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The 20 Year Fall of Japan's Sharp Corporation
The mechanical pencil. The calculators. The TVs.
Over the years, Japan's Sharp Corporation has delivered a bevy of iconic products.
But starting at the turn of the century, the company found itself increasingly trapped in a single, incredibly competitive business.
Attacked on all sides by foreign competitors and running out of money, the company sold itself to a Taiwanese electronics giant. The first such foreign takeover of a major Japanese consumer electronics company.
For this video, let us talk a bit about the rise and decline of the 100-year old Sharp Corporation.
Founder Tokuji Hayakawa (早川 徳次) was born in 1893 in Tokyo, the third son of a furniture-maker. He lived a harsh childhood. His mother suffered health problems and could not take care of him so he was put up for adoption.
Treated harshly by his new step-mother, Tokuji was forced to drop out of the second grade for work. But at the age of eight, an elderly lady got him a position as an apprentice for a strict but compassionate metalworker.
After training in metalworking for seven years, Hayakawa graduated and joined the workforce. Soon after came his first invention, a belt buckle dubbed the Tokubijo.
What was special about this buckle was that it can be fastened without needing to punch holes into the belt. It was a hit, selling 4,752 pieces and necessitating a serious expansion in capacity.
Thus at the age of 19, Hayakawa opened a metal workshop of his own in Tokyo with just 50 yen of invested capital. 40 of which was borrowed. The Workshop
A few years later in 1915, a manufacturer placed an order at Hayakawa's workshop for the metal innards for a mechanical pencil.
Struck by that pencil's poor quality, Hayakawa worked day and night to produce a superior version: the Hayakawa Mechanical Pencil.
This pencil was a hit. Most pencils at the time were imported from Germany. With Germany fighting World War I at the time, the Hayakawa Mechanical became the next best alternative.
The business rapidly expanded. Hayakawa's long-lost older brother Masaharu joined the business. In 1923, the two brothers built a new, 990 square-meter factory staffed with 200 workers to handle all the orders.
Then on September 1st 1923, 11:58 AM, the Great Kanto Earthquake struck the country.
Hayakawa, his family, and his factory survived the initial earthquake, which is said to have lasted over 4 minutes. However, Hayakawa's wife and two young children perished in the massive fires that followed the initial quake.
Over 100,000 people died in this national disaster. That does not include the various mob-driven massacres of ethnic Koreans that occurred thereafter. A horrific and under-covered secondary tragedy.
Amidst this devastating societal and personal tragedy, the Hayakawa Brothers pencil factory burned down. Hayakawa still owed 20,000 yen worth of pencils to his pencil sales distributor which he could no longer produce.
To compensate for this, Tokuji transferred over all his pencil-making equipment and granted them free use of his patents. He then moved to Osaka for six months to help them produce these pencils themselves.
Rejuvenation and Radio
Tokuji enjoyed his time in Osaka, and resolved to rebuild his business there.
In 1924, after fulfilling his six month contract, he established Hayakawa Metal Laboratories and started tinkering with a new product - the crystal radio.
Radio was only recently introduced into Japan, and most radio receivers were basically regarded as mere toys. The dominant telephone and telegraph makers did not deal with them, leaving the market to tinkerers and hobbyists.
Hayakawa bought an imported radio for 7.50 yen and tore it apart. Despite knowing nothing about electricity or radio principles, he and his team reverse-engineered the device.
In 1925, Hayakawa released their own domestically-assembled crystal radio - called the "Sharp". At 3.50 yen, it was drastically cheaper than its foreign competitors.
The Sharp radio came at the perfect time. That same year, the Tokyo Broadcasting Station - an ancestor of NHK - started Japan's first radio program. Radio channel subscribers grew steadily throughout the 1920s and 1930s.
Despite the Sharp radio's popularity, Hayakawa knew that crystal radios were an inferior product.
A crystal radio relies on the radio signal's power to make sound, limiting its reception and volume levels.
Vacuum tube radios on the other hand were capable of boosting the signal's power and volume.
After reverse-engineering an imported Neutrodyne, Hayakawa eventually produced the Sharp Dyne series of radios.
Depending on the model, the Sharp Dyne had 3-8 vacuum tubes, ran on AC power, and cost a fraction of the foreign imported models. It sold like hot cakes - sales went from 58,000 in 1936 to 130,000 in 1939.
To make enough radios to fulfill demand Hayakawa built a new factory and set up a production line with 23 minute-long steps on a conveyer belt.
