TOP CONTRIBUTORS

Amit Amin

SHCAY AT A GLANCE

 

 

 

 

 

 

Sharp is a Japanese multinational electronics manufacturer that dominates the Japanese market, with the largest market share by sales for both cell phones and LCD TV's.^[1][2] Globally, Sharp is still a small player, with less than 10% of the LCD market^[1] and about 1% of the cell phone market.^[3] Unfortunately, the global economic downturn has hit Sharp worse than most American companies.^[4] Japan, where the company makes almost half of its sales,^[5] has had a larger drop in spending than other markets. The $93 drop in oil prices from June to December of 2008 also made Sharp's solar cells less competitive, cutting the segment's quarterly growth in half.^[6][7]

The company is fighting two additional negative trends. First, the growing feasibility of manufacturing OLED TV's at low cost is challenging Sharp's piece of the TV market, as they are more efficient than LCD TV's. Second, the growing preference for smartphones has wiped out the PDA market, causing Sharp to leave some large markets, like the U.S.^[8] Sales in the PDA market fell 40% in 2007,^[9] and 50% in 2008.^[10]

Business & Financials

Sharp's edge has been dull of late. Revenue growth isn't the problem - from March 31, 2006 to March 31, 2007 (FY 2006) sales rose 12%, and in FY 2007 sales rose 9.3%.^[11] Net income, on the other hand, hasn't moved since 2006, when it rose 15%.^[11] Sharp's expansion into foreign markets, construction of new manufacturing plants, and its reduction of prices for many key products to retain customers amidst the 2008 Financial Crisis has stressed its margins.^[12]

Consumer/Information Products

• Audio-Visual & Communication Equipment (38% of total sales): This segment increased sales by 15.7% in 2007, making it Sharp's fastest growing.^[13] Demand for Sharp's AQUOS brand has been high, especially for its large-screen, high-resolution LCD TV's, and high-definition video recorders. The company's high-end cell phones also sold well, as consumer preference for app loaded phones rose. To maintain its technological advantage, Sharp released LCD technology last year capable of tactile recognition.^[14] However, in Q3 2008, sales in this segment fell 18% over the last year.^[7]

• Home Appliances (8%): Sales growth in this segment was slow but positive, 6.4% from 2006 to 2007, and 4.4% from 2007 to 2008.^[13] In 2008, third quarter sales fell 17.9%.^[7] The segment's main offerings include the Plasmacluster Ion Technology, a filter that can be used with air conditioners, humidifiers, and washer-dryers, HEALSIO, a superheated steam oven, and refrigerators.
• Information Equipment (16%): This is the only consumer/information segment without any growth from 2007 to 2008.^[13] Furthermore, in 2008, third quarter sales fell 20.9%.^[7] Sharp provides carriers WILLCOM Inc. and EMOBILE Ltd. in Japan, and T-Mobile in the USA with wireless PDA’s. Sharp purchases PDA's from original design manufacturer High Tech Computer Corporation, which are then rebranded and resold. The segment also produces high speed multifunctional digital printers.

Electronics Components

• Large Scale Integrated (LSI) Chips (5% of total sales): Sharp uses highly packed integrated circuits (LSIs) to develop camera and mobile phone modules, and drivers for LCDs. Sales grew 11.6% from 2007 to 2008, in line with growing demand for high-end phones and cameras and increased development of new applications for LCD technology.^[13] However, taking away internal sales to Sharp's LCD product group, this segment grew only 1.6% during that same time period.^[11] Worse yet, this segment has been the hardest hit by the recession in the U.S. and Japan. In Q3 2008, quarterly sales fell 36.1% over Q3 2007.^[7]

