Sharp's Taiwanese savior in waiting shows off his Japan prize

TOKYO Wed Aug 29, 2012 5:16pm EDT

Hon Hai Precision Industry chairman and founder Terry Gou speaks during a news conference in Tokyo August 27, 2012. REUTERS/Toru Hanai

Hon Hai Precision Industry chairman and founder Terry Gou speaks during a news conference in Tokyo August 27, 2012.

Credit: Reuters/Toru Hanai

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TOKYO (Reuters) - Terry Gou, founder of Hon Hai Precision Industries, will show off an advanced LCD panel factory he jointly owns with Sharp to a delegation of fellow Taiwanese on Thursday that has become a symbol of how he may save the Japanese firm from the wreck of Japan's sinking TV industry.

Feeble demand that left the $4 billion plant operating well below capacity forced the maker of Aquos LCD TVs to post its worst ever annual loss last business year. But helped by recent orders won by Hon Hai, production at the plant in Sakai, western Japan, has surged, according to sources.

Gou, looking to further tap Sharp's expertise to produce more panels for Apple Inc's iPhones and consumer electronics, is on the cusp of sealing a deal that will make his company the biggest shareholder of century-old Sharp with at least a 9.9 percent stake.

But whether he makes the investment, Gou says, depends on the Japanese firm's willingness to heed his advice on how to restore profits.

"Just pure investment is not for me," Gou said on arrival at Tokyo's Haneda Airport on Monday before joining other Taiwanese businessmen and politicians visiting Japan.

"I don't think this is a good investment candidate without any kind of strategic cooperation to improve their productivity," he said, striding off to board a bus with his entourage for a ride into the city.

Hon Hai and Sharp may announce details of that investment as early as Friday.

The Taiwanese company agreed to pay 67 billion yen ($854 million), or 550 yen a share, for a 9.9 percent stake in March, but reopened talks in August to seek a lower price after the LCD TV pioneer's stock slumped to below 200 yen as mounting losses raised a question mark over its future. Sharp's shares closed almost 7 percent higher on Wednesday at 230 yen.

Hon Hai is expected to report this week a second-quarter net profit of T$10.03 billion ($334 million), according to the median estimate of 11 analysts by Thomson Reuters I/B/E/S, well below T$12.9 billion a year earlier and down sharply from T$14.92 billion in the first quarter.

The Taiwanese company has spent heavily on improving working conditions at its plants in China and hiking wages, resulting in a drop in operating margins.

REHABILITATION

Hon Hai, which Gou started four decades ago as a plastic parts maker, is hoping to get the technological know-how of Japan's leading panel maker to improve operating margins and boost its supply of panels to Apple.

For Sharp, the Japanese firm needs backup from Hon Hai to remain viable in the long term, say investors.

Sharp for now is relying on hundreds of billions of yen of fresh loans from its main banks, Mizuho Financial Group and Mitsubishi UFJ Financial Group, to pay its debts over the next year.

"They depend very much on Hon Hai," said Yuuki Sakurai, CEO of Fukoku Capital Management, an investment arm of Fukoku Mutual Life Insurance. "The role of the banks is to treat the disease, but the role of Hon Hai is to get it out of bed and running."

Sharp and other Japanese TV makers Sony Corp and Panasonic Corp, which ruled the global TV market in the 1980s and 1990s, have been battered by aggressive South Korean rivals Samsung Electronics and LG Electronics.

Combined, Japan's big three expect to sell 10 million fewer TVs in the year to March 31 than in the previous 12 months. Sharp is feeling the pain of that more keenly than its domestic peers because with fewer non-TV related businesses to fall back on, it has less scope to retool.

HON HAI LIFT

A Hon Hai lift is already being felt at the Sakai LCD plant, of which Gou owns 38 percent stake, putting his control of the facility on par with Sharp.

The factory produces credit card-thin panels of liquid crystal sandwiched between sheets of glass wider and longer than king-sized beds that are cut up to make TV screens.

With output running at levels as low as 30 percent of capacity, the factory was responsible for much of the net loss of 376 billion yen that Sharp posted in the last business year.

Output at Sakai jumped to 80 percent in August, helped by orders from Sony and U.S. TV maker Vizio won by Hon Hai, sources familiar with the orders told Reuters last week.

While Gou and Sharp have indicated that Hon Hai's stake in the Japanese company will not rise above the 9.9 percent agreed in March, Sharp's need for cash has nonetheless given Gou, a billionaire who owns a castle in Europe, a chance to carve out a bigger slice of Sharp.

The Japanese company, which takes its name from the ever-sharp mechanical pencil it invented a century ago, is considering selling TV plants in Mexico and China to Hon Hai as part of what could be a tighter partnership deal.

As the major shareholder in Sharp, which also builds screens for Apple's iPhone and iPad, Hon Hai will be concerned about the performance of the Japanese firm's other units, including its money-losing solar-panel business, profitable appliance division and printer unit.

Sharp so far has said that to return to health, it will lay off 5,000 workers, its first redundancies in more than 60 years. It may have to cut more, analysts say, if pressure from Gou adds to a similar push from lenders to do more to turn itself around. ($1 = 78.6750 Japanese yen)

(Additional reporting by James Topham, Reiji Muraiand Jonathan Standing; Editing by Linda Sieg and Ryan Woo)

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