Sharp and Japan Display may join forces in OLED challenge to Samsung

The long saga of the rescue of ailing Japanese electronics vendor Sharp ended in summer 2016, making its majority shareholder Foxconn. The Taiwanese manufacturer defeated a proposal, in late 2016, for Sharp to be merged with Japan Display to create a united Japanese front against the mighty South Korean display and chip suppliers, and the emerging giants of China. However, that Japanese group may still materialize in the crucial area of OLED screens, since Sharp and Japan Display are looking to work together to challenge the leadership of Samsung and LG, according to reports from Taiwan.

If true, the alliance’s timing probably relates to Apple’s conversion from advanced LCD screens, to OLED displays, for the high end iPhones. Japan Display, a joint venture between Hitachi, Sony and Toshiba, will aim to take advantage of Apple’s well known desire to reduce its reliance on Samsung – its competitor in smartphones – and to diversify its supply chain overall, reducing the risk of shortages and allowing it to push prices down.

These shortages have reportedly affected the new iPhone X model, which has hit supply and manufacturing issues. Other vendors are also scrambling for OLED supplies – Google was reported to be interested in investing about $880m in LG Display last year, to support OLED screens for its Pixel handsets.

Samsung is currently Apple’s only OLED supplier, and recently won a $4.3bn deal to supply OLEDs for the next iPhone.  LG will be added as a second supplier of iPhone OLEDs later this year, according to reports in 9To5Mac. The same journal also picked up on Taiwanese reports about the new Japanese collaboration, which would see Sharp ramping up OLED production in the second quarter of this year.

“The overall OLED panel production capacity from panel makers in Korea, Japan and China will definitely far surpass that of actually demand in coming years leading to oversupply of the panels,” reported Taiwanese source DigiTimes.

Sharp’s CEO, Tai Jeng-wu, told reporters at the Tokyo Stock Exchange before Christmas that he wanted to form a “Japan alliance” to compete with the South Korean giants in TV and mobile products. Meanwhile, he also said he was interested in investing in JOLED, an affiliate of Japan Display, which announced plans to mass-produce ‘printed’ OLED panels.

In 2016, the deal was finalized for Foxconn to pay ¥389bn ($3.5bn) for a 66% holding in Sharp, a price which was reduced by about $900m in April 2016 because of unexpectedly high liabilities and worse than anticipated earnings for Sharp’s fiscal year to March 2016. Foxconn, also known as Hon Hai Precision Industry, has been diversifying its activities beyond its contract manufacturing business, to boost growth and margins and to forge deeper bonds with key customers like Apple.

The Apple relationship was seen as being at the heart of its interest in Sharp – the Japanese firm makes some displays for iPhones and iPads, which Foxconn assembles, and the iDevice maker has previously helped to bail Sharp out to protect a valuable source of these critical components. In particular, Sharp has very advanced display technology, called IGZO, which could be important for both Apple and Foxconn to differentiate themselves, and it is growing its OLED screen business.

It is clear that the displays are the crown jewel for Foxconn. Indeed, there was a clause in the deal which would have given the Taiwanese firm first refusal to buy Sharp’s display business if the overall deal fell apart before October 5. It is a testament to the expertise within this business that major players repeatedly step up to rescue Sharp on the basis of its screen acumen – even if, in recent years, it has failed to turn that knowhow into profits.

Sharp’s financial woes have previously limited its ability to leverage those to gain market share. At its purchase, it had only 9% of the market for small and mid-sized screens, according to research by IHS, well behind market leader Samsung Display, on 24%, and also tailing Japan Display and LG Display.

“Sharp could benefit from a steady demand for smartphone screens from its new parent,” Hideki Yasuda, an analyst at Ace Research Institute in Tokyo, told Bloomberg. “They may also get access to new customers.”

One of the jewels is the pioneering IGZO platform, which was upgraded in 2016 to ‘Super IGZO’. This attracted an investment of up to $120m from Qualcomm in December 2012, including an 18-month pact to “develop and commercialize high quality color, low power MEMS displays incorporating IGZO”, advancing Qualcomm’s long standing interest in MEMS screens. Sharp has pioneered IGZO (Indium Gallium Zinc Oxide) technology, which supports very slim, bezel-less displays, running at ultra-low power (one-fifth of that of a regular LCD, a figure which improve by a further 10-20% with Super IGZO). All this is achieved using existing LCD manufacturing processes.

That was probably also the attraction for Samsung when it paid $112m for a 3% stake in Sharp in 2013 – this, like Qualcomm’s investment, came with a technology collaboration deal.