Can Sharp Pull Out of Its Nose-Dive?

Two Reasons for Sharp’s Woes

Sharp once led the world in development of liquid crystal display panels and solar cells, and was the first company to commercially produce LCD televisions. But this one-time industry leader is now on the brink of bankruptcy. After posting combined net losses of over ¥900 billion for fiscal 2011 and 2012, it set about major restructuring in an attempt to turn around its fortunes, but recorded another ¥222.3 billion net loss in fiscal 2014, sending its planning team back to the drawing board. On May 14, Sharp announced a new medium-term management plan, which aims to get the company back on its feet again over the next three years.

There are two main reasons for Sharp’s continuing troubles. One is placing too much confidence in its own technology. The company’s self-indulgent delusion that it could not possibly be matched by rivals led to the belief that it could develop its business at its own pace. The second is the gap that emerged between Sharp’s unexpected growth and the effectiveness of its management team. The company proved unable to find top managers capable of handling the increased diversity and complexity of a larger organization.

Both of these are common pitfalls for Japanese manufacturing companies. The naive idea that excellent products are all that a firm requires to beat the competition fosters a tendency to downplay the importance of market needs and the movements of rivals. And because it is usual for executives to be selected from within after they have boosted performance in one particular division, it is difficult to cultivate managers who can skillfully steer a company as a whole. When these two factors combine, it becomes impossible to respond nimbly to changes in the competitive environment and the company sinks into a mire of worsening performance. Sharp is a prime example of this.

Bad Timing

Unwise investments caused Sharp’s fiscal 2011–12 losses of over ¥900 billion. In 2004, it built a huge LCD panel plant in Kameyama, Mie Prefecture, before adding a second plant in 2006, bringing total spending on this capacity to more than ¥400 billion. “Kameyama model” LCD televisions became a hit product and were for a time the top seller on the domestic market.

In 2007, Katayama Mikio was appointed president of Sharp, having risen through the ranks in the company’s LCD business. At 49, he was then the youngest member of the Sharp board. One of his first decisions was to plow ¥430 billion into a new production complex in Sakai, Osaka Prefecture. This consisted of a cutting-edge LCD plant, which could effectively produce large-scale LCD panels for 60-inch televisions, and the world’s largest solar cell plant. It was completed in 2010.

But as the global financial crisis worsened through 2008 and 60-inch LCD TVs did not sell as well in the United States as Katayama had planned, the bad timing of the move became apparent. With Samsung and others taking advantage by supplying consumers with midsize TVs, Sharp was left with a mountain of unsold stock. Inventory disposal and decreased operating rates caused the red ink to swell rapidly.

The decision to focus on jumbo televisions was also based on the tendency for sets to increase in size as they become more high-tech. Sharp’s fixation on technology fostered the mistaken belief that consumers were sure to line up for large-screen TVs with crystal-clear pictures.

In its excessive focus on technological advantage, Sharp sought to prevent leaks at its Kameyama plant. Visiting suppliers of equipment and materials were made to wear bibs, keeping them clearly visible as outsiders, and monitored carefully to ensure they remained within designated areas. This “black-box” strategy aimed to maintain Sharp’s technological edge. In the end, though, these measures could not stop Korean and Taiwanese manufacturers from moving ahead in the marketplace.

Management Confusion

In April 2012, Katayama left the president’s office to become chairman and was replaced by executive officer Okuda Takashi. Ballooning losses forced Katayama to relinquish control unexpectedly early, thrusting Okuda suddenly onto center stage to restructure the company. But with his experience confined only to LCD televisions and overseas business, Okuda was soon at a loss.

Following the announcement of these changes in the previous month, Machida Katsuhiko, the outgoing Sharp chairman who made the company a global power through LCDs, led negotiations for a capital and business alliance with Taiwan’s Hon Hai Precision Industry (which trades as Foxconn). Katayama was also involved in setting up the alliance, which sought to rebuild Sharp’s LCD business. Negotiations later ran into difficulties, though, and Hon Hai did not invest in Sharp directly. Machida, meanwhile, remained involved in discussions between the companies even after resigning as chairman in April. As Katayama, now chairman, dashed around in search of further foreign capital, the company entered a period of confusion in which it was not clear who was really in charge.

Unable to find a way out of the mess, in June 2013 Okuda resigned as president to become nonexecutive chairman, having served for a year and three months. Sharp’s current president, Takahashi Kōzō, was appointed at this time. He immediately announced a medium-term plan to dig the company out of crisis by fiscal 2015. Takahashi compared the plan to a “mortgage” by which Sharp was able to secure bank financing. But this plan, too, failed after just two years.

Temporary Recovery

The changes made to reduce costs included granting voluntary early retirement to 3,000 employees and curbing wage increases. But this did not amount to the drastic structural reform that was required. Sharp continued to rely on its erratically performing LCD division and maintained the perennially unprofitable structure of its solar cell business. Takahashi, with no experience of overseeing Sharp’s LCD or solar cell operations, left management of these areas to other executives.