• LCDs (21%): Sharp's second largest product segment, sales grew 8.7% from 2007 to 2008. ^[13] Growth was fueled by expansion of the large-sized LCD market for TVs and computers. In the third quarter of 2008, however, sales of luxury goods fell, causing the segment's revenues to fall 25.6% over Q3 2008.^[7]
• Solar Cells (10%): Sharp has been concurrently developing technology for two types of solar cell - for crystalline solar cells, and thin-film solar cells. Although Sharp is the worlds largest producer of solar cells, and demand for renewable energy has been rising, sales growth was stagnant for the three years until the run up in oil prices in 2008.^[13] During the company's second quarter (July to September), when prices were at their highest, quarterly sales rose 36.4%.^[6] In the company's third quarter (September to December), while energy prices were declining but had not yet reached their bottom, quarterly sales rose 18.1%.^[7]

Breakdown By Geographic Region

Sharp Corporation Geographic Distribution of Sales^[13]

• Japan: Sharp dominates its home country Japan. The company has the largest domestic share of the cell phone market, and is one of the largest players in the LCD and LSI markets.^[2] Although sales rose 6.2% from 2007 to 2008, operating income fell 11.5% because of changes in Japanese corporate tax law.^[5]
• The Americas: Driven by rising U.S. demand for LCD TVs, sales in the America's rose 8.3% from 2007 to 2008.^[15] To satiate demand, Sharp opened up a new LCD TV production facility in Mexico,^[16] causing operating income to fall 21.9%.^[15]
• Europe: Regional sales in Europe rose 11.9%, and operating income climbed 38.8% in 2007. ^[15]
• China: Sharp's fastest growing geographic market, operating income increased 11.2% from 2007 to 2008, on sales growth of 22.4%.^[15] Growth has been fueled by a growing population of Chinese capable and willing to buy high-end cell phones and TV with LCD technology. ^[5]
• Other: In Sharp's other markets, mostly in Asia, sales grew 12%, and operating income rose 74.1%.^[15]

Anti-trust Suits Cost Sharp $123M & It's Reputation

In December of 2008, Sharp pleaded guilty to the U.S. government of three conspiracies to fix the prices of TFT-LCD panels sold to Dell, Apple Computer, and Motorola Inc.^[17] Sharp's collaborators include LG, which was fined $400M, and Chunghwa, which was fined $65M.^[17] In Japan, Sharp was fined $3M for fixing the price of LCD panels sold to Nintendo. In the U.S., Sharp was fined $120M, and has been forced to lower the prices of its LCD panels across the globe, cutting into the margins of its most profitable business.^[18] Company executives have avoided the fines and prison sentences imposed on LC and Chunghwa executives in the U.S. so far, but as of January, the matter is not over.

Trends & Forces

The Global Economy Is Performing Poorly

Economic Turmoil in U.S. & Europe Slowing Sales Growth and Creating Foreign Exchange Losses

Sharp is a multinational company - it earned 59% of its revenues oversees in 2008.^[13] When consumer spending in its primary foreign markets falls, namely the US and Europe, one the first things to go is high-end LCD TVs and cell phone purchases. In Europe, LCD sales rose just 6% from June 2007 to 2008, compared to growth of 300% in China.^[19] In North America, electronics sales started falling after June, and so Q1 sales growth was still high, at 30% over 2007.^[19] However, taking into account the weaker dollar and the weaker euro, Sharp had foreign exchange losses of $51M in just the 3 months from April to June.^[19] Things have only gotten worse since. On January 24th, the Yen reached a 13 year high against the dollar, and a 7-year high against the Euro.^[20]

*Last Day of Each Month

Consumer Spending In Japan Has Tanked

Sharp has also had huge losses in its domestic market. For the six months ended September, sales of mobile phones and wireless PDA's in Japan fell approximately $1.1B.^[6] The reason is Japan's slowing economy.

