Coverage: Foxconn and Sharp agree to $3.5 billion deal

The Foxconn Technology Group board agreed Wednesday to purchase struggling Japanese electronics company Sharp Corp. for about $3.5 billion.

The decision comes one month after the Taiwanese electronics assembler pressed pause on its original offer after discovering some of Sharp’s potential liabilities.

Takashi Mochizuk, Eva Dou and Wayne Ma of The Wall Street Journal had the day’s news:

The boards of Sharp Corp. and Foxconn Technology Group approved a plan Wednesday for the Taiwanese electronics assembler to take over the struggling Japanese consumer electronics company for about 389 billion yen (US$3.5 billion), capping months of negotiations that in the end led to a lower price tag for the deal.

The deal is a victory for Foxconn, which has been looking to expand in the market for next-generation displays with its pursuit of Sharp, a supplier of smartphone screens to Apple Inc. Foxconn believes acquiring Sharp will allow it to move up the technology value chain by making smartphone screens, which are the most expensive components in mobile devices.

Based in Osaka, Sharp offers a wide range of consumer products in Japan, from desktop calculators to flat-screen TVs and refrigerators. It invented many of the world’s first tech products during its 103-year history but fell into deep financial trouble beginning in 2012 due to big investments in display screens and solar panels. Its products remain a preferred choice for Japanese consumers, but Sharp hasn’t been able to expand its business globally due to a lack of resources.

“We have much that we want to achieve and I am confident that we will unlock Sharp’s true potential and together reach great heights,” Foxconn Chairman Terry Gou said in a statement Wednesday.

Under the revised terms, Sharp plans to issue new shares to Foxconn in exchange for an infusion of ¥389 billion which would initially give the Taiwanese company, known formally as Hon Hai Precision Industry Co., a 66% stake. That could increase to 72% after July 2017. Initially, Foxconn proposed a capital injection of ¥489 billion.

Makiko Yamazaki and J.R. Wu of Reuters detailed how the price of this deal had been slashed:

The firms had been on the verge of finalizing terms last month when contingent liabilities at Sharp were suddenly revealed, causing Foxconn to hit the pause button on the deal.

That revived ill will from four years ago, when Foxconn agreed to take a stake in Sharp as part of a broader partnership. Sharp then warned of losses and Foxconn walked away as shares in the Japanese firm sank.

Analysts said that even without the history of distrust, there was little assurance the combination will be able to deflect pricing pressure in LCDs or beat rivals in OLED, a new screen technology which Apple is expected to adopt for its iPhones by 2018.

“If you are talking about two years, it will be difficult. Three years, there is potential. Five years, then definitely,” said Kylie Huang, analyst with Daiwa-Cathay Capital Markets in Taipei.

She added that Samsung Electronics’ display unit and LG Display will for some time likely remain the preferred choice for OLED or organic light-emitting diode screens which are thinner, lighter and more flexible than other displays.

Paul Mozur of The New York Times explained some background in Foxconn:

The deal is a return to form for Foxconn — formally known as Hon Hai Precision Industry — in its emphasis on scale. The company in recent years has been looking for ways to further cut costs, including investment in automation. It has also expanded into businesses potentially more lucrative than grunt-work manufacturing, opening factories producing new technology like batteries for electric cars. It even created incubators to help hardware start-ups.

Foxconn, most of whose factories are in China, is emblematic of the challenges facing the Chinese economy at large. Even while it tries to maintain the huge scale and efficiency of its production base, it is trying to climb the value chain to find new, more profitable streams of revenue.

Near Beijing, Foxconn operates a hardware incubator called Innoconn, which helps start-ups with production management while looking for investment targets.

Liu Haoyang, founder of Noitom, a company that makes motion-capture sensors and hardware, said Foxconn had approached his company when it was seeking crowdfunding for a sample product in 2014. Ultimately Foxconn gave Noitom advice, and it now helps Noitom produce, Mr. Liu said.

“They make parts of high complexity for us,” he said. “Average factories aren’t able to make this type of thing, never mind in small batches.”

Foxconn, founded in Taiwan as a maker of television knobs in 1974 by Mr. Gou, became a company with more than $100 billion in annual revenue by making stuff for other companies. Starting in the 1990s, as orders poured in to make personal computers, Mr. Gou built new and larger factories in China, culminating in the city-size Longhua plant in Shenzhen, near Hong Kong.

At the Longhua complex, Foxconn coordinates more than 100,000 workers assembling gadgets — including the iPhone — in daily and nightly shifts, and the feeding, clothing and planning for the turnover of workers are gargantuan challenges. The company developed recreation facilities for the campus and designed a kitchen able to churn out the huge amounts of food necessary to feed tens of thousands of workers each day.

A marvel of modern manufacturing, the Longhua plant is the most extreme example of Foxconn’s philosophy of maximizing efficiency through huge scale, though in some ways the Longhua plant has proved too large. It was there in 2010 that a series of worker suicides drew international scrutiny from workers’ rights groups and the news media. The company put nets on the sides of buildings to catch would-be jumpers. On many buildings the nets still sag today.

Foxconn’s sales growth has slowed to single-digit percentages in the past two years from the double-digit growth it posted in the past, although profit growth has picked up recently, thanks in part to consumers buying bigger, more expensive phones with bigger screens.