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On 25 February, Hon Hai Precision Industry Co Ltd, trading as Foxconn Technology Group, beat Innovation Network Corporation of Japan (INCJ) to the acquisition of Sharp Corp, with its strengths in contract manufacturing services to giants that include Apple Inc, with its ¥700 billion (US$6 billion) offer. While waiting for Sharp to clarify some of the last-minute disclosures of liabilities and terms, the deal will enable Foxconn to break into the consumer appliances industry, with Sharp’s strong presence in Asia Pacific, and exploit synergies in developing smart appliances, if this vertical acquisition is ultimately approved.
Source: Euromonitor International
On the one hand, with 81% of its appliances sold in Asia Pacific, Foxconn will change the consumer appliances market landscape in this region, especially in Japan, Indonesia and Thailand, since Sharp Corp already ranks fourth in Japan, holds the leadership in Indonesia, and ranks second in Thailand in consumer appliances in volume sales terms. More importantly, Sharp’s century-old brand, existing distribution channels and global leadership in air purifiers will help Foxconn make a quicker take-off in the appliances industry, since Foxconn has been planning to break into the consumer appliances industry, but had not yet been successful. With 40 years of electronics manufacturing services, Foxconn has developed a robust system to control production costs, which will also help Sharp Corp to improve profitability.
On the other hand, via vertical integration, Foxconn will represent a strong competitive threat in smart appliances, since it can exploit synergies between its experience in manufacturing semiconductor components and smartphones in the upstream, and Sharp’s strengths in designing consumer appliances and consumer electronics in the downstream. Since pricing is a key hurdle for smart appliances adoption, Foxconn-made smart appliances will also have a highly competitive cost advantage in terms of gaining greater market penetration.
However, in the face of the risk of Japanese government intervention in terms of intellectual property protection of core Japanese-developed technologies, Foxconn will still have to address the challenge of maintaining the Sharp premium brand and retaining its customers, especially in Japan. Japanese consumers are loyal to domestic brands in appliances and automobiles, which is supported by the fact that none of the top five consumer appliances manufacturers by retail volume in Japan is a foreign company, as they are concerned about losing the long business history and advanced technologies developed over the years to foreign companies.
Despite the risks and challenges ahead, this acquisition will be a win-win solution for both Foxconn and Sharp. With Japanese appliances manufacturers short of funds, Foxconn’s broad client network, financial strengths and advantages in manufacturing management will be able to save the century-old brand.
Although Sharp’s sales in the Japanese market will be hurt in the short term, Japanese consumers will gradually accept the change, if Foxconn maintains independent branding of the Sharp brand and continues to develop appliances catering to their needs. Foxconn can also transform its business from pure manufacturing services into a vertically integrated conglomerate to gain a foothold in the appliances industry.
As it will take time for Foxconn to learn about brand management and sales channels in the appliances industry and Foxconn is unlikely to launch a price war by lowering the price of Sharp’s appliances, which would damage the Sharp brand value, there will be less threat to budget or mid-priced players in Asia Pacific, including Chinese and Taiwanese companies, in the short term.
However, in the long term, Foxconn will be able to leverage the Sharp brand’s reputation in the premium range to extend its own brands’ (including InFocus) coverage to consumer appliances, which would represent a stronger threat to players in the budget and mid-priced ranges, including Chinese and Taiwanese companies, which have traditionally had a price advantage.