*Annualized Estimate

Economics of Solar Energy Disappearing

Solar energy is expensive. Although the price of silicon, one of the key components of photovoltaic cells, has fallen from its highs in 2007 and early 2008, manufacturing photovoltaic cells is still an expensive process.^[23] Given the low conversion efficiency of Sharp's cells, just 13% in 2008, the cost of capital has to be low for an investment in its cells to make sense.^[24] If a company or household has to pay 15% interest to take a loan on installing solar cells, just to save 10% on its energy bills, it won't make that purchase. With oil, gas, and coal prices on the decline, and with falling power plant construction costs, the price of electricity has on average been falling.^[25] Cheap electricity means small energy savings. Sharp only began to feel the full effects of the fall in Q4(January to March). In Q3, quarterly growth fell from 36.4%^[6] to 18.1%.^[7]

OLED Gaining Ground Over LCD Technology, To Sharp's Detriment

In Q4 2007, Liquid Crystal Display (LCD) TV sales surpassed CRT TV sales for the first time.^[26] Sharp won, because its AQUOS and other brands of LCD bring in the greatest share of the company's revenues.^[13] Even while LCD sales continue to grow versus CRT sales, a new player is gaining ground. Organic light-emitting diode's (OLED's) have the potential to be more efficient, cheaper, and of higher quality than LCD screens.^[27] Sharp's largest competitor, Sony, has succeed in reducing the price of an 11-inch screen to $2,500, but without billions of dollars of R&D and the creation of large, low cost, high volume manufacturing plants, OLEDs will never be cost competitive with LCD's.^[28]Sharp is betting that it can make already cheap LCD technology even cheaper,^[29] and in doing so keep the OLED market from growing (at $600M in 2008).^[28]

PDA Sales Continue to Fall

The PDA market has shrunk consecutively for the past fifteen quarters.^[30] From 2007 to 2008, Sharp was actually able to maintain its level of PDA sales.^[13] Unfortunately, the advent of the iPhone and other smartphones has crippled the PDA market; in 2004, Sharp exited the U.S. market and stopped development of its flagship line, Zaurus.^[8] In December of 2008, Sharp stopped selling the Zaurus everywhere.^[31] With those moves, Sharp has limited further exposure to the declining PDA market.

Competition & Market Share

LCDs & Other Electrical Components

LCD Industry, Market Share by Sales for Q4 2007^[1]

In Japan Sharp is # 1, with just under half of the market for LCD TVs in 2006.^[32] Its main competitors are Sony and Matsushita, with 23.8% and 12.2% market share respectively.^[32] Worldwide, Sharp's grip on the market has been loosening, with 10.1% market share on a revenue basis in Q4 2007, falling to number 3.^[1] However, Sharp is highly diversified, producing LCD's for TVs, mobile phones, computers, and mobile PDAs.

Competitors with LCD TV market share by sales for Q4 '07 include:

• Sony Electronics (19.5%) & Samsung (19.3%)- Sony & Samsung both have a cost advantage, having formed a join venture to supply them with LCD panels at cost in 2004.^[33] Both also believe that OLED technology will eventually replace LCD technology. Sony was the first to sell an OLED TV, and in 2008 Samsung showcased its OLED TV, the largest in the world.^[34]
• Philips (10.1%) - Philips has also been developing its OLED technology, being the first to develop a flexible OLED screen.^[35]
• LG Electronics (7.7%) - LG has been the last of these four companies to begin developing OLED technology. LGE has been purchasing some of its LCD panels from Sharp.^[36]

Other competitors include: AU Optronics Corp. (AUO), Fujitsu Limited (FJTSY), Matsushita Electric Industrial Company (MC), Sanyo, Toshiba (TOSBF), and Hitachi (HIT).

Cell Phones

Cell Phone Industry, Market Share by Sales for 2008^[3]

Sharp is a baby in the global cell phone industry, with just 1% market share in terms of sales in 2008.^[3] The company has, until 2008, focused on the Japanese market, where it is the largest manufacturer of cell phones.^[37]

Competitors with cell phone market share by sales for 2008 include:

