Globalisation has helped the world to become a smaller place. It has allowed businesses to import and export products all over the world, reducing the costs of raw materials and components that go into our electronic devices today. It has made it much easier for a small business to compete on a global scale. Unfortunately, a side effect of globalisation is that it puts downwards pressure on profit margins: in other words, as individual sectors become more and more competitive, so the prices tend to drop. We have seen this in the smartphone arena and two good examples are the System-on-Chips and display panels that every device has. For the mobile display business, over the last half decade a number of Chinese display screen manufacturers have started selling their own screens at highly competitive prices. The established display manufacturers, such as Sharp, have taken pride in selling better quality components. Unfortunately for Sharp, cheaper displays have been getting better. As the industry moves to a higher resolution world and as technology improves, so the benefit of a premium display has been eroded. Sharp has been struggling for years and has even benefited from not one but two bailouts from the Japanese government, plus a number of rethinks about strategy.
Earlier in the year, it seemed that Sharp had conceded and was in discussions with Foxconn to essentially sell the business on. After agreeing the idea, Foxconn then went away to complete due diligence on Sharp's business so that they understand exactly what they are buying and the condition of Sharp's business. Sharp is estimated to be worth close to $6 billion according to industry sources despite the pressure, which would make this the largest takeover of a Japanese business by a foreign investor. However, Reuters have reported that "two people familiar with the matter" that the deal may not be inked this week. The reason is because Foxconn have raised questions over Sharp's potential liabilities, which typically means unpaid debt. Sharp's shares slid by 9% on this news. Foxconn is waiting for Sharp's auditors and accountants to confirm that the discovered liabilities are "in the right ballpark," according to one unnamed source. A Sharp spokesman reported that both companies are working together to reach a satisfactory agreement, but have not set a signing date.
Investors and the market are jittery about the deal given the size; Foxconn is also said to be asking questions of Sharp's management about their latest quarterly performance. In early February, Sharp stated that it expected to make an operating profit of approximately 10 billion yen ($88 million) for the year ending in March, after reporting a nine month operating loss of over 29 billion yen.