A major merger deal was announced Wednesday on the industrial side of the tech industry. Foxconn, the big contract manufacturer of tech hardware—especially iPhones—is buying Sharp, the century-old Japanese electronics company, for $3.5 billion (389 billion yen).
Over the years, Foxconn has profited handsomely from its close supply-chain relationship with Apple, as each new iPhone launched and instantly sold in the millions across the globe. Foxconn employs hundreds of thousands of Chinese workers in city-sized factory complexes.
“That requires the mobilization of an enormous amount of labor—very efficiently and at a good cost,” said Harvard Business School management professor Willy Shih.
But Foxconn and other contract manufacturers are seeing their profits squeezed now, in part because of the steady rise in Chinese labor and production costs. Shih said salary increases alone—which are mandated by the government—have been in the 10 to 30 percent range year-to-year since the mid-2000s. There are also increasing labor shortages for big employers like Foxconn, as China’s one-child policy has reduced population growth for a generation.
Foxconn’s response, said Shih, is “to try to move up the value chain. That is one of the attractive aspects of Sharp. They have these IGZO [indium gallium zinc oxide] displays—very attractive for high-pixel-density, high-resolution screens.” Shih speculated that Foxconn will also invest in Sharp’s R&D operations, in order to become a stronger competitor for the next generation of device screens. Screen technology is complex, and potentially very profitable for manufacturers.
Sharp also brings difficulties to Foxconn, in the form of past financial liabilities, and the purchase price was reduced in negotiations leading up to the deal.
As strong as Foxconn’s relationship is with Apple, it also faces an uncertain future, said equity-analyst Angelo Zino at S&P Global Market Intelligence.
“There’s always the risk that Apple could stumble here,” said Zino, although he said his firm’s analysis still favors the company with a strong buy recommendation. Zino said the potential risks to Foxconn include that Apple could lose market-share, or that it could further diversify its supply chain, spreading manufacturing and assembly work around among Foxconn’s competitors.
“Unfortunately, given that they’re the biggest acquirer of hardware equipment on the planet, Apple is always going to always be a major purchaser,” said Zino.
Peter Cohan, a lecturer at Babson College business school and regular contributor to Forbes, said the entire mobile-device ecosystem is facing a challenge going forward, in the form of “the maturing of the smartphone industry.”
“Apple is slowing down,” said Cohan, “and any supplier to Apple is slowing down because the iPhone is slowing down. Everyone is scrambling to restore growth to where it used to be in the good old days. But it won’t happen unless everyone gets on a new growth curve.”
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