During Sharp's shareholders' meeting on June 27th, the newly appointed CEO Po-Hsuan Wu (吳柏勳), who took the reins just last year, kicked things off with a contrite bow. "I sincerely apologize for the massive losses and the decision not to issue dividends," he said.

Sharp posted a net loss of 260.8 billion yen in fiscal year 2022, ending its six-year-long money-making streak. Hon Hai (Foxconn), which is a major shareholder with a 34% equity interest in Sharp, also took a blow. It suffered a loss of NT$17.3 billion from its investment in the first quarter of this year, which drastically caused  its profit to shrink by 68% quarter-to-quarter and reduced its single-quarter earnings per share to less than one dollar, the lowest in three years.

During Hon Hai's shareholders' meeting late in May, a Japanese investor addressed the elephant in the room: "Sharp is not doing well, what are your future plans for it?"

Hon Hai Chairman Young Liu (劉揚偉) replied that they had issued a formal request to Sharp asking it to explain its losses and propose a plan for course correction. If they're dissatisfied with the response, adjustments will be made to the management team.

Advanced LCD panels have become a millstone

The main reason for Sharp's losses came from its LCD panels business, which bled 188.4 billion yen due to asset devaluation. The LCD business covers the Kameyama and Hakushan Plants in Japan, which make iPads, iPhones, and MacBooks, and Sakai Display Products (SDP), which manufactures TV panels.

Both the Japanese media and Japanese investors lay the blame for the LCD business's asset devaluation at SDP's doorstep. Sharp insisted on reacquiring SDP last year, even as the panel market faced a downturn. Ultimately, SDP lost 36 billion yen in fiscal year 2022.

Located in Sakai City in the Osaka Prefecture, SDP was once considered the world’s most advanced panel manufacturer. When it was built by Sharp and Sony in 2009, it was the world's only 10th-generation LCD panel plant, capable of churning out the largest panels on the market. Hon Hai founder Terry Gou was very fond of SDP, going so far as to purchase a stake in it through his personal investment company, SIO International Holdings, in 2012 before he sold the shares to the Hong Kong-based private equity firm WPL.

Last June, Sharp bought back 80% of the shares from WPL through a stock swap, effectively turning SDP into its wholly-owned subsidiary. According to publicly available information, SDP incurred annual losses of 28.5 billion, 19.6 billion, and 102 billion yen in the three years from 2018 to 2020, respectively. Sharp had done the equivalent of attaching a millstone around its neck. People inside and outside of the company were understandably concerned.

The decision drew the ire of Sharp's shareholders during their last annual meeting, especially since then-president Tai Cheng-wu (戴正吳) was stepping down at the same time. Commonwealth Magazine witnessed first-hand the anger of an unnamed investor during last year's shareholders' meeting: "Was senior management really skipping town without an apology?"

Shareholders worried that turning SDP into a wholly-owned subsidiary would plunge Sharp's profits into the red. This is even more pertinent since the panels market took a turn for the worse in 2022, with the price tag on big-size TVs dropping by over 50%. SDP was having a hard time pulling through, and it was dragging Sharp down with it.

To appease his staff, Tai himself wrote an internal memo explaining the decision: SDP was like a child that Sharp had sent away to boarding school, "It makes sense to bring it back now that the financial situation is better."

A year later, Sharp's appalling losses justified its shareholders' concerns. It also fanned the flame of the Japanese investors' rage.

According to Asahi Shimbun, a Sharp stakeholder was quoted as saying that although the subsidiarization of SDP was probably legally sound, it resulted in massive losses. "There's no doubt that it was a grave error in operational judgment."

Why has the purchase of SDP failed to bear fruit?

In Sharp's own words, there were three major reasons why they bought shares in SDP.

The first was to make sure that Sharp's own TVs and display products had an advantageous source of LCD panels. The second was to help Sharp expand its display products into the metaverse and automotive electronics. The third was that SDP was the only 10th-generation panel plant outside of China. With China and the U.S. at loggerheads, it was a way to secure inroads into the American market.

A year later, these advantages have failed to pan out.

David Hsieh (謝勤益), Senior Research Director at Display Research, Omdia, points out that tension between the superpowers and the trade war have failed to affect display panels so far. U.S.-based TV panel manufacturers have not profited from the current political climate.

In addition, Sharp TVs have limited market share around the world, with around five million units sold every year. It's not enough to use up SDP's capacity, and so SDP still needs to sell its panels to other international TV manufacturers.

Non-standard sizes are the problem

But SDP's lead in the panels market is vanishingly small. First and foremost, its greatest challenge lies in the fact that the sizes of its panels are no longer mainstream.

Hsieh points out that panel plants adhere to the principle of economy when cutting large sheets into smaller panels. In other words, they cut in a way that delivers the highest number of usable panels out of the same sheet. 10th-generation plants like SDP cut in a way that yields 40, 60, and 70-inch panels.

However, the current mainstream TV sizes are 43, 65, and 75 inches, which are the economical ways of cutting for the 10.5 generation of panel plants. SDP has strayed from the mainstream, but it will drive up costs if it cuts in a way that's not economical. This is not to mention the fact that most 10.5-generation panel plants are based in China.

A Japanese industry analyst points out that as Chinese plants start to adopt new 10.5-generation technology, even big Chinese manufacturers like BOE Technology and TCL are experiencing oversupply.

"We need to ask ourselves, is Japan cut out for competing in the panels industry?" says the analyst.

In truth, demand for panels briefly overtook supply during the COVID pandemic, which boosted their asking price. And indeed, SDP posted 6.9 billion yen in profits in fiscal year 2021. But in 2022 and 2023, the market returned to being oversupplied. In the second half of last year, SDP's utilization rate dropped so low as to fall below 20%.

"SDP's investment is so large that it can't cover costs if utilization dips below 70%," says Hsieh.

Can a rebound in the panels market save SDP?

There is some good news: the TV panels market is rebounding. According to the market research company TrendForce, demand has been rising again for TV panels, and prices are improving. The forecast is that in the second quarter of this year, the utilization rate for LCD panel plants from the 5th generation onward will increase to 77%.

Hsieh feels that SDP's money troubles will change for the better as the panel market rebounds and utilization rates shoot up. But for it to get out of the red, it will also need to reorganize its product line. So long as SDP panels clash with mainstream products, it won't be able to raise its asking price.

Indeed, Sharp is shaking up its product lineup. According to its 2022 annual report, large TV-sized products made up 99% of SDP's panel output. In 2024, this ratio will drop to 40%, while the percentage of panels used in PC tablets and automotive electronics will increase.

During the shareholders' meeting, Wu stressed that this would be the year when they turn loss into profit. This is not only to placate Sharp's shareholders. The 800,000 investors with stakes in Hon Hai would hate to see the Japanese panel plant shrink Hon Hai's profits and cut into their dividends.

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Translated by Jack Chou
Uploaded by Ian Huang