The economic and political dynamics in Asia are quickly changing. Just a few decades ago, Japan was the tech-country that was home to almost every market leader in the consumer electronics segment. From video game consoles to TVs to home appliances, Japan’s rule was well established. However, now, former industry titans need the support of companies from other Asian economies such as China, South Korea and Taiwan for their survival. Nowhere is this more apparent than in the case of Sharp Corporation (ADR) (PINK:SHCAY), whose survival now depends on every penny that will come its way from SAMSUNG ELECT LTD(F) (NASDAQOTH:SSNLF), QUALCOMM, Inc. (NASDAQ:QCOM).
Samsung recently entered into a deal with Sharp whereby it will acquire a 3% interest by investing $111 million in the firm. This comes along with the firm posting a quarterly operating profit of $28.5 million versus a loss of $250 million a year ago. The company benefitted from better sales of home appliances and mobile phones while a weak Yen also helped it to turn things around slightly.
However, the company’s cash reserves still continue to shrink down to just $1.70 billion by December, dropping by 16% since March 2012. During this period, Sharp’s current liabilities increased by 18.1% to $17 billion – nearly ten times as much as its cash reserves. Moreover, there is a $2.1 billion convertible bond due in September.
Samsung, by aligning with Sharp, is looking to strengthen its supply chain of display panels through this investment via vertical integration. This won’t be the first such case for Samsung; acquiring a 5% stake in Japan’s Wacom, which makes styluses for the Galaxy Note.
This deal with Samsung comes after QUALCOMM, Inc. (NASDAQ:QCOM) spent $121 million in December last year. Like Qualcomm, Samsung is also making investments for Sharp’s display technology. The better than expected results in the most recent quarter might trigger another round of investment from Qualcomm, which could very well become the largest shareholder in Sharp.
The general turnaround in LCD sales is the key here. It’s obvious that both Samsung and QUALCOMM, Inc. (NASDAQ:QCOM) bided their time during the decline in LCD sales to see which assets would pop up as the most distressed and pounce on them.
Now that a potential purchase by Foxconn is out of the way, Sharp will have to sell its future on its IGZO display technology. IGZO – Indium Gallium Zinc Oxide – is a potentially revolutionary material for mobile computing that could pave the way to solving the biggest design problem in modern large-screen devices, the power draw of the screen itself.
And this is why Samsung wanted a piece of Sharp and why Sharp resisted selling 20% of itself to Foxconn out of simple desperation. Its rebuffing of Foxconn’s demands means that Sharp has a firm commitment for more support from Samsung and QUALCOMM, Inc. (NASDAQ:QCOM) to finish bringing IGZO to a wider market than just Japan, where it is currently being used in its branded products.
Samsung’s investment in Sharp is also going to create problems for Apple Inc. (NASDAQ:AAPL) in two ways. First, it will make it more difficult for the iPhone maker to diversify its supply chain and cut off a means by which to reduce its reliance on Samsung. Apple Inc. (NASDAQ:AAPL) reportedly buys a third of its display panels from Sharp and has been partnering with it for its HDTV. It wouldn’t be surprising if Samsung’s enormous display requirements prompt the company to increase its stake in Sharp, since its SmartTV plans are ambitious. For now Apple Inc. (NASDAQ:AAPL) wouldn’t be threatened, but Samsung could make life miserable by taking up much of Sharp’s capacity.
Hooking up with Samsung gives Sharp the opportunity to push IGZO out through their manufacturing channels to allay OEM fears of relying on a single producer. It may not be enough to save Sharp in the end, but it will accelerate the conversion of the world to mobile computing on devices that don’t need to be charged every few hours.
The article Sharp’s Hopes Depend on Samsung Deal for IGZO originally appeared on Fool.com and is written by Peter Pham.
Peter Pham has no position in any stocks mentioned. The Motley Fool recommends Apple Inc. (NASDAQ:AAPL). The Motley Fool owns shares of Apple Inc. (NASDAQ:AAPL) and Qualcomm.
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