The Economist: Why did Terry Gou buy Sharp at a high price?

The Economist magazine website recently published an article analyzing the intentions behind Foxconn's high-priced acquisition of Sharp. The article excerpt is as follows: On the surface value alone, Foxconn's offer of $5.6 billion to acquire Sharp does not make much sense. For a company that is heavily in debt, has wasted two rescue opportunities and is still losing money, this price seems too extravagant. The head of the company, Terry Gou, does not seem to care about the impact of a previous transaction. Foxconn injected $800 million into the company in 2012 after Sharp's financial situation deteriorated greatly.

Why is he so enthusiastic now to spend so much on something that could become a heavy burden? Gou himself has not said, but there are several possible explanations.

Foxconn has long been the largest assembler of Apple's iPhone and other devices, with more than 1 million workers in mainland China. Foxconn's business with Apple contributes nearly half of the company's revenue, and it naturally wants to gain bargaining power. Sharp produces display panels and is also a major supplier to Apple. The merged company will have a greater say in profit margins. Foxconn's current profit margin is only a meager 3%.

Another reason may be that Gou wants to diversify Foxconn away from making equipment for other companies. It would be more profitable to have its own brand. About two-fifths of Foxconn's revenue comes from making network equipment and servers for a few Western companies such as HP and Cisco. In contrast, the company's handheld device assembly business has many more customers, such as Xiaomi in China (although demand for smartphones in China is saturating). The rise of handheld devices has seriously affected sales of desktop and laptop computers, which are also within Foxconn's business. If it can use Sharp's world-renowned brand to design and sell its own equipment, Foxconn can at least keep the profits that belong to brand manufacturers.

The desire to move from a low-margin assembler to the front of the value chain is understandable. Foxconn has worked hard to be more innovative. A 2014 study by the United Nations World Intellectual Property Organization ranked Foxconn as one of the companies in mainland China that applied for the most high-quality patents (even though its parent company is actually in Taiwan). Foxconn also applies for patents in the United States, where standards are more stringent than in China, and it mostly applies for "invention" patents rather than "utility" patents, which are less important.

Historically, Sharp has made significant contributions to the advancement of the technology industry. So this may be the reason why Terry Gou is willing to pay a high price for the acquisition - especially since he personally invested in Sharp's display business a few years ago. He believes that the company can make important breakthroughs in related fields.

If so, the acquisition of Sharp may help Guo Taiming's "11-screen" strategy. He hopes that his company will provide displays for all devices, from computers to cars to smart watches. This may explain why he is willing to pay a high price for Sharp. However, even if he finally owns Sharp, it will not be easy to turn around the bankrupt and troubled company.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.