The boards of Foxconn and Sharp approved a takeover plan valued at US$3.5 billion at the end of March. This means Foxconn will control Sharp from now on. Through its subsidiaries Innolux and Century, Foxconn is a leading supplier of thin film transistor liquid crystal displays (TFT LCDs). Foxconn is already the largest component supplier, systems integrator and subcontract manufacturer for many of the world’s leading brands. The convergence of Foxconn’s business with Sharp’s TFT LCD business and other innovative developments, such as active-matrix organic light-emitting diode (AMOLED) and larger TV displays, creates a powerhouse with the largest TFT LCD production capacity and research capabilities in the world. We believe Foxconn Group’s takeover deal means it will acquire all of Sharp’s TFT LCD business. This allows Foxconn to strategically consolidate all the existing display operations and future research development with an aim to compete with other display makers from South Korea, Taiwan and China, as they all race towards capturing a larger share in other lucrative segments such as smart homes, robotics, Internet of Things (IoT) and smart cars.
Foxconn’s Innolux subsidiary is already in the process of increasing its production capacity with the building of its Gen 8.6 TFT LCD fab in Taiwan. In addition, Foxconn is building three Gen 6 low temperature poly-silicon (LTPS) TFT LCD fabs in Taiwan and China, which are targeting the high-end high-resolution and low-power consumption smartphone displays. These fabs are expected to be completed and operational within the next two years. With the acquisition of Sharp, which is currently the leading LCD maker—particularly in high-resolution LTPS TFT LCD smartphone displays, low-power oxide TFT LCD tablet PC displays and a-Si–based TFT LCD automotive displays—Foxconn is eager to make a considerable investment in building an AMOLED fab for flexible smartphone displays.
In terms of TFT LCD production capacity, the new company will account for 21% of total global capacity in 2016, surpassing LG Display, Samsung Display and BOE, according to IHS analysis (see graph below).
And the new company will retain its leading position in terms of production capacity for the next couple of years, in spite of aggressive capacity expansion plans from many Chinese LCD suppliers. The takeover deal comes at a time when the TFT LCD industry is locked in fierce competition, with Korean and Chinese companies increasing capacity with the display demand replacement cycle is slowing down. Display makers have also started to diversify to high-end display products that use either LTPS or oxide for high resolution, as well as to a product mix that is based on demand in various segments, such as PCs and TVs, and emerging applications for automotive and digital signage. IHS believes the Foxconn-Sharp takeover deal gives the new company a strategic advantage—not just in terms of production capacity, but also the broad diversification of display products that can be sold into existing and emerging segments.
The most immediate challenge for the new company is how fast and how smoothly it can merge operations, company culture and business models. However, given that the new company will be selling into the same key existing customers such as Apple, Sony, Samsung Electronics, LG Electronics and Lenovo, the consolidation of its operations may well be easier and faster to implement. But it's always a big challenge for any merger and acquisition to form a new operational organization, not to mention in this case, where it is a cross-culture, cross-border and cross-business model.
On the other hand, what are the implications for Apple, who is the most important customer for Foxconn in terms of the OEM/ODM business? Will this give Apple concerns in terms of its supply chain/sourcing strategy as it adds more reliance on Foxconn? As we know, Apple is considering AMOLED as an option for the display of its future iPhone, and Foxconn and Sharp have declared that the new merger will inject JPY 200 billion (US$1.7 billion) to establish the AMOLED production line. Does the Foxconn/Sharp merger encourage Apple to move on AMOLED development promptly?
Apple might be considering shifting the current iPhone display from LTPS TFT LCD to OLED (organic light-emitting display) and even flexible OLED for the iPhone 7 or iPhone 8. The reason for this might be the picture/photo performance (on OLED’s high color gamut) and flexible form factor. More information on the benefits of OLED is presented in the IHS Small Medium Display Supply Chain Tracker.
Of course, this model may not satisfy Foxconn's ambition when the company is looking forward to growing its business. We believe Foxconn intends to control more panel sources to strengthen its business with Apple in two aspects. First, to maintain its dominant position as a partner for Apple in which, compared to other ODMs/OEMs like Pegatron or Wistron, Foxconn has "displays" in its portfolio. And second, to start to include displays in its quote to Apple whereby Foxconn can attempt to increase its revenues rather than simply making money on assembly services. We believe Foxconn’s position as a supplier to Apple would not be easy to replace given Foxconn's strength in supply chain management, assembly yield and technology integration, and its great economic scale. Apple certainly recognizes these benefits for its products.
For Apple, Sharp is a key display supplier but Sharp is struggling with its financials. While Sharp’s technology (LTPS TFT LCD and oxide TFT LCD) are praised by Apple, it is a positive development for Apple to see Foxconn to acquire Sharp and provide financial support for Sharp to expand with new display capacity and technology.
One critical element that Apple always requires is that its suppliers dedicate display capacity to Apple. This means that panel suppliers must build a special “Apple” production line once they decide to do business with Apple. Out of the current possible OLED suppliers on the table—Samsung Display, LG Display, JDI and Sharp—Sharp is the only one that has lacked the money to keep investing in dedicated production lines. Therefore, Foxconn’s injection of money is vital for Sharp if it wants to compete for Apple's business if it shifts to OLED. Meanwhile, Foxconn's takeover of Sharp might encourage Apple to transition to OLED faster given that the reliable supply pool will expand.
David Hsieh is Director of Analysis & Research within the IHS Technology group
Posted on 6 April 2016