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Foxconn Possibly Reversing Course in Display Production
August 12, 2019
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Terry Gou, the founder and former CEO of Foxconn saw an opportunity to become a player in the display market 2016 and bought a 66.7% controlling interest in Sharp for $3.5b. He already owned 50% of the output of the Sakai Gen 10 facility and a controlling interest in Innolux. Foxconn, the leading assembler of smartphones and white box TVs was the biggest buyer of displays, so why not move down the supply chain and increase revenues and margins, with little sales expense? At the time, Innolux was enjoying a paucity of large area panels as Samsung and LG were closing or converting Gen 7 LCD fabs and BOE had not started production at their Gen 10.5 fabs,  triggering a demand shortage, higher panel prices and high margins. Gou subsequently took other actions, by committing to an LCD Gen 10.5 fab in Guangzhou, China and an LCD Gen 10.5 fab in Wisconsin, U.S. But Gou might not have considered the effects of the “Crystal Cycle”, where in a 3 year period, performance goes from high margins to negative margins based on how well timed the introduction of new capacity coincides  with new demand. 
 
What occurred seems to be a disaster for Foxconn:
 

• Sharp after an initial turnaround, where the fat was cut, an attempt to revitalize the TV brand by cancelling Hisense use of brand in NA, and capacity was reduced by shuttering poor performing fabs is again on the decline. Sharp reported a double-digit decline in profit for the quarter ended June due to sluggish demand.
• Sharp’s venture into OLED production has been shut down and they seem to be exiting the smartphone panel market
• Sharp is trying to buy Gou’s 50% interest in Sakai for some unknown reason
• The TV brand in the U.S. and Europe has not recovered due to a lack of shelf space in Big Box stores, having been replaced by TCL
• Innolux performance has been the red for 18 months with no signs of recovery, a victim of the capacity growth in China, which will get even worse when BOE adds its 2ndGen 10.5 and CSoT adds 2 Gen 10.5 fabs.
• The effort in Wisconsin proved to be too ambitious as the idea of creating jobs in the U.S. to make Trump look good fell flat because there was no expertise in the U.S. and the market was already saturated. The $3b state investment is political fodder and Foxconn has shifted to a  Gen 6 LCD fab, where the overall market is actually decreasing. The state has contracted with DSCC to help them come up with a solution.
• Sharp has a market cap of $5.917b, which puts Foxconn’s investment at ~$3.9b (vs. their $3.5b investment) but try getting it in today’s environment.

 
This week Reuter’s reported that Foxconn is exploring the sale of its Gen 10.5, $8.8 billion display panel factory in China with 90,000 substrate/month capacity, just as it is about to start MP.   Foxconn is in talks to appoint banks to find a buyer for its liquid crystal display (LCD) factory that is being built in Guangzhou China. The discussions are at an initial stage and it has not yet come up with a price tag for the Gen-10.5 fab. The project was run by a joint venture between the Guangzhou government and Japan’s Sakai Display Products.  Foxconn is already under the spotlight for having failed so far to meet job-creation targets in Wisconsin. The company told Reuters earlier this year it was reconsidering plans to make advanced LCD panels at Wisconsin. 
 
And Gou, who retired from active management of Foxconn to pursue the role of President of Taiwan, lost to the mayor of Taiwan’s 2ndlargest city in the primaries.