Sharp-Hon Hai Deal Sparks Optimistic Outlook For Japanese Manufacturing Industry

Investors pounced on Sharp Corp. (IW 1000/120) March 28, embracing the news that the Japanese electronics giant had penned what one analyst described as a "win-win" deal with Taiwan's Hon Hai Precision (IW 1000/25).

The stock surged 15.15 percent following Tuesday's announcement of an $808 million cash injection from the parent company of Foxconn, which assembles Apple (IW 500/14) products in China.

Sharp remained bid-only and limit-up at 570 yen throughout the day's trading on the Tokyo Stock Exchange, with buyers clamoring for a slice of the action on news that Hon Hai will pay a premium to become its biggest shareholder.

Under the deal, Sharp will sell 121 million new shares worth $807 million to Hon Hai, which will also take half of its 93.0 percent interest in a huge LCD plant in Sakai, western Japan.

Analysts said this kind of deal was the best way for Japan's electronics sector to haul itself out of the dire straits in which it is languishing.

Once-proud Japan Inc. faces a double-whammy, losing manufacturing work to rising Asian rivals, and falling behind American competitors on the cutting edge of gadgets and software.

It is rare for a major Japanese electronics maker to give up a big stake to foreign companies, but the deal is in line with an increasing trend in which Japanese firms seek opportunities to work with energetic Asian businesses.

Last year, NEC integrated its personal computer business with China's Lenovo, which purchased IBM's (IW 500/8) computer-making operation in 2005.

Chinese appliance maker Haier paid Panasonic (IW 1000/30) for the washing machine and refrigerator business of its subsidiary Sanyo (IW 1000/200), which allowed the Japanese conglomerate to focus on speciality areas such as high-end batteries.

The latest deal is a "win-win" for Sharp and Hon Hai and should serve as a "much needed remedy to an unhealthy panel industry," said Diana Wu, a tech analyst at Capital Securities.

"Sharp not only raised funds through selling its stake to Hon Hai, but can lower manufacturing costs in the future," she told Dow Jones Newswires in Taipei. "HonHai, on the other hand, is expected to receive more TV orders from Sharp to increase its market share."

Japan's electronics giants have suffered deep losses, partly due to their unprofitable television units as the strong yen makes their products more expensive overseas and tough competition from foreign rivals, including South Korea's Samsung, lowers prices.

They are also beset by the relatively high cost of labor, electricity, imported fuels and raw materials -- all putting them at a disadvantage.

Japan's politicians are also blamed because of the paucity of free trade deals they have managed to sign, while regional powers such as South Korea have aggressively sought pacts that allow their exporters much greater reach.

Sharp's incoming president Takashi Okuda told a news conference March 27 that it has become difficult for his firm to stay competitive while continuing to do everything by itself, from design to procurement to manufacturing to services.

"We wanted to go beyond national borders and seek opportunities to expand our business," he said, stressing that Sharp possesses unique technology that should help growth.

But the very task of innovation has proven frustratingly difficult for Japanese firms to perform, said Nobuo Kurahashi, analyst at Mizuho Investors Securities.

"The [Hon Hai] deal allowed Sharp to get out of the short-term crisis," he said, but it could present a risk in the long run of losing the manufacturing finesse that added unique value to Sharp products.

"They have to turn the sophisticated technology into value-added products and services. Unless they find a way to do that, foreign rivals will catch up before they enjoy the fruits" of their technology, he said.

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