Sharp Explores China Cellphone Tie-Up 夏普联手富士康打造低端手机

By newsdoug on May 8, 2012

Sharp, Foxconn talk smartphone tie-up There’s an interesting story out today saying that fading Japanese electronics giant Sharp (Tokyo: 3128) is exploring the possibility of a cellphone tie-up with Taiwan’s Foxconn (HKEx: 2038), the latest wrinkle in a story that is seeing a growing number of Japanese firms hand over many of their struggling consumer electronics to Chinese firms that specialize in low-cost manufacturing. The latest media reports indicate that talks are very preliminary, saying only that top executives from Foxconn and Sharp met in Beijing this week to discuss such a tie-up. (English article; Chinese article) It adds that Foxconn could find such a tie-up attractive as it seeks to develop its own brands and move away from its core contract manufacturing, a low-margin business that sees it make products for other companies such as Apple’s (Nasdaq: AAPL) popular iPhones. For Sharp, such a tie-up would be part of its ongoing strategy to either sell or outsource many of its less profitable businesses to other firms. In this case, Sharp is still clearly a recognizable name in the cellphone space, but it’s also a decidedly second-tier player and its cellphone operations are probably not very profitable. That could be a good fit for Foxconn, which could significantly lower Sharp’s manufacturing costs and also has good resources for developing new products. In fact, this deal, if it happens, would look strikingly similar to a growing relationship between Chinese PC specialist Lenovo (HKEx: 992) and Japan’s NEC (Tokyo: 6701). That relationship began last year when NEC and Lenovo formed a joint venture that saw Lenovo take over the operation of NEC’s PC operations. (previous post) Like Sharp in cellphones, NEC is a relatively well known PC brand, but also a decidedly second-tier player that is rapidly losing relevance outside its home Japan market. After that tie-up was formed, NEC announced later in the year that it was re-entering the China cellphone market after withdrawing several years earlier. (previous post) There were few details in that announcement, but the timing so close after the PC tie-up with Lenovo led me to speculate that NEC was going to rely heavily on Lenovo’s well-established sales channels in China to relaunch its cellphones in the market. I further speculated that if NEC was successful in gaining some market share, it could eventually put its cellphone business into another joint venture with Lenovo, effectively handing over the brand to the Chinese firm. Such a move would certainly make sense for Lenovo, as it wants to rapidly build up its cellphone business but has had trouble developing its own brand, especially at the higher end of the market where it faces still competition from names like Apple, HTC (Taipei: 2498) and Samsung (Seoul: 005930). I would give these latest talks between Sharp and Foxconn a 50-50 chance of resulting in a new joint venture, and would look for more similar tie-ups in the next couple of years.

Bottom line: Sharp’s cellphone talks with Foxconn have a 50-50 chance of producing a joint venture, and reflect the growing ties between Chinese and Japanese electronics makers.

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