What's next for Japan's once-mighty Sharp after Foxconn deal?

Foxconn, a giant Taiwanese contract manufacturer, has just acquired Japan’s Sharp, a loss-making consumer-electronics designer and manufacturer in need of restructuring. Foxconn paid a 'lucky' ¥88 per share—a low price for a once mighty brand.

One of Foxconn’s largest acquisitions ever has obvious benefits for Foxconn—like access to Sharp’s leading screen technology and better pricing power with customers, including its largest, Apple, whose customer loyalty has been waning. But beyond these benefits, we’re wondering whether the Sharp brand is worth saving.

Curious, we ran some social analytics. We found that Sharp is a sunset brand. While the majority of leading tech-brand loyalists are under 30 and more likely to have disposable income, over 50 percent of Sharp’s loyalists are over 55 and less affluent. Sharp’s current consumer is 'past prime', meaning difficult work to rebuild relevance amongst a younger customer base—with future purchasing potential.

Foxconn’s founder and CEO Terry Gou hinted he intends to keep the Sharp brand alive, so how can he ensure it regains relevance? We see two strategic options for Sharp-ening up the brand:

1) Refresh Sharp as a consumer master brand

If it chooses this route, Foxconn could take an evolutionary or revolutionary approach. Evolution: Sharp maintains its current branding in existing categories while restoring profitability through cost-cutting and incremental product improvements. Revolution: Foxconn uses Sharp as a vehicle to become a brand player beyond Sharp’s current core: expanding beyond phones, TVs, speakers and microwaves into new consumer-electronics categories, similar to Samsung or Electrolux. Sharp’s brand equity is in premium screen technology and being Japanese—a challenging but not insurmountable starting point.

Reviving the Sharp brand is not necessarily a 'go big or go home' play. Instead of becoming the next Samsung or Apple, many Chinese companies are focusing on markets where their value proposition (great value) brings competitive advantage. There are 3 billion consumers in China, India, Africa and Eastern Europe who will pay a fair price for good quality from a Japanese brand.

2) Reposition Sharp as a consumer 'ingredient' brand

Sharp’s core competency is screen technology, so Foxconn could 'double down' here. Sharp screens could become a premium ingredient, allowing the company—and its device brand customers—to command greater margins. Like 'Intel inside' and 'Lenses by Zeiss', why not ‘Sharp Screen’?

Apple wouldn’t need or want to do this, but other Foxconn customers may find this valuable to differentiate their products. From our work in the industry, we know that screen technology is an increasingly important purchase driver, now that consumers see processing power and features as ‘good enough.’

This type of ingredient branding approach isn’t new. We’ve noticed a renaissance of the approach, with new characteristics. Xiaomi is known for building its own brand on the credibility of its component suppliers. The company promotes the Samsung battery in its new electric bicycle to build trust, and heavily markets Sony as the camera-tech provider for its smartphones.

Sharp is already partnering with Nintendo on its “free form” (flexible) console display—a “premium ingredient” model Foxconn could extend. Looking ahead, Foxconn could license brand usage alongside Sharp screens, though investment would be needed to refresh the brand's image.

So what’s the Sharp-est way forward?

Foxconn needs to diversify its business to avoid overreliance on its contract-manufacturing business and its decreasing margins, driven by rising Chinese labor costs. Perhaps better margins through branded business is the answer.

We’ve seen manufacturers attempt to move up the value chain before. We helped HTC make its shift from ODM to global brand in 2010. This experience taught us that building a relevant global brand is far from a trivial exercise. It requires a cultural transformation from technology to customer-centricity, not ot mention relentless marketing execution. Missteps aren’t forgiven, and sustaining momentum over time is challenging.

Foxconn has been experimenting with branded business to increase margin and move up the value chain. Recently it started making its own mobile accessories under the Coverbank brand, launched a Bluetooth headset brand, Candyard, and introduced Kick2real, a platform for helping entrepreneurs prototype products that Foxconn can then manufacture.

What if Foxconn became the provider of leading, branded electronic technology—screens, batteries, or other essentials? Saying 'you design it, we’ll make it premium' is a less risky, more sustainable way for the manufacturer to capture more value without straying too far from its core. More and more ambitious, emerging homegrown brands—tomorrow’s Xiaomis, OPPOs and OnePluses—will be keen to leverage established brands’ equity to build credibility and premium associations.

David Brabbins is a Hong Kong-based associate partner at Prophet