WitsView: Hon Hai Establishes Strategic Partnership with Sharp with Promising Prospects

According to WitsView, TrendForce’s display research division, the earlier merger between CMO and Innolux announced in November 14, 2009 was expected to encourage the lackluster Taiwan panel industry. However, due to varying internal opinions toward major operation strategies, CMI’s performance proved to be not as well as anticipated.    

Hon Hai defended the merger idea initially; however, while facing the potential cooperation between AUO and CMI, Hon Hai promptly decided to have Innolux to merge with CMO, ranked 4th in terms of the global TFT LCD panel makers, through a share exchange based on long-term strategic considerations. However, when the EU hit CMI with 0.3 billion Euro penalty due to antitrust law violation in December 2010, Terry Gou was unaware of this situation prior to the official announcement. Thereafter, CMI and Hon Hai’s diverging stance towards resolving the penalty situation caused inherent breach in their future collaboration.

Moreover, since Hon Hai holds less stock shares than Chimei Group, Terry Gou’s operation strategies faced impediments internally within CMI. For instance, originally Hon Hai intended to spin off “mid-to-small panel”, “touch”, “large-sized panel” and “set OEM” business among CMI’s current organization, but the plans were challenged by CMI. At the same time, Sharp’s aggressive interaction with Hon Hai urged their strategic partnership officially on March 27, 2012.     

Although Hon Hai places great emphasis on strategy and cost efficiency, CMI’s performance after the merger was not on par with Hon Hai’s expectations. Despite global economic downturns, Hon Hai continues to receive orders and remains Apple’s preferred strategic partner. Following the spin-off failure, the Hon Hai’s founder Terry Gou actively pushes forth his “Eyeball” strategic plans, including plants in Chengdu, China and Brazil. Moreover, he also established an “Eyeball” business group consisting of Xincheng, Yecheng, Yexin, Ruizhida Photoelectric and Tianyi in the hope to establish vertical integration in this field; however, this arrangement continued to lack technical capabilities.

As such, WitsView research director, Burrell Liu indicates that Hon-Hai and Sharp’s collaboration are based on the following considerations:
1.    Sharp can provide support for Oxide and UV2A technology.  
2.    Mutual Business Support:

A.    Sharp will release more TVs OEM orders to Hon-Hai, creating greater cost effective edge for its TV production line.
B.    Hon Hai has solid relationships with SONY and Vizio and possesses strong export outlets, allowing Sharp to have greater sales outlets for Sharp’s panels.
C.    Sharp can benefit from Hon Hai’s China sales channel, thus expanding its market scale.
D.    Hon Hai, Sharp and Apple have tight-knit supply chain relationship for smartphones and tablets. With this further collaboration, it is likely that they will continue to work together on i-TV, which is expected to be equipped with high resolution.
E.    Hon-Hai’s financial support will alleviate Sharp’s financial pressure.
F.    The collaboration is also another gradual step towards Terry Gou’s strategic plan of joining forces with Japan to compete against Korean makers.

Hon Hai’s recent announcement on March 27 indicated that it will also continue to purchase expanded capital stocks from CMI in the next 3 years. WitsView indicates that the move is more of a symbolic support for CMI since it purchased NT$2.7 billion CMI shares while its investment in Sharp reached NT$47.3billion in stark contrast.