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The Latest Strategic Investment in Sharp is Eye Opening for Apple

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Supply Chain Matters has often reinforced the importance of identifying and investing in key strategic supplier relationships.  Investing takes on many dimensions including co-innovation in product and component development, deeper collaboration in business processes, and sometimes financial investments to insure longer-term continuity of supply.

We have provided through our various blog commentaries some specific industry examples of such investments.  One that has been of high interest in the high tech and consumer electronics sector is that of Sharp Corporation, a television and LCD display supplier that has pioneered in LCD screen based technology, the latest being the use of high resolution indium gallium zinc oxide screen technology (IGZO) that is thinner and less power consuming than conventional displays. The significance was rather important since Sharp supplies LCD displays to a number of prominent high OEM’s including Apple.  Sharp is second to LG Display as a supplier of LCD displays for Apple including the supplier for the iPhone 5 screen. However Sharp ran into initial production ramp-up difficulties with this new technology, causing some drag to Apple’s supply chain momentum in Q4.  A report in September indicated that a shortage of the new and larger LCD displays, and the lack of contribution from specific supplier Sharp, may have cost Apple a million or more in initial sales.

Sharp literally reached the precipice of imminent bankruptcy before a rescue came forward. In early November 2012, Sharp forecasted a near doubling of operating losses to $5.63 billion and was struggling to make some form of operating profit to justify a bailout from either Japanese banks or key customers. In order to secure fresh working capital loans, Sharp was compelled to mortgage most of its offices and factories in Japan, including the specific factory producing LCD displays for Apple’s iPhone and iPad.

Earlier in 2012, there were many business and social media reports indicating that Hon Hai Precision Industry Corp., the parent of global contract manufacturer Foxconn, was prepared to take an equity stake in Sharp’s LCD development and factory operations, but with implications that Hon Hai would become Sharp’s largest shareholder and have the ability to assume some strategic management control of Sharp.  The implication was that Apple, through its relationship with Hon Hai and Foxconn, was willing to invest in Sharp’s longer term supply, but that component strategies would cede to Hon Hai.  The Hon Hai investment did not occur in 2012, because of Sharp’s deteriorating stock price and the threat of too much outside control.

In December, Qualcomm, who produces communications microchips for Apple’s mobility products agreed to invest $120 million in Sharp, including ownership of up to 5 percent of Sharp stock.  Reports indicated that the two companies would collaborate on developing even newer next-generation displays for mobile phones and tablet computers, while the new cash infusion would assist in ramping up IGZO display production. Qualcomm also acquired start-up LCD supplier Pixtronix, and the Sharp investment deal calls for an exchange of technology with Sharp. It seemed as though Qualcomm was a more suitable strategic partner.

This week features an even more interesting and thought provoking announcement indicating that Apple rival Samsung will itself provide a $110 million lifeline investment for Sharp. The deal is reported to provide Samsung with a 3 percent stake, along with gaining access to IGZO and other technology.  According to a published Reuters report, this is the first time Samsung has taken an equity stake in a Japanese based rival.  The byline headline for the Reuters report is that this deal could check Apple’s influence at Sharp. Reuters notes: “Although Sharp is one of Samsung’s smallest suppliers, its importance to the Korean company will likely grow as demand for large-screen TV’s over 60 inches burgeons, analyst say.”  That in our view is a rather important indicator.  Keep in mind that there have been continuous rumors and reports indicating that Apple is working on a new breakthrough dimension of Apple branded televisions. Samsung’s investment in Sharp may tap some future large screen LCD capacity or yield more favorable pricing.

The Reuters article further speculates that this strategic investment in IGZO screen technology will allow Samsung to concentrate on its own existing OLED screen technology for both mobile devices and televisions, without having to invest additional capital investments in alternative display technology.

Reuters quotes a Hon Hai spokesperson as indicating that the Samsung deal would not alter that company’s relationships with Sharp on LCD screen products, and that the previous added investment talks were continuing.

An even more interesting perspective came from Taiwan based DigiTimes which speculated that the latest Sharp investment deal may imply that a previous alien Foxconn-Samsung may be realized in the future. That speculation really captured this author’s interest.

Thus Sharp, a supplier that was on the financial brink is now infused with cash from a set of new investors with different strategic supply goals. The strategic picture 6-12 months ago is now dramatically different with far more interesting scenarios, including supply to another huge global supply chain.

The takeaway for sourcing, product management and procurement teams, especially those in the high tech sector, is fairly obvious.  Suppliers need to be evaluated not only on their current financial health, or opportunistic pricing, but on long-term market and product technology strategy needs.  Your reluctance to invest could be trumped by an industry competitor who views a pearl in a bed of oysters.

Bob Ferrari

 

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