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To woo Apple, Foxconn bets $3.5 billion on Sharp

A Foxconn factory in Zhengzhou, China
A Foxconn factory in Zhengzhou, ChinaGilles Sabrie/The New York Times/NYT

HONG KONG — The Apple iPhone transformed the technology industry by popularizing the smartphone and blazing a path to a mobile future. But to do it, the American gadget company needed an important ally: a penny-pinching Taiwan-based factory operator named Foxconn.

Using vast facilities in mainland China employing hundreds of thousands of workers, Foxconn figured out a way to assemble the iPhone at a cost low enough that middle-class Americans could afford it. The business offered low profit margins, but the work buffed Foxconn’s financial results and cemented its status as the world’s largest maker of hardware for companies like Apple and Sony.

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Those relationships are now shifting — and Foxconn is betting heavily to keep up.

Foxconn said on Wednesday it had struck a deal to acquire control of Japanese screen maker Sharp for $3.5 billion, after weeks of negotiations and high-profile setbacks.

The deal, for a 66 percent stake in Sharp, is intended to make Foxconn a more attractive partner for Apple. The American technology company uses Sharp screens, which could give Foxconn added attractiveness and leverage in dealings between the two.

The Sharp purchase will saddle Foxconn with an ailing business that will take considerable money and effort to turn around, some analysts say. Reflecting those problems, the purchase price is $2 billion lower than a deal the two sides struck just last month, after Sharp disclosed the potential for costly problems — totaling nearly $3 billion in potential liabilities — down the road.

But Apple has been diversifying its supply chain, giving some production contracts to other assemblers and component makers. And Foxconn is grappling with China’s rising labor costs and a slowdown in the global smartphone market.

The deal highlights the huge pressure that the industry’s shifting dynamics are placing on Foxconn.

“On the one hand, you can see why Foxconn is trying to do it. It’s not clear the economics make sense, but it’s that they need to control more and more of the supply chain,” said Willy Shih, a professor at Harvard Business School. He noted that Apple might soon switch to screens made by other producers.

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The deal follows months of dramatic back-and-forth talks about the terms, including the disclosure last month of billions of dollars worth of potential problems on Sharp’s books. Acknowledging Sharp’s poor performance, Terry Gou, Foxconn’s founder and chairman, said in the news release that he was “confident that we will unlock Sharp’s true potential.”

The deal is a return to form for Foxconn — formally known as Hon Hai Precision Industry — in its emphasis on scale. The company has been looking in recent years for ways to further cut costs, including investment in automation. It has also expanded into businesses potentially more lucrative than grunt-work manufacturing, opening factories producing new technology like batteries for electric cars. It even created incubators to help hardware startups.

Foxconn, most of whose factories are in China, is emblematic of the challenges facing the Chinese economy at large.

Foxconn’s sales growth has slowed to single-digit percentages in the past two years from the double-digit growth it posted in the past, although profit growth has picked up recently, thanks in part to consumers buying bigger, more expensive phones with bigger screens.

While Foxconn’s revenue has been padded by booming orders for less expensive Chinese-branded smartphones, increased competition from China-based suppliers has been a concern highlighted by analysts. Also, Apple has actively sought to diversify its supply chain, giving orders for iPhone assembly to Pegatron, another Taiwan-based contract manufacturer, which operates a huge factory near Shanghai.

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