• Nokia (38.6%) - Nokia has been hit the hardest by the slump in the cell phone industry, selling 53% fewer phones in Q4 2008 than in Q4 2007.^[38] Nevertheless, the company still dominates the market, with more than double the market share of the second largest competitor in the field.
• Samsung (16.2%) - Samsung has tried to mitigate the decline of cell phone sales in developed markets by expanding its product offerings into 6 unique lines while reaching further into developing markets.^[39]
• LG (8.3%) - Like Samsung, LG has begun development of a low-tier platform in order to better compete in developing countries, where cell phone sales are still growing.^[40]
• Motorola (8.3%) - Motorola's top product is the RAZR, which was made with fashion in mind. Like with Sharp, the introduction of smart phones has caught the company off-guard.^[41]
• Sony-Ericsson (8%) - This partnership between Sony (SNE) and Ericsson B (ERIC'B-SK) has focused on improving the music storage and playback capabilities of traditional cell phones, culminating with the development of the Walkman phone.

Other competitors include: Research in Motion (RIMM), Kyocera (KYO), Apple (AAPL), and Hungarian Telephone & Cable (HTC).

Solar Energy

The most effective way to distinguish solar cells is by their conversion efficiency, though these distinctions are small, leading to the increased commoditization of the industry. This is a measure of the electrical energy generated from the solar cell against the light energy input (a combination of light intensity and the area of the solar panel).

Sharp is the largest photovoltaic cell manufacturer in the world, with a market share of 24%. Other competitors, with 2005 market share^[42], include:

• SunPower (SPWR) (insignificant in 2005) - One of the fastest growing solar companies, with one of the most efficient cells around.
• Suntech (4%) - A Chinese photovoltaic cell company that is muscling its way into world solar markets.
• JA Solar Holdings, (insignificant in 2005) - A Chinese PV company that only sells monocrystalline solar cells; it lets its customers take care of building the modules and systems.
• Solarfun Power Holdings (insignificant in 2005) - Another Chinese PV company that operates 90% in Europe and makes most of its money by selling modules, rather than individual cells.
• Evergreen Solar (insignificant in 2005) - A solar company that produces string ribbon PV cells and operates at all production levels from silicon wafer to power system.
• Kyocera (8%) - A Japanese electronics company that is also a large manufacturer of solar cells.
• Q-Cells (9%) - A privately owned, German solar manufacturer.
• First Solar (insignificant in 2005) - A thin cell solar panel manufacturer that uses cadmium telluride instead of silicon for its cells.
• BP (5%), Mitsubishi (6%), and Sanyo (7%) - Not primarily photovoltaic cell manufacturers, but heavy market competitors nonetheless.
• EMCORE (insignificant in 2005) - A Concentrated Photovoltaic System manufacturer that uses Gallium arsenide PV cells and got its start in the solar business making power cells for satellites.
• Energy Conversion Devices - This company uses amorphous thin-film silicon in its ultra-thin, albeit low-efficiency solar cells.

