Foxconn TV: Watch This Space

At the very least, Foxconn's recent investment in Sharp Electronics Corp. is a major step in its strategy to secure a supply of the most important component in today’s consumer electronics: the LCD panel. Some in the technology industry see the move as a strong indication that Apple Inc. (Nasdaq: AAPL) will bring a TV to market soon.

On March 27, Sharp announced that it would sell Foxconn a 10 percent share of the company and a 46.5 percent stake in Sharp’s 10th-generation LCD fab, which makes 60-inch panels. Foxconn agreed to buy 50 percent of the production from that fab, and Sharp agreed to outsource more of its TV OEM business to the company.

Foxconn Electronics Inc. , which also goes by the name Hon Hai Precision Industry Co. Ltd., is the largest EMS in the world and manufactures many of Apple’s products, including the iPhone and iPad. It is also becoming a major ODM for TV makers. Just two years ago, it made a huge investment in the LCD market. It spent more than $5 billion on a complex merger that combined Innolux, Chi Mei Optoelectronics, and TPO Displays Corp. to form ChiMei Innolux (CMI), the third-largest LCD maker. By securing its own supply of panels, which account for 70 percent of an LCD TV’s cost and 90 percent of its display performance, Hon Hai made itself a one-stop shop for TV makers.

The Sharp investment fills a couple of gaps in Hon Hai’s LCD supply chain. First, the 10 percent share presumably gives it better access to 9.7-inch panels for the iPad 3, says Sweta Dash, an IHS iSuppli Corp. analyst. Though CMI supplied some of the panels for Apple’s iPad 2, the majority came from Samsung and LG Display. (Dash estimates CMI supplied only about 6 percent.) For the new iPad, CMI was dropped altogether as a supplier and replaced by Sharp.

Also, the investment gives Hon Hai access to panels for large-screen TVs. Through CMI, Hon Hai already has supplies of nearly all panels except the very largest (60 inches and larger). Dash calls Sharp’s 10th-generation fab the only facility capable of making such panels efficiently. By becoming a joint owner of the fab (Sharp owns 46.5 percent, and Sony owns the rest), Hon Hai is securing access to large panels, and it is probably getting a technology transfer that will help with its own LCD development.

“Besides the Gen 10 capacity, it’s possible that Sharp will transfer other technologies to Foxconn, including the high resolution low temperature polysilicon (LTPS), oxide TFT, color filter and advanced processes,” David Hsieh, vice president of the greater China market for DisplaySearch, wrote in a blog post. “Foxconn is currently building a Gen 6 LTPS fab in China for high resolution mobile phone panels, and may require more technical support from Sharp.”

According to IHS iSuppli, the need to lower costs and improve efficiency is driving more TV companies to outsource manufacturing, and Hon Hai is undoubtedly trying to position itself to capture as much of that business as possible. The company already builds Sony TVs, having bought that company’s Mexican and Slovakian TV assembly plants in 2009 and 2010.

In addition, the Sharp deal has industry watchers speculating that Hon Hai is preparing to manufacture a TV for Apple.

“We expect Apple to debut the iTV by the end of this year, and it is likely to adopt Sharp’s 10th generation TFT production line to produce TFT LCDs for iTVs,” according to a Daiwa Capital Markets report quoted in a BusinessWeek article. “We believe Hon Hai will have better vertical integration for the Apple iTV following its stake acquisition in Sharp’s plant.”