The new plan got off to a solid start, as Sharp’s fiscal 2013 figures surpassed planned targets. But they took a turn for the worse in the second half of the following year. The early numbers were boosted by strong performance for the key LCD division, accounting for 30% of the company’s total sales, as it switched to producing small and mid-size LCD panels for smartphones and tablets, for which there is a relatively high profit margin.

The meteoric growth of Chinese smartphone maker Xiaomi fuelled demand for these smaller screens, giving Sharp’s LCD business a major fillip. It appeared that Sharp had a chance at rapid recovery thanks to this chance to ramp up production of high-margin LCD panels.

Beginning in the second half of fiscal 2014, though, Xiaomi orders fell and the price of panels dropped. This came about because Sharp was losing a battle with Japan Display Inc. over both cost and performance. JDI, a joint venture based on the merger of LCD divisions from Sony, Toshiba, and Hitachi, offered a panel with integrated touchscreen functions.

Sharp’s LCD panels, meanwhile, still required a touchscreen to be attached externally. The company sped up development of an integrated panel, projecting it would be able to start supplying it to customers by June 2015, but paid a massive penalty for falling behind. Despite its confidence in its technology, Sharp has often been slow to complete saleable products. It was beaten to the punch by Samsung in the commercialization of LED-backlit LCD panels, which are now standard, and was also late to get started on ultra-high-definition 4K television sets.

Chief Technology Officer Mizushima Shigeaki states: “Sharp is the world leader in LCD development. This is because we have many brilliant technicians with almost forty years of development experience.” But because it does not pay attention to market movements, the company fails to convert this technological capability into commercial success.

The New Plan: Too Superficial?

At Sharp’s May 14 press conference, Takahashi announced that the company aimed “to secure a stable profit base through drastic structural reforms.” But his words are contradicted by the new medium-term management plan, which fails to address the company’s business structure.

The plan’s main points include recording impairment losses on facilities that are not expected to recover their costs and setting aside reserves to cover the gap between the high contracted purchasing price and the current market price of polysilicon for solar panels. Sharp will also offer voluntary retirement to 3,500 Japanese employees, cut its global workforce by 10%, and sell its head office. In other words, it will cut mainly fixed costs and postpone getting to grips with structural issues.

Sharp’s fiscal 2014 consolidated balance sheet saw a 4.8% year-on-year decrease in sales to ¥2.8 trillion, an operating deficit of ¥48.0 billion, and net losses of ¥222.3 billion, including impairment losses. Shareholders’ equity ratio plummeted to 1.5% from 8.9% at the end of the previous fiscal year. On a consolidated basis, the group boasts net assets of ¥44.5 billion, but Sharp on its own is nearly ¥6 billion in the red.

Following approval at the June shareholders meeting, Mizuho Bank and the Bank of Tokyo-Mitsubishi UFJ will write off ¥200 billion worth of loans in exchange for preferred shares in a debt-for-equity swap. The investment fund Japan Industrial Solutions will also purchase ¥25 billion of preferred shares. Sharp will then dramatically reduce its capital by 99.8%, to just ¥500 million, in order to clear away accumulated losses. But even if these contrivances succeed in clearing away the red ink on the company’s books, it will remain in dire financial straits.

Sharp’s Position Under Threat

Takahashi will continue to lead Sharp as president, with his ally Mizushima becoming chairman. Ōnishi Tetsuo will leave the board to oversee reform of the company’s LCD business, but still hold office as executive vice president. Meanwhile, Hōshi Norikazu and Nakayama Fujikazu will take responsibility for Sharp’s poor performance and retire from their positions as directors.

At the May 14 press conference, Takahashi also stated: “I will lead with unflinching determination, working together with all employees to implement the new management plan.” But it will not be enough simply to reshape two business groups into five independent companies. It is questionable whether it will be possible to effectively manage the LCD and solar cell businesses with limited capital in markets where it is increasingly difficult to gain a competitive edge. If the volatile LCD industry takes a downturn, any gains could be wiped out due to the scale of Sharp’s investment in this area.

What Sharp needs is the kind of thoroughgoing reform that is not found in its management plan. This includes deciding what to keep as its core business and selling the divisions it cannot maintain or opening them up for mergers with other companies. By ducking the major surgery it requires, Sharp seems to have little inclination to hold its place as an established presence in the electronics industry.

(Originally written in Japanese and published on May 20, 2015. Banner photo: Sharp’s head office in Osaka’s Abeno Ward will be sold as part of restructuring plans. © Jiji.)

▼Further reading

Sony Downsizes its Ambitions (March 2015)

What the Sharp-Foxconn Tie-up Suggests (December 2012)