In 1942, the company changed its name to the Hayakawa Electric Company, producing all sorts of radios from simple receivers to advanced two-way radios for airplanes in the military effort.
This business supported the company through the difficult war and post-War reconstruction periods. In one case, the company only survived thanks to the Korean War spurring massive radio purchases by the US Army.
In 1951, NHK and other big Japanese companies started experimental television broadcasts. To demonstrate the technology's potential, they set up receivers in public areas.
These large screen projections were well-received so the NHK moved forward with public television broadcasts. Same as with radio, Hayakawa Electric wanted a television receiver ready for the big event.
With technical assistance from RCA, the company eventually produced a device in time for NHK's first television broadcasts in February 1953 - the TV3-14T, Japan's first commercially available television.
The TV3-14T still cost a mega-ton. It cost 175,000 yen at a time where the average civil servant made 8,700 yen a month.
Nevertheless, the product’s early and timely entrance secured Hayakawa's dominance in the domestic television market.
Manufacturing costs fell and monthly salaries grew.
And before long, a household television set was no longer so expensive and sales skyrocketed.
Hayakawa Electric quickly started moving on to other categories.
In 1962, they released Japan's first microwave, the R-10.
As well as Japan's first solar-powered consumer electronics product, a transistor radio. Hayakawa remained a dominant solar cell producer into the 1990s.
But it would be another product that put the company onto the global electronics map.
In 1960, excited about the future possibilities of the growing semiconductor industry, Hayakawa Electric started a team to design logic circuits and eventually produce a computer.
However, Japan's Ministry of International Trade and Industry decided not to enroll the company into its mainframe computer development program.
Without government support, Hayakawa decided to focus instead on sophisticated but non-programmable consumer electronics like voucher printers, cash registers, and calculators.
Calculators, especially. In 1962, the British company Bell Punch had started importing and selling its vacuum tube-powered desktop calculator - ANITA. So Hayakawa set out to produce their own 20-key desktop calculator, powered by germanium transistors.
Thus came the CS 10-A Compet, one of the first all-transistor calculators. It used 530 transistors, weighed 25 kilograms and cost about 535,000 yen or $15,000 in today's USD. Despite the price, it sold out its entire 300-unit supply in just a few months.
The next year, silicon transistor prices rapidly started to drop, allowing Hayakawa to produce the CS 20-A calculator, first released in September 1965. It was more power efficient, reliable, and best of all cheaper.
Newer models quickly followed. 1966 saw the CS-31A, the first desktop calculator made using integrated circuits. The calculator had half the parts, half the weight, and sold for half the price.
That year, Hayakawa led the Japanese calculator industry with 44% market share, selling 24,000 units.
About half of that was exported to the United States through its Sharp Electronics subsidiary as well as global distributors like Sweden's Facit.
I did a video about Facit earlier in this channel. Worth watching.
In 1970, Hayakawa Electric changed its name to Sharp Corporation. The brand's name derived from a pencil, but soon came to encompass everything the company did.
That year, Founder Tokuji Hayakawa also stepped down as the company's president. Tokuji passed away ten years later in 1980 at the ripe old age of 86.
New President Akira Saeki took on the challenge of guiding Sharp through new, uncertain economic conditions.
Sharp's calculator's success triggered over 50 Japanese manufacturers - not to mention various American ones - to enter the market too, setting off what we now call the "Calculator Wars".
In about a decade, the calculator went from this desktop-bound monstrosity with hundreds of vacuum tubes to a portable, battery-powered gadget doing all of its calculations on a single, integrated chip.
The calculator was the mobile phone of its time. And the calculator wars pushed Sharp and its competitors to pull every possible trick to make their calculators smaller, cheaper, faster, and better.
A Better Display
Up until now, such calculators used fluorescent display tubes or Nixie cold cathode tubes to display their numbers. However, these were expensive, large, and power inefficient.
In January 1969, a Sharp researcher watched a NHK documentary about RCA. In that documentary, RCA demonstrated a technology they announced back in 1968 - Dynamic Scattering Mode Liquid Crystal Displays.
Scientists first observed liquid crystals in 1880. They were a strange material. They sat in a phase between liquid and solid, and refracted light like a crystal. Thus, the name.
In the early 1960s, RCA researchers noticed that liquid crystals had interesting electro-optic characteristics, and eventually invented a way to electrically control the way they reflect light as a technology for creating a display.
