Sharp Corp. (6753), Japan’s biggest liquid-crystal display maker, put up its Osaka headquarters and some plants as collateral last week to win bank loans after its credit ratings were cut to junk. The supplier to Apple Inc. (AAPL) is also renegotiating a stock sale to Taiwan’s Foxconn Technology Group as it tries to recover from record losses and a 70 percent slump in shares this year.
Within six months of assuming office, President Takashi Okuda, 59, is firing employees for the first time in six decades after widening Sharp’s full-year loss forecast eightfold on plunging demand for TVs. Sharp’s troubles are symptomatic of what’s ailing Japanese consumer electronics companies Sony Corp. (6758) and Panasonic Corp. (6752) as they compete with TVs and phones made by South Korea’s Samsung Electronics Co. (005930) and LG Electronics Inc. (066570)
“Sharp isn’t in a situation to think about the next century,” said Makoto Kikuchi, chief executive officer at Myojo Asset Management Japan Co., a Tokyo-based hedge fund advisory firm. “It’s a matter of whether the company can survive in the next 12 months.”
Okuda must raise funds for a company that’s burning through cash. Total liabilities reached 2 trillion yen ($26 billion) at the end of June, the highest since at least 2003 -- or more than four times sales in that quarter, according to data compiled by Bloomberg.
Ratings companies aren’t making it any easier -- Moody’s Investors Service and Standard & Poor’s both downgraded Sharp’s credit ratings to speculative grade, or junk. Okuda’s efforts to raise funds by selling equity to Taiwan billionaire Terry Gou’s Foxconn group and its flagship Hon Hai Precision Industry Co. (2317) stalled after Sharp’s shares plunged to a 37-year low.
Foxconn wants a stake in Sharp to secure access to the latest technology for parts used by its biggest customer, Apple. In offering a lifeline, Gou is betting that Sharp, which invented the mechanical Ever-Ready Sharp Pencil in 1915, will continue providing it with key components for the iPads and iPhones (AAPL) that Foxconn assembles, while ensuring one of Apple’s important suppliers survives.
“If Hon Hai can’t come soon to help Sharp speed up development of products, lower manufacturing cost, improve supply-chain management, it’s probably hard to make an achievement,” Gou said in Tokyo last month. Meetings between the two companies during Gou’s visit didn’t produce a final agreement.
Gou has invested 66 billion yen of his own money into the display venture with Sharp.
Widening losses and weakening demand amid a strengthening yen is the story of Japan’s electronics companies. Sony last had a profit in the year ended March 2008, and Panasonic has been unprofitable in three of the past four years. Like Sharp, both companies changed their CEOs this year.
Investors are getting less optimistic: the $32 billion combined current market value of Sony, Panasonic and Sharp -- Japan’s three biggest TV makers -- is dwarfed by Samsung’s $163 billion and Apple’s $638 billion. Sharp’s value has fallen 92 percent from its December 1999 peak.
“The Japanese electronics industry is in a crisis as South Koreans and Chinese are catching up,” said Toshihiro Nagahama, chief economist at Dai-Ichi Life Insurance (8750) Research Institute in Tokyo. “Japan is good at making products with better performance, and that’s the easiest for newcomers to copy.”
Miyuki Nakayama, a spokeswoman for Sharp, declined to comment. The company fell 1.9 percent to 202 yen at the 3 p.m. close of trading in Tokyo.
Sharp’s troubles began when the company relied on debt funding for its LCD factories in Kameyama and Sakai, which opened in 2004 and 2009, respectively. The investment for the two factories, totaling 1 trillion yen, weighed on Sharp as LCD prices started falling and a stronger yen ruined its competitiveness against Taiwanese and South Korean companies.
The average price of a 40-inch LCD panel used in TVs fell to $250 in the first quarter of 2012, less than a 10th of the $2,772 price in the fourth quarter of 2003, according to researcher DisplaySearch.
The factory in Sakai, near Osaka, is an example of Sharp’s poor investment decisions, said Jeff Loff, a senior analyst with Macquarie Capital Securities in Tokyo. The world’s only operational 10th-generation facility, suitable for 60-inch TV panels, has been underutilized and adding to a glut since operations began in 2009.
Another mistake was converting a production line at the Kameyama plant into facilities for displays featuring the IGZO technology meant for iPads, Loff said. The transition was too aggressive, he said.
“It probably would have been wiser to wait to convert the factory until it could prove consistent supply capability at high volume,” Loff said. “The company looks to have placed too much emphasis on trying to serve Apple with IGZO tablet displays.”
Sharp, which started Sept. 15, 1912, with the invention of the snap belt buckle, is in talks with potential lenders including life insurance companies for a syndicated loan, a person with knowledge of the matter said last week. Mizuho Financial Group Inc. (8411) and Mitsubishi UFJ Financial Group Inc. (8306), Sharp’s two main banks, provided it with a short-term facility to help refinance its commercial papers, another person with knowledge of the matter has said.
The company had 706 billion yen of short-term debt maturing within 12 months and 314 billion yen in long-term debts at the end of June, according to its financial statement. Sharp’s cash and near cash stood at 218 billion yen at the time.
The plunge in share price hasn’t helped Sharp’s cause of raising equity from Gou’s Foxconn, which wants to renegotiate an initial plan unveiled in March. Gou’s group companies agreed in March to buy 9.9 percent of the Japanese manufacturer at 550 yen per share, a total bill of 67 billion yen. Separately, Sharp also sold a stake in the Sakai LCD plant to Gou for 66 billion yen to jointly run the factory.
Without Gou’s helping hand, Sharp may fail to secure financial support from banks, Kikuchi said.
“Banks may consider walking away if there is no sign of improvement in the next year,” he said.
To contact the reporters on this story: Naoko Fujimura in Tokyo at firstname.lastname@example.org; Mariko Yasu in Tokyo at email@example.com
To contact the editor responsible for this story: Michael Tighe at firstname.lastname@example.org