Hon Hai's move to invest $800 million for a 10 percent stake of Sharp sets up an interesting supply chain battle that will benefit Apple and potentially threaten Samsung.
Behind the popularity of Apple's iPad is a supply chain war for components. Apple's supply chain is second to none and the company uses its cash hoard to procure parts. That Retina Display in the iPad was a major coup. In addition, Apple will gobble up more screens should it launch an iTV.
Enter the Hon Hai move to buy a stake of Sharp. Hon Hai, which owns Foxconn, will become Sharp's largest shareholder. Hon Hai Chairman Terry Gou will also invest an undisclosed sum to take a 46.5 percent stake in Sharp Display, which owns a fab. Hon Hai also agreed to buy 50 percent of the LCD panels from Sharp's fab.
Sharp, one of Japan's leading electronics companies, will get balance sheet help and Hon Hai likely gets to procure more Apple business for its Foxconn unit. Sure, the Sharp investment is a risk, but Hon Hai thinks the bet is worth the effort.
Macquarie analyst Jeff Su wrote:
One possible angle is that Hon Hai is using Sharp to leverage the Apple TV supply chain as it can secure next-gen TV technology. In addition, this should also help Apple to diversify away from its heavy Korean component supply chain. If this scenario is true and helps Hon Hai secure an Apple TV order in 2013, it would immediately make this deal more reasonable.
Barclays Capital analyst Kirk Yang said:
We believe this is positive for Hon Hai. Sharp is one of the three LCD panel suppliers for Apple’s iPad, along with Samsung and LG Display. As Samsung is already a competitor to Apple (on tablets, smartphones and maybe smart TVs) while LG could potentially become one, it is possible for Sharp, a non-Apple competitor, to gain market share with Apple.
For Apple, the Hon Hai move to buy a stake of Sharp allows it to diversify away from Samsung. Samsung is a major supplier to Apple and for now that co-opetition is workable. Apple and Samsung compete on tablets and smartphones. However, Apple entering the TV business would be a material threat to Samsung. Given the likely turmoil ahead, Apple needs to diversify away from Samsung as a supplier.
Barclays Capital analyst SC Bae said in a research note:
We believe the synergy between Sharp’s panel technology and Hon Hai’s cost efficiency could have a certain degree of negative impact on Korean TV manufactures, such as Samsung Electronics and LG Electronics in the mid- to low-end areas. We speculate that Sony may try to leverage this alliance to improve the cost competitiveness of its TV division given.
Sony is Hon Hai's largest TV customer.
Add it up and the Hon Hai investment in Sharp benefits Apple by dinging Samsung and ensuring the stream of LCD screens of all sizes keep flowing.