Sharp Corp decided to shift its front-end process of LCD panels and solar cells to overseas (outside Japan) through joint ventures with local companies "as if the company is selling its entire front-end process." Sharp President Mikio Katayama made this announcement at its business strategy meeting.
"We have come to a situation where we can no longer maintain the profit of our business based on the business model of exporting devices from our plants in Japan, even if they are state-of-the-art products," Katayama said.
Therefore, Sharp will employ a policy to establish joint ventures with local companies and earn profits from dividends and fees for its production technologies provided to them (See related article).
"As long as we are changing our current business model, our business will no longer be vertically integrated," Katayama said.
The launch of the business to sell its production technologies, which Sharp refers to as "engineering business," is a major strategic change for Sharp. It means that the company will abandon the "vertically-integrated" business model centering on its expertise in large LCD TV panel production technologies, which Sharp has kept secret as "secret sauce."
At its large LCD TV panel plants, Sharp has pursued a greater range of "vertical integration" not only by manufacturing from panels to TV sets but also by making its component and material manufacturers involved and manufacture their products at its production bases (See related article 2). And, the company has built up its expertise through this system.
To the contrary, it is clearly stated that Sharp will procure components and materials from local suppliers in the basic scheme of the engineering business disclosed by the company.
Sharp seems to assume that local companies will provide the majority of capital for its overseas joint ventures. In that case, decision making, which Sharp has done alone thus far, will become difficult, and other new issues might affect its business operation.
"So far, Sharp has constructed its plants using its own capital and sold products manufactured in house," Katayama said. "I feel that the limitations of such a business model resulted in the latest downturn in our earnings. That's why we decided to start the engineering business. And Sharp itself has to radically change to succeed in the new business."
Katayama has been considering the previous business model of exporting products from Japan as a disadvantage in competition with overseas rivals in terms of exchange rates and infrastructure costs, including labor costs, he said.
"Sharp can overcome such a disadvantage through local production because our production technologies are fairly competitive," Katayama said, indicating his confidence that the company will keep the upper hand in terms of production technologies even if its rivals start local production too.
Sharp explained other benefits of its engineering business and how it is planning to recoup its investment as follows.
Lower exchange risks, a measure against the block economy and lower investment risks
- Investment return
Substantially, Sharp will make no initial investment in a joint venture by setting the value of its investment equal to the fee for its technologies. And, once the joint venture starts production, Sharp can earn fees for its technologies, dividends and gross profits from sales, etc, from the first year.