Is Terry Gou a friend of Sharp or a man with ambitions to defeat Samsung?

On March 27, Sharp announced the news of capital business cooperation with Taiwan's Hon Hai Precision Industry, the world's largest EMS (electronics product manufacturing service) company. This decision has brought a huge impact on the Japanese industry. Is Hon Hai a "friend" who helps Sharp, which is burdened with huge interest-bearing debts, or is it an "ambitious" group that intends to swallow up Sharp and take away cutting-edge technology?

At the Sharp shareholders' meeting held on June 26, Sharp explained the cooperation relationship between the two parties. How will the shareholders who heard the explanation judge the future value of Sharp?

The cooperation will also involve the smartphone field.

The previously disclosed capital business cooperation content is that Hon Hai Group invested 66.9 billion yen in Sharp, acquired 9.88% of the shares, and became its largest shareholder. In addition, Hon Hai's founder, CEO (Chief Executive Officer) and Chairman Terry Gou invested 66 billion yen in Sharp Display Products (SDP), which operates the most advanced large-scale LCD panel manufacturing plant, Sakai Factory, and acquired 46.5% of its shares.

On June 8, Sharp held a business strategy briefing for the fiscal year 2012, and President Takashi Okuda discussed future strategies, including capital business cooperation with the Hon Hai Group. Okuda said, "Sharp is currently facing the following issues: (1) low competitiveness in the mass-market digital product field, and (2) deteriorating profits due to the low operating rate of the Sakai plant."

In terms of strengthening competitiveness in the digital product field, Sharp intends to cooperate with Hon Hai in the field of smartphones for the Chinese market, with Hon Hai responsible for mass-market popular products and Sharp responsible for high-end models.

In terms of increasing the operating rate of the Sakai plant, Hon Hai will start using LCD panels produced at the Sakai plant in the second quarter of 2012, three months ahead of schedule. This will allow the operating rate, which has now fallen below 50%, to rise to around 90% from the third quarter.

"Is it really okay to increase the operating rate?"
However, many market participants are skeptical about the increase in the operating rate of the Sakai plant. The report "Sharp, the Indelible LCD Risk" published on "Nikkei Business Online" mentioned that a foreign securities company believed that "I haven't heard that Sharp has received a major customer. In this case, is it really okay to increase the operating rate?" In the past, Sharp's management has made mistakes in forecasting the demand for large LCD panels many times, so market participants are skeptical about Sharp's judgment.

"Sharp, the Indelible LCD Risk" pointed out: "Assuming that 60-inch panels are produced at a 90% operating rate, according to simple calculations, by the end of fiscal 2012 (ending March 2013), the output will exceed 4.5 million units. In 2012, the consumer demand for 60 inches or more was about 1.6 million units. Even if Hon Hai's customers are included, it is difficult to fully digest the production capacity of 4.5 million units."

Although Hon Hai has decided to accept large LCD panels, can Hon Hai's customers alone consume these 4.5 million units? There is no reliable evidence on this point.

President Okuda emphasized that Sharp will separate the loss-making large LCD business from the main body to "overcome the biggest operating risk." The large-size LCD business will be transferred to Sharp Display Products Co., Ltd., which is controlled by Terry Gou, from July 2012, and about 1,300 people are expected to be transferred to the company.

While carrying out the above reforms, Sharp is also preparing to apply oxide semiconductor IGZO technology to medical devices and commercial products, and to develop high-value-added products such as high-precision image diagnostic monitors.

"Cooperate as friends and overcome difficulties together"

Sharp will receive a total of more than 130 billion yen in funds from Hon Hai Group and Terry Gou. For Sharp, which has interest-bearing debts of more than 1.1 trillion yen, this is a blessing in disguise. In fact, there is an unimaginable gap between Hon Hai and Sharp in terms of corporate scale. In terms of sales, Sharp is about 2.55 trillion yen, while Hon Hai is about 9.7 trillion yen; in terms of net profit and loss, Sharp has a net loss of 290 billion yen, while Hon Hai has a net profit of more than 210 billion yen.

Kenichi Ohmae pointed out, "From these operating indicators, it can be seen that the result of this third-party private placement is more like an 'acquisition' than a 'capital business cooperation'."

So, how does Terry Gou view the cooperation between Sharp and Foxconn? This website has a detailed interview. At the beginning of the interview, Terry Gou said: "I gave a 40-minute speech at Sharp's management meeting a few days ago, and conveyed to Sharp's senior management the idea that 'rather than being investors or business partners, we hope to work together as friends and overcome difficulties'."

In addition, Terry Gou also said in the interview that the Sakai factory "will definitely not lay off employees in the next three years", which also left a deep impression. At the end of the interview, Terry Gou confidently said, "I will do my best to make the cooperation between Foxconn and Sharp a success. This is not for money. I hope to verify my belief that if Sharp, Osaka, Foxconn, and Taiwan work together, it will produce very good results. Sakai International Corp. will become a window for Osaka's economic revival."

"Terry Gou is a very difficult person to deal with."

However, can these words really be accepted? Since the announcement of the cooperation in March, many Japanese media have reported on Terry Gou's "true colors".

One of the most interesting reports is the June 25th issue of the electronic version of the Nihon Keizai Shimbun, "Full acquisition, pressure from Hon Hai makes Sharp tremble." This report vividly describes how Terry Gou used various means to shake Sharp, and how Sharp was expecting but also uneasy.

Another side of Terry Gou shown in the article can also be seen in other reports. Ohmae wrote in his article "Hon Hai is actually "acquiring", will Sharp be willing to play a supporting role?" "It is well known that Terry Gou is a business operator with a strong personality. He is like-minded with the late Steve Jobs of Apple, and is not a simple person who will only follow Sharp." Other insiders also said, "As a

person who can make Hon Hai achieve such rapid development, Terry Gou is very difficult to deal with. There are probably only two ways left for Sharp, either to be acquired or to be abandoned after losing its function." Terry Gou has always said that

"Hon Hai and Japanese companies can defeat Samsung together", and his speeches always point the finger at South Korea's Samsung Electronics, which makes people feel that Terry Gou's ambition is actually to "defeat Samsung."

Not just large LCD panels and smartphones

Foxconn will not always be satisfied with its position as an EMS. They are likely to get involved in upstream R&D and design to create products that can sweep the world market.

In the interview mentioned above, Terry Gou also said: "The cooperation between Foxconn and Sharp will involve many products, including mobile phones, solar cells, and white goods such as air conditioners. We are in a dominant position in the personal computer industry, and this will also play a role in the white goods field."

After large LCD panels and smartphones, what will be Foxconn's next goal? Sharp's solar cell business is now in the red. In order to reorganize, fund raising may become a problem, and Foxconn will definitely not miss this opportunity.

Foxconn may also increase its investment in Sharp and Sharp Display Products Company in the future. For Sharp, which is being pressed step by step by the giant Foxconn, if it does not get rid of its loss situation and reduce its debt, the harsh battle will continue.