Sharp Hangs Up On Chinese Smartphone Plans
Reports suggest that Sharp Corporation is to end a partnership with Hon Hai Precision Industry under which the two companies would have jointly developed and manufactured smartphones for the Chinese market. Increased competition from domestic handset manufacturers as well as the dominance of global brands such as Samsung have rendered the putative venture's business model non-viable. Although the decision will be a major blow for Sharp's ailing handset business, BMI believes the capital earmarked for the venture would be better utilised by its recovering LCD panels unit, among others.
In March 2012, it was reported that Hon Hai (which trades as Foxconn) was preparing to acquire 10% of Sharp as part of an alliance that would have seen it increase production of LCD television panels for sale in China. It was expected that smartphone panels would be included in this strategy and that the companies would work together to develop handsets for the Chinese market. With domestic sales of its handsets falling rapidly as Japanese consumers switched to global brands and with international sales in terminal decline, the deal appeared to represent a much-needed lifeline for Sharp's handsets business.
|A Missed Opportunity For Sharp|
|China Smartphone Shipments ('000), 2010-2017|
However, as BMI remarked at the time, the proposal bore considerable potential downside risks from the start, as data from China's three mobile operators indicated that consumers increasingly favoured low-cost 'smart enough' handsets from local brands such as Xiaomi, Lenovo, Huawei Technologies and ZTE, among many others. This, we felt, left little room for Sharp and we believed that the venture would realise little tangible benefits for the Japanese company. The trend for local brands continues unabated and, with anti-Japanese sentiments riding high (relating to still-sensitive territorial disputes), it is likely that Sharp has missed whatever window of opportunity it may have had. Foxconn, meanwhile, is hardly short of work, given that it is one of Apple's main device manufacturers and is benefiting from closer relations with the increasingly popular Xiaomi. Foxconn is a major contributor to the Chinese handset market, where BMI forecasts unit shipments to rise from 261.3mn in 2012 to 372.2mn in 2017.
BMI does not expect the decision to impact on production of LCD TV panels at Foxconn plants in China, given that the market still favours global TV brands over lower-quality local products. However, Sharp's increasingly precarious financial position means that Foxconn will be reluctant to invest in the company, even for access to Sharp's extensive patent portfolio. Qualcomm invested US$120mn in Sharp in July 2013, most likely as a means of leveraging Sharp's new LCD and low power consumption technologies. In March 2013, Samsung invested US$110mn in Sharp also with a view to using these technologies in its smartphones and TVs.
In November 2013, Sharp agreed to sell its indium-gallium-zinc oxide based (IGZO) power-saving LCD panels to ZTE for use in its smartphones, effectively undermining any remaining plans it may have had to develop its own devices for the Chinese market. This, to BMI, seems to be a more profitable endeavour for Sharp and the company's latest quarterly results, for the six-month period ended September 30 2013, seem to bear this view out.
Consolidated sales were up by 21.5% y-o-y to JPY1.342trn, with the LCD panels business seeing y-o-y growth of 17.0% to JPY147.8bn. The LCD unit recorded an operating profit of JPY5.2bn in the six months to September 2013, much improved on the loss of JPY23.7bn a year earlier. However, TV unit sales were down 5.3% y-o-y and sales were also impacted despite price cuts and promotional offers. The handsets business recorded 11% y-o-y declines in both unit shipments and sales revenue as Japanese operators promoted foreign brands ahead of local products.
With 87.5mn handsets shipped in the six months to September 2013, Sharp continues to be a moderately sized player. However, the devices have limited appeal outside Japan, due to their idiosyncratic design and plans to relaunch the products for the European and Chinese markets came too late to dilute the impact of Android-backed Samsung and low-cost Chinese-made 'smart enough' devices.