Why would Hon Hai, also known as Foxconn, make its biggest bet in Japan ever by buying a 10 per cent stake in flagging television-maker Sharp? Terry Gou, founder and chief executive of Hon Hai, who is even putting up his own cash to fund the deal, is being clever.
The world’s biggest electronics maker (and a main assembler of Apple’s products) needs Sharp’s television technology. The deal gives Hon Hai direct access via an agreed co-management of Sharp’s Sakai LCD panel plant. Sure, the factory is operating at half capacity because there is an oversupply of large screen displays and demand has been falling. But this is a long-term defensive move for Mr Gou. By making iPhones and iPads, Hon Hai depends on Apple for two-fifths of its sales. In iPhones, however, the Taiwanese company now faces competition from another local electronics maker, Pegatron. Although Hon Hai’s relationship with Apple has been driving strong revenue growth, dependence on one client carries risk. And sales growth has been moderating – the compound annual growth rate of Hon Hai’s revenues has halved to 20 per cent over the past five years compared with the five years previously.
Televisions are a good hedge. Hon Hai has already bought up most of Sony’s TV assembly business and now makes about 6 per cent of its revenues assembling TVs for the Japanese company. Hon Hai also has a stake in Taiwanese TV panel maker Chimei Innolux. But the latter lacks the superior technology of Sharp in panel-making. The Sharp deal offers the missing link. And if Apple does decide to launch its much touted iTV, Hon Hai with its long-term relationship would be well placed. Mr Gou might have paid an 11 per cent premium to Tuesday’s closing price for his stake in Sharp, but shares in Sharp are at a 30-month low. The deal makes sense.