.

Furthermore, Hon Hai has also confirmed another US$800 million investment to take over 46.5% of Sharp's 10G plant in Sakai City to secure about a half of the output.

The recent investment enables Hon Hai, which has a 12% stake in the Taiwanese display panel maker Chimei Innolux Corp., to further raise capacity of 10G-plant produced panels, as well as its global influence in the segment.

Long-time Solidification 
To say that Hon Hai's decision to increasingly invest in Sharp is a product of the long-time solidification between the both sides is not an overstatement, says analysts of DisplaySearch, a global market researcher, considering the two parties have consistently tapped synergy, building mutually-beneficial business for some time.

Hon Hai has contract manufactured LCD modules for Sharp for years, and recently received increasing orders for LCD TVs from the Japanese partner amid rising Korean LCD TV brand vendors worldwide.

In turn, Sharp will license Chimei Innolux to use its UV2A technology to help the Hon Hai Group's affiliate to upgrade and improve its 7- and 8-generation manufacturing lines. Chimei Innolux also supplies Sharp LCD TV panels that the Japanese maker no longer makes at home, since its 8th-generation production lines were upgraded to use oxide TFT (thin file transistor) technology and 10th-generation lines were improved for better yield rate, says the analysts.

Hon Hai and Sharp's close ties are also shown in their joint solving of technological problems in production of iPhones and iPads, stressed DisplaySearch's analysts, given that the former is the major assembler of the two hot-sellers, while the latter is one of Apple Inc.'s suppliers of display panels, not to mention that the two makers have worked closely to supply Sony LCD TVs.

Mutual Benefit 
In light of the solid partnership, DisplaySearch says that the two makers will certainly generate more gains from such synergy and the recent investment in the long-run.

Firstly, the investment enables Hon Hai to secure around 50% of Sharp's output from the 10th generation plant, which also allows Sharp to improve capacity utilization rate driven by higher orders to Hon Hai.

Hon Hai's investment is a blessing for Sharp has not received enough orders to fully activate its 10th-generation plant, which technically has full monthly capacity of 720,000 glass substrates to produce 40, 60 and 70-inch display panels. But the reality is that the plant has been consuming only about 420,000 substrates monthly in the first quarter of this year, and will be streamlined later to cut operating costs, with such unenviable fate avoided by Hon Hai's investment.

Hon Hai's investment also helps to relieve Sharp's financial stress in the past months, due to sluggish or negative revenue growths.

Meanwhile, DisplaySearch analysts believe that Hon Hai will surely receive more orders for LCD TVs from Sharp with the investment. In 2012, Hon Hai is scheduled to ship 9.5 million LCD TVs, 8 million of which to go to Sony and the remainder to Sharp, with Sharp planning to sell 12-13 million units. In short, the Taiwanese supplier will command a 12.5% share of the Japanese customer's LCD TV shipment, far higher than the 3.2% achieved in the fourth quarter of 2011, further encroaching into TPV and Wistron's LCD TV manufacturing business.

Industry-leading Display Technologies 
Hon Hai's investment in Sharp also allows access to the latter's industry-leading display technologies, which is perhaps the critical reason behind the Taiwanese maker's plan.

DisplaySearch's analysts think that Hon Hai will likely tap Sharp's display technologies to upgrade production lines, which include not only those for large-sized display panels, but also cutting-edge ones for small and medium-sized and mobile device displays, such as LTPS (low temperature poly silicon or dubbed by Sharp as CGS (continuous grain silicon), oxide TFT, UV2A and RGBY four-color arrangement, and so forth. Sharp owns the world's most technology patents for naked eye 3D displays.

For the moment, Hon Hai plans to upgrade its 5th-generation line in Shenzhen to LTPS, while setting up a new 6th-generation line using LTPS in Chengdu. Therefore, DisplaySearch says that the Taiwanese company can step up production upgrading with the investment. Moreover, with Sharp's technological support, Hon Hai may outbid competitors for Apple Inc.'s orders for new TV products using innovative display technologies.

DisplaySearch analysts add that Sharp has other benefits to gain from Hon Hai's investment, as more economical purchase of materials and components for display panels, and a broader customer base. However, it remains to be seen if Sharp will be allowed by Hon Hai to continue supplying display panels to major rivals in the LCD TV segment as Samsung Electronics and TPV Technology.

Possible Moves 
Based on market research, DisplaySearch believes that Hon Hai is likely to adopt several strategies following the investment to boost presence in the industry to better compete against Korean competitors.

Firstly, Hon Hai may acquire Sharp's TV manufacturing plants in China, Indonesia and Mexico in the short term, to consolidate its position in the Japanese brand vendor's supply chain, and rein in business operations from output allocation to customer selection and pricing of Sharp's 10th-generation plant, say the analysts.

To optimize operating efficiency of the 10th-generation plant, Hon Hai will most certainly use all the advanced production lines to turn out display panels with screen sizes of 60-inches and above, which will be mainly supplied to exiting customers as Vizio, Sony, Panasonic and some Chinese brand vendors. Samsung Electronics, Hon Hai's rival and the Korean LCD TV maker and a world's top-three brand vendor by market share, has been dealt a coup-de-grace by Hon Hai's investment, for Samsung won't be able to buy needed display panels from Sharp, its current supplier.

Later, DisplaySearch forecasts that Hon Hai will begin negotiating with existing and potential customers over joint promotion of 60-inch-and-larger LCD TVs in the second half of this year, to tap the closer Hon Hai-Sharp ties to further build global influence in the segment, which will drive down faster in the long-run retail prices of larger-sized LCD TVs.

Before Hon Hai's recent acquisition of a majority stake, Sharp promoted its 60-inch LCD TVs with the CCFL (cold cathode fluorescent lamp)-backlit feature at a unit price of only US$999 during the Black Friday sale in the U.S. last year, and will be able to promote, backed by added clout and synergy created by Hon Hai, more aggressively along with lower prices. (SC, May 2012)

source & copyright: CENS