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Sharp finds itself in survival mode

Big losses, weak TV demand hit Japanese icon

– The 100-year-old inventor of mechanical pencils needs to pen a new plan to make it to 101.

Sharp, Japan’s biggest liquid-crystal display maker, put up its Osaka headquarters and some plants as collateral this month to win bank loans after its credit ratings were cut to junk.

The supplier to Apple is also renegotiating a stock sale to Taiwan’s Foxconn Technology Group as it tries to recover from record losses and a 70 percent slump in shares this year.

Within six months of assuming office, President Takashi Okuda, 59, is firing employees for the first time in six decades after widening Sharp’s full-year loss forecast eightfold on plunging demand for TVs. Sharp’s troubles are symptomatic of what’s ailing Japanese consumer electronics companies Sony and Panasonic as they compete with TVs and phones made by South Korea’s Samsung Electronics and LG Electronics.

“Sharp isn’t in a situation to think about the next century,” said Makoto Kikuchi, chief executive officer at Myojo Asset Management Japan Co., a Tokyo-based hedge fund advisory firm. “It’s a matter of whether the company can survive in the next 12 months.”

Okuda must raise funds for a company that’s burning through cash.

Total liabilities reached $26 billion at the end of June, the highest since at least 2003 – or more than four times sales in that quarter, according to data compiled by Bloomberg.

Ratings companies aren’t making it any easier. Moody’s Investors Service and Standard & Poor’s both downgraded Sharp’s credit ratings to speculative grade, or junk. Okuda’s efforts to raise funds by selling equity to Taiwan billionaire Terry Gou’s Foxconn group and its flagship Hon Hai Precision Industry stalled after Sharp’s shares plunged to a 37-year low.

Foxconn wants a stake in Sharp to secure access to the latest technology for parts used by its biggest customer, Apple. In offering a lifeline, Gou is betting that Sharp, which invented the mechanical Ever-Ready Sharp Pencil in 1915, will continue providing it with key components for the iPads and iPhones that Foxconn assembles, while ensuring one of Apple’s important suppliers survives.

“If Hon Hai can’t come soon to help Sharp speed up development of products, lower manufacturing cost, improve supply-chain management, it’s probably hard to make an achievement,” Gou said in Tokyo last month.

Meetings between the two companies during Gou’s visit didn’t produce a final agreement.

Gou has invested 66 billion yen of his own money into the display venture with Sharp.

Widening losses and weakening demand amid a strengthening yen is the story of Japan’s electronics companies. Sony last had a profit in the year ended March 2008, and Panasonic has been unprofitable in three of the past four years. Like Sharp, both companies changed their CEOs this year.

Investors are getting less optimistic: the $32 billion combined current market value of Sony, Panasonic and Sharp – Japan’s three biggest TV makers – is dwarfed by Samsung’s $163 billion and Apple’s $638 billion. Sharp’s value has fallen 92 percent from its December 1999 peak.

“The Japanese electronics industry is in a crisis as South Koreans and Chinese are catching up,” said Toshihiro Nagahama, chief economist at Dai-Ichi Life Insurance Research Institute in Tokyo. “Japan is good at making products with better performance, and that’s the easiest for newcomers to copy.”