The on again, off again proposed acquisition of Japan based Sharp Corporation by Foxconn Technology Group is as of today, reported as off again. Thus, a multi-year saga continues.

Yesterday, Sharp’s board of directors reportedly approved the acquisition plan which made headlines in social and traditional business media. Today, however, Foxconn indicated it is delaying the signing of the definitive agreement because of last minute disclosures by Sharp of a 100 item list of “contingent liabilities”. A published report in today’s edition of The Wall Street Journal cites informed sources as indicating that Foxconn received this contingent liabilities list consisting of ¥350 billion yen of costs that the company might face in the future related to either outstanding lawsuits, accounting changes, supply contracts or other uncertainties.

In a prepared statement to the WSJ, Foxconn indicated it hopes to clarify the newly disclosed information quickly and bring the proposed acquisition to a successful conclusion. Sharp has reportedly declined to comment to the WSJ and other publications on Foxconn’s latest statement.

The stakes are obviously high in this proposed acquisition. As noted in our most recent posting, LCD screen suppliers such as Sharp have extraordinary challenges. The need for production innovation is relentless, the cost of capital is expensive and yet supply often exceeds demand, eroding abilities to maintain prices that insure adequate profitability as well as new investment needs. LCD screens account for a considerable amount of COGS not only in smartphones and tablets, but increasingly in other products that want to cater to needs for enhanced user interaction.

Customers such as Apple exercise bargaining power by multi-sourcing component supply contracts. In the specific case of Apple, Sharp represents one of three other suppliers of LCD screens.  The other reported bidder for Sharp was the state-directed Innovation Network Corp of Japan, which controls one of the four Apple LCD suppliers, Japan Display. In its reporting today, The WSJ quotes an academic professor at Waseda Business School opining that Apple would likely not desire that Sharp and Japan Display join forces because it will diminish bargaining leverage on price and other supply conditions.

There are other more strategic far reaching implications for Foxconn as well. A recent commentary published by The Economist (Paid subscription required) observes: “At face value, there is little sense in the $5.6 billion proposal by Foxconn, the world’s largest contract electronics manufacturer, owned by Hon Hai of Taiwan, to buy Sharp of Japan.” While the commentary also cites the increased bargaining power with Apple to the advantage of Foxconn, it cites a broader strategy implication, a risky attempt to reinvent a business model.

If Foxconn could design and sell its own devices under Sharp’s globally recognized name, it could at least keep the brand owner’s margin for itself.”

The commentary further points out that in acquiring Sharp, Chairman Terry Gau gets the opportunity to exercise his grand “eleven screens” strategy, which opens the possibility that Foxconn assumes the dominant supplier position of advanced high-tech displays of broader industry products from computers, to automobiles to industrial devices or smart watches.

That ladies and gents is the mother lode insight- the ability of the world’s largest contract manufacturer that continues to have to deal with the slimmest of margins from high tech and consumer electronics equipment OEM’s , having the opportunity to diversify both up and down the value chain. This author wrote of that possibility several years ago and since then, others have joined in predicting the inevitable, namely that the CMS model could evolve into the designing and selling of owned products under a recognized brand, or in becoming the leading-edge, preferred supplier of advanced LCD screens.

Our sense, for what’s it’s worth, is that Foxconn will go-forward with its acquisition despite last-minute financial concerns because the strategic high tech value-chain opportunities are bold and reflect the visions of industry icon Terry Gau.

Time will tell how the saga of Sharp and Foxconn transpires and what it eventually leads to

Industry supply chain strategists should obviously continue to monitor events such as these since the traditional contract manufacturing business model is about to change.

It is inevitable, and OEM’s need to be prepared to deal with the potential consequences.

Bob Ferrari

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