References

1. ↑ ^{1.0 1.1 1.2 1.3} DisplaySearch - Q4'07 Worldwide LCD TV Shipments Surpass CRTs for First Time; TV Revenues Reach a Record High, Up 10% to $33B
2. ↑ ^{2.0 2.1} Annual Report, 2008, Firscal 2007 Review By Product Group, Page 23
3. ↑ ^{3.0 3.1 3.2} ars technica - iPhone passes 1 percent goal for 2008, looking good for 2009
4. ↑ ^{4.0 4.1} Trading Economics - Japan GDP Growth Rate
5. ↑ ^{5.0 5.1 5.2} Annual Report, 2008, Financial Review, Page 39
6. ↑ ^{6.0 6.1 6.2 6.3} Sharp World Investor Relations - Consolidated Financial Results for the Second Quarter Ended September 30, 2008
7. ↑ ^{7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7} Sharp World Investor Relations - Financial Results for the Third Quarter Ended December 31, 2008
8. ↑ ^{8.0 8.1} Twice - Sharp Exits U.S. PDA Market
9. ↑ Ars Technica - PDA sales drop by 40 percent in a single year, vendors bolt for exit
10. ↑ Palm InfoCenter - PDA Market Continues Contraction, Palm Remains on Top
11. ↑ ^{11.0 11.1 11.2 11.3} Sharp World Investor Relations - Financial Highlights
12. ↑ Sharp World Investor Relations - Fiscal Year 2007, Operating Results
13. ↑ ^{13.00 13.01 13.02 13.03 13.04 13.05 13.06 13.07 13.08 13.09 13.10 13.11} Sharp World Investor Relations - Segment And Regional Information
14. ↑ JCNetwork - Sharp Announces New System LCD with Embedded Optical Sensors; Provides Input Capabilities Including Touch Screen and Scanner Functions
15. ↑ ^{15.0 15.1 15.2 15.3 15.4} Annual Report, 2008, Financial Review, Page 40
16. ↑ Forbes - Sharp to construct LCD TV production base in Mexico - report
17. ↑ ^{17.0 17.1} INetwork World - Asian executives face jail in U.S. for fixing LCD prices
18. ↑ Alley Insider - US Government Busts LCD Cartel: LG, Sharp, And Chunghwa To Pay $585 Million Fine
19. ↑ ^{19.0 19.1 19.2} Sharp Investor Relations - Consolidated Financial Results for The First Quarter Ended June 30, 2008
20. ↑ Bloomberg Currencies - Yen Rises to Strongest Versus Dollar Since 1995 on Haven Demand
21. ↑ Exchange-Rates.org - Euro Exchange Rate Graph
22. ↑ Exchange-Rates.org - US Dollar Exchange Rate Graph
23. ↑ Market Watch - Suntech taking loss on silicon inventories; laying off 800
24. ↑ ^{24.0 24.1} SharpUSA Product Brochure
25. ↑ USA Today - Declining energy prices extend to electricity
26. ↑ TG Daily - LCD TVs outship CRT TVs for the first time
27. ↑ MSN - Why LCD TVs might soon be obsolete
28. ↑ ^{28.0 28.1} Forbes - OLED TVs drop jaws, but they'll also need to drop prices before we see them in living rooms
29. ↑ Tech Radar - Sharp talks down OLED: 'present & future is LCD'
30. ↑ Mobile Wire - PDA sales fall for the fifteenth quarter
31. ↑ Engadget - Sharp halts Zaurus PDA production, smartphones to blame
32. ↑ ^{32.0 32.1} Seeking Alpha - Sharp vs Sony: LCD TV Battle Heating Up in Japan
33. ↑ cnet - Sony, Samsung complete LCD plant
34. ↑ Oled-Display - Pictures of the world largest OLED Television from Samsung 40-inch with 1920x1080 pixel
35. ↑ CDRinfo - LG.Philips LCD Develops First Flexible Color A4-Size E-Pape
36. ↑ displayblog - LG Electronics Procure LCD Panels from Sharp
37. ↑ HighBeam Research - Sharp eyes China's cell phone market
38. ↑ The Tampa Tribune - Signaling A Change In The Cell Industry
39. ↑ Samsung mobile - SAMSUNG UNVEILS NEW CONSUMER SEGMENTATION MODEL TO SPUR GROWTH
40. ↑ Silicon Republic - Mobile phone market begins major freefall
41. ↑ LA Times - Razr loses sales edge to iPhone in shift to functional fashion
42. ↑ CIBC Initiating Coverage, SOLF, January 29th, 2007
43. ↑ ^{43.0 43.1} [1]
44. ↑ Forbes - Sun King; SunPower's New Solar Panel Is 22% Efficient
45. ↑ Kyocera - Solar Timeline
46. ↑ Solarfun Website
47. ↑ http://jasolar.com/Web/products-en.asp
48. ↑ TSL 20-F 2007 Pg. 7
49. ↑ ESLR 2007 Earnings Call Transcript, Page 1
50. ↑ EMCORE.com: Terrestrial Solar Cells and Receivers"
51. ↑ ENER F1Q08 Earnings Call Transcript, Page 5
52. ↑ DSTI 10-k 2007 Pg 1
53. ↑ Ascent First Quarter 2008 10-Q Pg 23