A struggling Sharp Corp. has reached a crossroads as it will soon need to decide what to do with its signature LCD business.
Media outlets recently reported that Innovation Network Corporation of Japan (INCJ), a government-backed fund, is trying to talk Sharp into splitting off its money-losing LCD division and merge it with LCD joint venture Japan Display Inc.
If realized, it would turn all-Japanese Japan Display into a major global panel maker.
Yet experts have warned that merging with Japan Display will not be easy and may not be the best answer for Sharp. While it may improve the Osaka-based firm’s earnings in the short term, it could impact it negatively in the long term.
In addition, the size of the new entity might raise antitrust issues in some countries, and such a move could saddle it with too large a workforce and excess production capacity, they said.
“If Sharp’s LCD sector merged with Japan Display, it would be too big … they have some overlap that would have to be streamlined,” said Yasuo Nakane, a senior analyst at Mizuho Securities. “In that case, it would cost money to cut jobs and report a post-impairment loss if they closed some factories.”
Japan Display, established in 2012, was formed by combining the display divisions of Hitachi Ltd., Sony Corp. and Toshiba Corp. into one entity.
At that time, Sharp was reportedly asked to join the alliance, but declined. Given the firm’s recent troubles, the idea is once again being floated.
In May, Sharp expected to report a ¥45 billion operating profit from its LCD panel business, but was forced to revise that number downward in October to a ¥30 billion loss due to increased competition in China on production of LCD panels.
INCJ, the biggest shareholder in Japan Display, has been talking with Sharp about its LCD business.
The government, through the fund, is reportedly trying to get Sharp to merge its division with Japan Display because it wants to prevent the company’s technology from going to foreign competitors such as Taiwan’s Hon Hai Precision Industry Co. Hon Hai has expressed interest in the LCD division.
Japanese national broadcaster NHK reported Tuesday that Hon Hai has proposed several deals, including acquiring Sharp itself.
Analysts believe Hon Hai, also known as Foxconn, the company that assembles Apple’s iPhones and iPads, wants Sharp’s LCD panel business because the cutting-edge LCD technology would increase the value of its own products.
Sharp’s technology could help rivals compete with the Japanese alliance, which is why such a deal overseas would also pose a threat to Japan Display’s business.
Nakane said even though their combined shares of LCD panels for in-vehicle products might trigger antitrust concerns in China and Europe, they could command more of the segment if merged.
There would be other synergies, too, he added. For instance, Japan Display has a low-temperature poly-silicon technology that can create small, high-resolution displays, while Sharp has its IGZO technology to produce energy-saving midsized panels.
Another analyst who declined to be named questioned the benefits of the deal.
“I feel that it would only help Sharp and there is no merit to the tie-up for Japan Display,” the analyst said, adding that the fundamental problem with Sharp’s LCD business is its production facilities, especially its Kameyama No. 2 plant in Mie Prefecture.
The plant was originally built to manufacture TV panels with large glass screens. But it is now also making smartphone displays due to rising demand in recent years from the phone manufacturing industry.
According to the analyst, the excessive supply capability for the production of smartphone displays will only burden Japan Display if the merger takes place.
He, too, noted the antitrust issues that could arise overseas.
Meanwhile, Nakane also noted that one of Sharp’s strengths is its ability to develop innovative products using its LCD technologies.
For example, the company was the first to develop a cellphone with a built-in camera.
If it loses the LCD business “the firm would face the risk that its products, such as TVs and smartphones, would lose their competitiveness in the medium and longer term,” Nakane said.
Nakane also asked what Sharp’s signature businesses would be if the LCD division were to be cut. While its LCD business is currently struggling, it still accounts for about one-third of sales and is key to Sharp’s brand image.
Nakane said Sharp’s business solution sector, which includes printers, is stable, but that it is not big enough to compete with major rivals, such as Canon.