But in order to be suitable for a calculator, the crystal display needed a better contrast ratio and had to work at room temperature. More work had to be done.
From RCA to Sharp
Sharp asked RCA's General Manager Bernie Vonderschmitt to develop and produce DSM LCD screens for their calculators, and even offered to pay for development. However, RCA and Vonderschmitt declined.
The reasons for this are unclear. RCA wasn’t too interested in LCD, seeing it as a distraction from their core Cathode Ray Tube or CRT display business. And Vonderschmitt personally had concerns about LCD's immaturity, cost, and yield.
By the way, Vonderschmitt was a Silicon Valley giant. He helped teach RCA's semiconductor manufacturing methods to Taiwan's first teams and later co-founded Xilinx with Ross Freeman in 1984. His Japanese contacts were essential in helping to secure manufacturing capacity for the first FPGA.
Anyway in 1971, Sharp licensed some of RCA's patents and set up a team called S734 to put a DSM LCD display into a calculator in 12 months.
After tediously mixing over 3,000 kinds of liquid crystals and synthesizing 500+ mixtures, the team eventually produced the right mix for a suitable screen.
Thusly in June 1973, Sharp brought the Elsi Mate EL-805 to the market. Made up of just an LCD and five ICs on a single glass substrate, it is hard to convey just how revolutionary this product was.
The calculator was 2.1 centimeters thick, 12 times thinner than its closest competitor. It used 1/9000th the power of existing calculators and can go for 100 hours on a single charge. And weighed just 200 grams, a 125 times reduction.
More calculators followed, including a solar powered one in 1975. By 1985, the company had cumulatively sold over 200 million calculator units.
An LCD Giant
Sharp continued its studies on LCD technology. In the mid-1980s, they found out that IBM had identified a new full color silicon-based display technology known as TFT-LCD as a potential replacement for CRTs.
They got to work producing their own version of it. And in 1987, the company leapfrogged its LCD competitors in successfully producing a 14 inch full color, full motion LCD display.
Then in 1991, they debuted the first wall-mounted television: the 9E-HC1. People recognized this electrifying technology as the future and it started replacing CRT in televisions and other displays.
Unfortunately, this strong position was in marked contrast with the rest of the company.
Struggling into the 1990s
Following the unraveling of its real estate bubble, Japan's domestic economy weakened from the influence of a strong yen, increasing wages, and the effects of manufacturing offshoring.
This recession fundamentally shifted the direction of Japan's big electronics firms. Cheap foreign imports challenged Sharp's older products like fax machines, calculators, and microwave ovens.
To replace them, Sharp launched a bevy of new, more advanced products. Some like the camcorder were relative hits. The Viewcam had 20% of the Japanese market after its release in 1992.
But other categories like the Wizard electronic organizer never took off, and saturated categories like notebook PCs failed to make enough money.
The Crystal Clear Company
Profits declined throughout the 1990s.
In 1998, net income fell to 24.8 billion Yen, representing just a 1.4% profit margin and a near 50% decline year over year.
This bad performance resulted in Sharp’s president resigning.
The company's one bright spot had been LCD Panels and LCD-related products, responsible for 30% of company revenues.
Thusly in 1998, new president Katsuhiko Machida sought to streamline Sharp and reposition its LCD business at its very center.
The "Crystal-Clear Company" as he called it. In his first press conference, he said:
> Sharp’s problem is low brand perception. For branding, we have to make a "clear face" for customers. To this end, we will set LCD technology as our face. From now, every Sharp product will be related to LCD technology.
Sharp's pivot towards displays was risky considering the emergence of intense competition from the rest of Asia, particularly Taiwan and South Korea.
Regardless, Sharp had high confidence in their LCD technology.
They ditched their venerable CRT television business - which dated all the way back to 1953 - and went all in on LCD televisions, launching its AQUOS TV brand.
This bold move seemed to have paid off. In 2001, AQUOS quickly captured 80% global market share in the very young LCD TV market, generating nearly $400 million USD in sales worldwide.
Sharp seemed to retain its dominance even after 2001, when a bevy of Japanese and Korean firms like Sony, Samsung, and LG followed Sharp into the television market.
By mid-2003, AQUOS dominated the local Japanese market with 60% share.
The next year in 2004, Sharp still held a leading 33% market share in the overall LCD industry. But Samsung and the competition were catching up faster than anyone at the company anticipated.
