HONG KONG, May 24 (Reuters Breakingviews) - Sharp (6753.T) has delivered a wake-up call to Foxconn. The $46 billion iPhone supplier, formally known as Hon Hai Precision Industry (2317.TW), rescued the Japanese electronics group in 2016 with a promise to turn it around. Sharp's surprise $1.6 billion writedown in the three months to March casts doubt on the Taiwanese group's grip on its investment - and its ability to strike similar deals.
Foxconn founder Terry Gou took a huge gamble on the Japanese technology icon. The $3.5 billion investment was meant to help the Taiwanese contract-electronics assembler compete with Sony (6758.T) and other consumer brands; Gou also hailed Sharp's display technology as superior to rival offerings from Samsung Electronics (005930.KS). Foxconn's turnaround efforts initially paid off: by 2018, Sharp was back in the black.
Yet Sharp's unexpected first annual net loss in six years raises awkward questions. The Japanese company’s equity value is now just $4 billion and it has delivered a total shareholder return of minus 26% since Foxconn took charge; Japan’s benchmark Topix Index (.TOPX) has returned 96% over the same period. Moreover, analysts estimate assembling iPhones and other Apple (AAPL.O) gadgets still brings in more than half of Foxconn’s annual sales.
The Taiwanese company’s relationship with its Japanese offshoot is also opaque. Sharp's latest financial woes stem from a display subsidiary it acquired last year. Some Japanese board members opposed the deal but were ultimately overruled by Foxconn, Nikkei reported on May 11, citing sources. The troubled unit was once a joint venture between Sharp, Foxconn and an entity tied to Gou.
Foxconn insists that it does not have a majority vote in the Japanese company, which operates independently. Yet filings show that as of March 2022, Foxconn and its affiliated companies held a combined 52.6% stake, though that has probably come down since.
The Sharp mess is more than a historical embarrassment, as Foxconn is now boldly diversifying into electric vehicles. Boss Liu Young-way, who took over from Gou in 2019, has been striking deals and partnerships in the United States, Thailand and elsewhere in a bid to become a manufacturer of cars, as well as the chips and batteries that go into them, for global automakers. One of those deals is already souring. Last November, Foxconn agreed to buy a near-20% stake in U.S. electric truck maker Lordstown Motors (RIDE.O). The two sides are now in bitter dispute and the cash-strapped upstart has warned it might be forced to file for bankruptcy. Foxconn's dealmaking is looking less than sharp.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)
Taiwan's Foxconn, formally known as Hon Hai Precision Industry, on May 11 reported net profit of T$12.8 billion ($417 million) for the three months to March, a decrease of 56% from a year earlier. The company attributed the slump to a non-operating loss of T$19.7 billion related to its 34% stake in Japanese electronics maker Sharp.
Foxconn said it would seek an explanation from the Japanese firm and "work harder on the management of our investment businesses", adding that it would ask Sharp to "adjust its management team" to improve operations if needed.
Sharp reported a 220-billion-yen ($1.6 billion) impairment loss in the quarter, mostly from buildings, machinery and goodwill relating to display businesses.
Editing by Peter Thal Larsen and Thomas Shum
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Robyn Mak joined Reuters Breakingviews in 2013. Previously, she was a Research Associate for the Global Policy Programs at the Asia Society in New York where she focused on US-Iran relations, US-Myanmar relations and sustainability issues in Asia. She has also worked as a researcher at the Carnegie Endowment for International Peace in Washington DC and interned at several consulting firms, including the Albright Stonebridge Group. She holds a masters degree in international economics and international relations from the Johns Hopkins School of Advanced International Studies and is a magna cum laude graduate of New York University.