Sharp’s Alliance with Foxconn: Escaping the Self-Sufficiency Mindset

Yasui Takayuki [Profile]

[2012.05.10] Read in: 日本語 | 简体字 | 繁體字 |

Sharp’s incoming president, Okuda Takashi, takes questions at a press conference to announce the capital and business alliance with Taiwan’s Hon Hai Precision Industries, a global leader in electronics manufacturing services. (Photo: Jiji Press)

Sharp has entered into a capital and business alliance with Taiwan’s Hon Hai Precision Industries (which trades as Foxconn), the world’s largest electronics manufacturing services group. The significance is clear: the vertically integrated model, in which a single company deals with everything from planning new products to designing and manufacturing the component parts and selling the finished product, is disappearing from the Japanese electronics industry.

Collaborating with emerging forces in Asia and elsewhere and moving to a model of horizontal specialization was unavoidable if Japanese companies were to compete with Samsung, Apple, and the rest. Now Japan needs to grapple with the problem of how to come up with ideas for attractive new products and services. If it fails to do this, Japan risks ending up as little more than a manufacturer of parts.

Digitalization and the Horizontal Specialization Model

The root cause of the enormous losses reported by Sharp, Panasonic, and others is their insistence on being self-sufficient. These companies have invested enormous amounts of capital to manufacture the panels that are the main components of large television sets themselves. So long as the finished product sells in sufficient numbers around the world, manufacturing the panels in your own factories means efficiencies of scale and higher profits. But a company takes a big risk with this strategy. If the volume sold fails to exceed the break-even point, the company immediately takes an enormous loss.

What about the other half of the alliance? Hon Hai Precision Industries produces a large number of products for Apple. To do this, they need to secure large numbers of high-quality glass panels and other components. With Apple rumored to be entering the television market in the near future, the company’s need for high-quality panels is only increasing. For Hon Hai, linking up with a Japanese manufacturer fulfills a long-held ambition. For Sharp, providing these services to Hon Hai will improve falling utilization rates at the cutting-edge plant that produces the panels at Sakai, near Osaka, and provide a welcome boost to profits. The interests of both parties are well aligned.

In a sense, moving away from vertical integration toward horizontal specialization marks an inevitable adjustment to the digital age. Compared to machine components, consistent quality parts for digital products can be readily manufactured more or less anywhere. Assembling the final product is also comparatively straightforward. It was these factors that led to the development of the horizontal specialization model of building electrical appliances, in which cheap parts made in Taiwan, China, and Southeast Asia are put together with Japan-made components at factories in Asia. Apple is one company that has made skillful use of this model to grow to where it is today.

For too long, Japanese companies have stuck to their self-sufficiency model and failed to keep up with the tide of change. For a colossal business like Samsung, it may be possible to enjoy the fruits of a self-sufficient, vertically integrated business model for some time to come. But for Japanese companies, with their rapidly dwindling share of the global market, this was already an impossible proposition.

Wanted: An Ability to Create New Concepts

Casting off the self-sufficiency mindset will mean putting a new challenge in front of Japanese manufacturers. They need to improve their ability to develop new concepts—something that is often pointed to as a weakness for the Japanese and Japanese businesses. Once a clearly defined concept is in place, Japanese companies are second to none at working toward the concept and building the product. Unfortunately, however, many Japanese companies are less adept when it comes to using strategic thinking to ascertain what the markets want, what products they need to make, and what kind of companies they should be looking to ally themselves with.

Japan’s companies need to develop the strengths that will enable them to perform as core players in the horizontal specialization model: coming up with new concepts for products and services, assembling parts, and maximizing sales opportunities in order to compete in the global marketplace. If they don’t, they will become mere cogs in the machinery of other global corporations.

  • [2012.05.10]

Senior staff writer on economics issues at the Asahi Shimbun. Born in 1957. Studied at Waseda University and the Tokyo Institute of Technology. His publications include Kore kara no yūryō kigyō (Leading Corporations in the Upcoming Era) and the co-authored work Nichibei dōmei keizai (Japan-US Allied Economy).

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