Notably in early 2002, Samsung caught Sharp and the rest of Japan's display industry by surprise by being the first to produce leading edge fifth-generation LCDs.
Looking to cement their lead, Sharp began investing billions of Yen into new TFT-LCD factories across Japan. The largest of which was the Kameyama Plant in Kameyama City in the Mie Prefecture.
This massive factory had two phases - completed in 2004 and 2006 - and cost a cumulative $4 billion USD. It produced over a million panels a year, the world's biggest at the time.
Kameyama represented a big bet on Japan-based production. By now, many other Japanese companies had offshored their LCD production to cheaper countries.
President Machida and the management however had high confidence in the superiority of Sharp's technology, and believed local production was necessary for the company to retain its secrets.
Local media praised the factory as a model of Japanese manufacturing. Sharp positioned its panels as a premium product. The "Kameyama Model" brand was to be like the Kobe beef of TFT-LCD televisions.
The billions of yen spent on the Kameyama plant however strained company finances.
Like many other conservative Japanese companies, Sharp had a long standing financial rule restricting any single division's investment to a certain percentage of its sales, operating income and cash flow. But because of LCD's importance to the company, these rules were waived.
Unfortunately, the plant came online the same time as other massive facilities built by Taiwan's AU Optronics, Sony, Samsung, and LG.
The LCD panel industry fell into a situation of over-supply. In 2004, a 32-inch TV panel cost about $865. By 2011, that same sized panel would cost about $149.
Throughout the 2000s, Sharp's TV market share would fall from as high as 80% to under 10% while its rivals caught up to the company's first-mover advantage.
The LCD television was starting to turn into a cheap commodity.
Looking to retain leadership, Sharp announced that they focus on selling more LCD panels to other businesses. As President Machida said back in 2004:
> We will try to keep greater than 50 percent share in world LCD panel production. Half of our products will be sold to other LCD TV manufacturers, and the rest will be used for our own TVs. Such a plan can be achieved if we continue to invest in production capacity.
This strategy meant even more financial investment - leading to Phase 2 of the Kameyama Plant.
In order to pay for it, Sharp cut its investment in home appliances. By 2006, LCDs made up half of the entire Sharp Corporation's revenues.
You can say that the LCD push had some positives. LCD-related division sales steadily grew from 2002 to 2006.
And in the fiscal year ending March 2008, Sharp as a whole showed record high sales of $34.5 billion and a billion dollars USD in profits.
But was this healthy revenue? Machida mentioned that he wanted 50% of production sold externally, but that ratio never cleared 20%.
And with competition from Taiwan, South Korea, and now China catching up to and surpassing Sharp, the massive investments they made into LCD production were not paying off as originally expected.
In 2007, president Machida stepped down and a new President took office - Mikio Katayama. However, Machida retained his influence as Chairman. Together, the two oversaw the financial blow that crippled the company.
In 2007, Sharp announced that it would build a new set of factories in the city of Sakai, Osaka Prefecture.
The Sakai factories would cost $3.4 billion USD and were projected to be almost as large than the latest Kameyama Phase 2 location - 13 million units of 32-inch equivalent panels compared to Kameyama's 20 million units.
Who was going to buy all of these new panels? Sharp reached out to fellow Japanese TV makers like Pioneer, Toshiba and most importantly, Sony.
In February 2008, Sony, then the second-largest LCD TV manufacturer, announced an agreement with Sharp in which Sony would take a 33% ownership share in the Sakai factories - then named Sharp Display Products.
However, Sharp failed to properly manage relations between its TV and Display panel divisions. It is the same issue with Samsung and Apple, where one division of the company competed with the customers of another division.
Sony found itself relegated to second place behind Sharp's own AQUOS TV sales, leading to shortages and delays that pissed them off.
In the end, Sony did not go through on its 33% purchase - it never owned more than 7% - and eventually sold its entire stake in the joint venture back to Sharp.
Sharp tried to sell Sakai's larger panels to the United States, but these 60 inch TVs never really caught on there.
Then came the Global Financial Crisis. Sales collapsed and losses increased. In March 2009, Sharp announced that it had turned a net loss for the first time since the stock went public in 1956.
Management admitted that they made a mistake in investing in local production within Japan. Yet they still continued investing in Sharp Display Products - which changed its name to Sakai Display - and kept LCD at the center of their strategy.
This was despite the TV business division continuing to deteriorate. By 2009, Sharp's TVs held a market share of just 6-7%, good for fifth place and a third of Samsung's market leading 18.8%.
