Terry Lloyd: ”Sharp: How Not to Sell a Company in Japan”.

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”Late last week, Mr. Terry Gou, the CEO of Foxconn Technology Group (also known as Honhai) signed a JPY389bn deal to take control of Sharp, one of Japan’s bedrock electronics firms. The signing came after a protracted cat-and-mouse game played between Mr. Gou, the management of Sharp, and in the wings, the public-private INCJ fund. Mr. Gou showed consummate deal sense in luring Sharp’s board with a much more attractive offer than the government’s INCJ (which wanted to break up the firm) then drag out the negotiations as Sharp was facing a possible collapse. Lastly, with impeccable timing he sprang a last minute demand to reduce the deal price by 20% and completely out-maneuvered, Sharp’s executives and shareholders, who eventually caved in and agreed.

Mr. Gou has already disclosed that he went into the deal with a turnaround plan in mind. He is no stranger to Sharp’s bureaucracy problems, having taken over the management of the company’s Sakai flat-panel TV factory in 2012 when he made his first investment. The factory reversed its money-losing status that same year, even as the rest of Sharp continued to flounder. If there is one thing that Mr. Gou knows better than his Japanese counterparts, it is how to demand cost cuts and get them. Of course in the process, much of the existing board of Sharp will be expected to fall on its collective sword as part of the effort, which will certainly be a start.

Financially deep pockets will also be necessary, but given that Mr. Gou’s Foxconn company makes more annual profit (US$4.1bn last year) than what it is costing him to buy Sharp, he will still have adequate funds for the changes he needs to make. Sharp’s own management didn’t have this ability, even if they’d had a viable route forward. Still, it is no sure thing that Mr. Gou and his team can turn about a behemoth like Sharp, especially since its management have tried so many times already to pull themselves out of the hole. However, as Mr. Ghosn of Nissan demonstrated 17 years ago, sometimes a Japanese organization with inbred senior management needs a determined and empowered foreign leader capable of cutting out the existing powerbase of that stricken company and replacing it with younger more flexible (and directed) minds can actually turn it around. In Mr. Ghosn’s case, the process took about 3-4 years, and we expect that Mr. Gou is setting himself a similar time frame.

Nonetheless, it has to be said that Mr. Gou is taking a huge risk in buying Sharp. Indeed, analysts overseas are falling over themselves with conspiracy theories as to why Foxconn is putting out so much cash to buy a company that is expected to report a massive JPY150bn net loss this last financial year. The most popular theory is that Apple is behind the deal, helping Foxconn with either order guarantees for Sharp’s Igzo and regular LCD products, or some kind of soft payment terms for transferring equipment it owns at Sharp’s factories, or perhaps a mix of the two. Certainly for Apple to keep Sharp and its screen-building capabilities close, it will buy up Sharp’s unloved LCDs while waiting for Foxconn to upgrade Sharp’s facilities for AMOLED manufacturing, something that will take it 3-5 years. In doing this, Apple gets to keep a supplier which is not either Samsung or LG, two of its existing suppliers who are also long-term competitors.

So, Sharp is turning Taiwanese. Is this a bad thing? Not if the factories and engineering stay in Japan, and so far Gou is saying he will continue both in this country. No doubt he WILL move basic production to his factories in China, but it sounds like he plans to move the remaining operations upstream, either into direct competition with the Koreans for AMOLED displays, or perhaps into some new direction as the innovative engineering teams at Sharp keep turning out new products.

While watching this deal, we couldn’t help being reminded that Sharp was doing everything a company should not do to be sold. In particular, the senior management seemed to have this sinking ship quality about them that marked them as sitting ducks for someone. Gou in the end happened to be the party most able to draw value out of the deal, but they would have been ripe for whomever plunked down the cash.

The things they did wrong were:

1. Waiting too long – wrong timing

Sharp knew at least 7-8 years ago that things were not well in the Japanese electronics industry, no thanks to the high yen and aggressive competition from Samsung and others. The company should have moved much faster to fix its situation, especially around 2010 when it still had credibility and funds, by moving into new product categories and diversifying its risk, and by moving production to China but not over-focusing on selling there. More importantly, they should have broken the business into a group of companies and let each sink or swim as they could. In that way they would have had a group of more flexible smaller companies, where they could afford to lose one or two in the portfolio. Of course, it’s understandable that with the huge investments made in LCD manufacturing that Sharp wanted to keep all the businesses in one company, but the high yen and cheaper offshore manufacturing trends were obvious back in 2010 and the company’s leadership should have rung the alarm bells then. NEC learned this lesson well, shedding its PCs and LCDs businesses, and unlike Sharp, it has survived independently.

2. In-bred management

Especially in multi-generational companies that don’t have strong merchantilist cultures (i.e., opposite of Japanese trading companies), even though the senior management may be self-disciplined as individuals, they grow up through the ranks by getting along with others rather than by taking quick and sometimes harsh actions. This is because
the Japanese management system is built on joint experience and a jointly-invested (emotionally invested) social group where the members have known each other all their adult working lives. As a result, they worry too much about their friends, colleagues, and other employees who are the weft of the business. This social spider’s web makes them too hesitant to make the cuts or reorganizations that are needed. In the end they hide the problems – as was done in Olympus and Toshiba. This is an underlying problem for society here – any aggressive behavior has been bred out of the people.

3. Wrong tools, wrong decisions

Lastly, while most directors of publicly listed companies are basically honest, hardworking people who are doing the best they can in archaic management structures (don’t say anything negative to the boss), they are also unfortunately equipped with often archaic management tools and insufficient global information. In such an environment, certain internal business “truths” emerge that are cooked up in a bubble and without proper understanding of how the outside world works. This makes these companies very vulnerable to international economic and political power shifts, and as in Sharp’s case, they can make well-meaning major investments then get broadsided by the yen and by their competitors being more nimble and better attuned to market needs.

Actually, these three failings sound very much like the same criticisms made of the current LDP political party as well, don’t they? Probably that is no accident, and shows that uninformed “stuck” management is indeed a deep and systemic problem.

Source:  Posted on behalf of Terrie Lloyd –   Sign up for his newsletter here:
http://www.japaninc.com/

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