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Sony and Sharp Deny their Panel-Making Relationship Has Gone Flat — But It Has

November 30th, 2010

Two days ago, The Yomiuri Shimbun reported that Sony Corporation will abandon its plans to jointly produce LCD panels for TVs with Sharp at Sharp’s Gen 10 factory in Sakai, Osaka Prefecture. Instead, Sony will increase its procurement of low-priced Taiwanese panels to 50% of its total procurement from the current 30%, the Japanese newspaper reported, citing comments Sony officials made on Saturday.

The continuing strength of the yen has made it difficult for Japanese manufacturers to compete on price. The Sony officials said the decision was motivated by a belief that the yen will remain strong for an extended period of time, as well as the difficult global economy, according to The Yomiuri Shimbun.

Sony and Sharp originally planned to establish a joint venture to operate the Sakai plant in 2008, but then delayed finalization because of the global economic crisis, and finally reached an agreement in July 2009. The plant started turning out panels in October 2009. Sony now has a 7% stake in the joint venture, and was scheduled to increase it to as much as 34% by April 2011, and to become seriously involved in the plant’s management. But, according to the story, Sony has now abandoned its plans to increase its stake in the JV, although it will maintain its current 7% percent share. If the Sony-Sharp plan were to proceed, Sharp’s LCD panel output would become comparable to that of other major South Korean and Taiwan manufacturers.

But Sony’s TV business is expected to slide back into the red for fiscal 2010 after a brief romance with black ink, and cost control has become a major obsession for Sony management. Japanese analysts openly discuss the "hollowing out" of Japan’s manufacturing sector. In this year’s July-September period, South Korean and Taiwanese produced 80% percent of the LCD panels for the global market. Sharp, Japan’s largest manufacturer, accounted for only 10%, The Yomiuri Shimbun said. Analysts said Sony’s decision can be expected to have a significant effect on Sharp’s business strategy.

2010 EBR Report

The Yomiuri Shimbun did not mention the continuing reports of poor manufacturing yields at Sakai, which would increase costs even more.

Sony’s efforts to control bloated cost structure of its TV business and turn a profit are not new. Since April 2009, when Yoshihisa Ishida took over as president of Sony’s TV business group, the unit has steadily reduced production costs and increased outsourcing. Over the last two years, the unit has cut the number of its assembly plants from nine to four. Much of the outsourced assembly work will be done by Foxconn (Hon Hai), so many of the newly outsourced LCD panels will be made by Hon Hai subsidiary Chimei Innolux.

All of this is so reasonable, so consistent, that it has an aura of inevitability about it. But soon after The Yomiuri Shimbun’s story appeared, Sony and Sharp denied it, according to a story by Adam Le in Bloomberg’s Osaka office. Shigenori Yoshida, a Sony spokesman based in Tokyo, told Le by telephone, "Sony is continuing talks on LCD production with Sharp and may increase its stake in the joint venture that operates the plant to as much as 34 percent by the end of April."

Le also called Sharp. "Sharp spokesman Toshiyuki Matsumura said there has been no change to its contract with Sony concerning liquid-crystal display supply or ownership of the venture."

But Sony’s statement was hardly a ringing endorsement. They are "continuing talks" and "may increase its stake…to as much as 34% by the end of April," which is just a restatement of the language in the original agreement. Basically, Sony may increase its stake — or it may not.

Sony’s consistent direction over the last two years has been to divest itself of manufacturing facilities, not to acquire them. It has sold its maquiladoras in Mexico to Hon Hai, most of its Slovakian LCD-TV plant to Hon Hai, and its Spanish TV plant to Ficosa International and Comsa Emte, as we reported in this space in October. The other side of its new-found strategy is to out-source manufacturing to low-cost contract manufacturers. It would run counter to this consistently pursued strategy for Sony to now increase its stake in the Sharp JV, especially since it is — thanks in part to the unfavorable exchange rate between the yen and almost any other currency — a high-cost manufacturer.

Would you like a prediction? Sony will stick with its 7 percent solution, or (face being what it is) something close to it.

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