Operating utilization for the new $3 billion dollar Sakai plant fell to less than 50%. Not being able to decide between the LCD panel supply and TV businesses led to Sharp losing in both of them.
Sharp's sales in the fiscal year ending in March 2012 declined by $10 billion from 2008. The company turned a net loss of over $5 billion, and the company nearly fell into bankruptcy.
In March 2012, Katayama stepped down from being Sharp's president for this terrible performance, making way for Takashi Okuda. However Katayama and Machida remained influential through positions as members on the board.
At this point, Foxconn enters the story. In 2012, the $150 billion Taiwanese electronics giant bought a 9.9% stake in Sharp for about $854 million. They also bought a larger share in Sakai Display.
Why would Foxconn be interested? I mentioned in a previous video that Foxconn has a land-and-expand business model that seeks to take over a client's whole manufacturing supply chain.
Electronics assembly is an extremely low margin business. Foxconn squeezes profits through economies of scale and vertical integration up and down the supply network.
The more components that Foxconn's clients source from a Foxconn affiliate, the more profits Foxconn gets to keep. And for electronics gadgets like your mobile phone, the most expensive component tends to be the display.
Three years earlier in 2009, Foxconn helped Taiwan's Innolux acquire two other Taiwanese display companies to create one of the world's biggest TFT-LCD panel makers. Adding Sharp's capacity and technologies enhances this rollup strategy.
Foxconn did request a more substantial partnership - perhaps even an acquisition. But Sharp declined such a tie-up and would do so for several more loss-making years.
Chairman Machida led the negotiations with Foxconn for the investment. And with Katayama and Okuda still influential in the company, rumors of power struggles wafted through the Japanese business press.
Okuda eliminated 11,000 jobs as new smartphone makers like Xiaomi became big buyers of Sharp's small and medium-sized panels. But the company remained deep in the red.
There was still too many players in the LCD market. In 2012, Sony, Toshiba, and Hitachi merged together their LCD divisions to create Japan Display Inc or JDI. JDI and Sharp competed for several years, causing pain to both.
And Sharp for all of its supposed technological prowess missed several critical industry transitions including that towards new display technologies like LED-backlit LCD screens and OLED.
In March 2013, the company announced a staggering $5 billion loss, leading to all three leaders and former leaders - Katayama, Machida, and Okuda - exiting their positions.
The company never regained its footing thereafter. In 2013, Sharp and Fujitsu began losing their once-solid grip on the Japanese domestic smartphone space - perhaps one of their last hopes in the consumer electronics space. Apple surged ahead and now holds dominant market share.
As early as the first investment in 2013, Foxconn had an offer out to Sharp for a more substantial investment. At the time, Sharp declined.
But in 2016, after three more difficult years, Sharp finally accepted Foxconn's offer to purchase a controlling 66% stake for $6.2 billion. However Foxconn then revised that offer down to $3.8 billion upon learning about a bunch of new financial liabilities.
Several other suitors came up, including those organized by the Japanese government. However, Sharp's bank creditors eventually chose to side with Foxconn.
Sharp's acquisition represents the first foreign takeover of a leading Japanese electronics firm. A sad end for a venerable 100 year company.
Foxconn appointed a Taiwanese - Tai Jeng-wu - as its new CEO. He has sought to cut costs, closing various unprofitable overseas ventures, cutting even more employees and moving production out of Japan.
In its first full year under Taiwanese management, Sharp turned a profit - though small - for the first time in four years.
Tai re-oriented the company back to producing the branded electronics products like it once had many years ago.
Foxconn is also rebuilding Sharp's withered semiconductor manufacturing business, which include a very nice 130 nanometer fab.
I mentioned this briefly in my video about Foxconn's semiconductor ventures in India.
In February 2022, Tai retired and a new CEO from Foxconn took the job - Wu Po-Hsuan. He previously led the company's brand products division, another indication of its future direction.
Sharp Corporation became a consumer electronics giant not necessarily because it had the best technologies, but because it used technology to produce the right products at the right time.
As the company fell deeper and deeper into LCDs, the company clung to a confidence in the superiority of its technology. But as it turns out, display panels are a brutal, grinding business with low margins and high insecurity. And it ground up Sharp too.
We shall see where Foxconn takes Sharp in the future. The brand still has a 100 years of value behind it. I hope I can see it rise to its former glory, once more.