TOKYO — When flat-screen televisions began replacing boxy analog sets in the world’s living rooms more than a decade ago, few companies bet bigger on the new technology than Sharp of Japan.
The century-old manufacturer, which got its start making belt buckles and mechanical pencils before World War I, defied corporate orthodoxy by building an advanced new display factory in its homeland, while rivals outsourced to cheaper countries.
The gamble paid off — for a while. Made-in-Japan Kameyama model TVs, named for the factory, became a hit, and Sharp reaped big profits.
“We were winners then,” said Yukihiko Nakata, an engineer who worked for 33 years at Sharp.
Those days are over. Sharp is now mired in losses and its future is in doubt.
Sharp had found a rescuer in a Taiwanese company called Foxconn, which makes gadgets for Apple and others and was offering a $5.5 billion lifeline. But Sharp unexpectedly told its would-be rescuer last week that it could be liable for close to $3 billion in potential costs, according to a person with knowledge of the talks. Foxconn is still examining the sudden disclosure, and it isn’t clear whether the Taiwanese company will complete the deal.
Sharp’s plight is a story of missteps by executives who failed to anticipate major shifts in the global electronics industry. China, long the home of cheap manufacturing, has become increasingly sophisticated, making gadgets that can rival Japan’s in quality. Rivals elsewhere are challenging Japanese companies on innovation. The industry’s center of power has moved away from Japan to places like China, South Korea and Silicon Valley in the United States.
Sharp’s leaders were slow to adapt, employees and industry experts say. Unwilling to change strategy when business conditions turned against them, they doubled down on investments in increasingly unprofitable businesses, deepening the company’s financial distress.
As prices of liquid-crystal displays, or LCDs, began falling quickly in the mid-2000s, because of advances in manufacturing and a supply glut in China, Sharp scrambled to keep ahead of cheaper competitors. It developed ever-bigger TV displays and expanded into touch screens for smartphones and tablet computers. But rivals matched it more quickly than executives had anticipated, said Mr. Nakata, who left Sharp a decade ago and is now a professor at Ritsumeikan Asia Pacific University in Japan.
“First computer monitors became commoditized. Then it was TVs, and finally smartphone screens,” he said.
Sharp may be in bigger trouble that it initially acknowledged. Last Thursday, the same day Sharp’s board voted in favor of selling the company, its suitor, Foxconn, abruptly suspended its offer. Foxconn cited the “new material information” revealed at the 11th hour by Sharp. According to the person with knowledge of the situation, the information was a list of about 100 contingent liabilities — potential costs that could emerge depending on business conditions or other matters — totaling close to 350 billion yen, or $3.1 billion. Sharp declined to comment on the negotiations.
Sharp chose Foxconn over an investment fund backed by the Japanese government. The fund, Innovation Network Corporation of Japan, already owns troubled LCD assets once run by Toshiba and others, and government officials see it as a potential savior for Japan’s flat-screen industry. Still, the fund may need to take a second look at Sharp’s books to see what might be lurking inside.
Sharp was blinded by its early success in flat-screen TVs, employees and experts say.
Soon after the Kameyama factory started churning out TVs, Sharp started work on an even bigger Japanese plant, near its Osaka headquarters in the industrial suburb of Sakai. Four times as large as Kameyama, it cost more than $4 billion to build.
By 2012, three years after production began, the factory was operating well below capacity, and Sharp decided to sell part of it to Foxconn’s billionaire founder and chairman, Terry Gou. Write-offs related to its initial investment are part of the reason Sharp has lost more than $10 billion over the last half decade.
“They had enough production capacity with Kameyama, but they went ahead and built Sakai,” said Mr. Nakata, the former Sharp engineer. “That was a fundamental mistake.”
Sharp’s executives didn’t see it that way. They sought to exploit economies of scale while preserving what they saw as the company’s lead in quality and technology. “Our rivals might pursue this kind of scale, but we’ll have a cost advantage for some time,” Mikio Katayama, then Sharp’s president, said when the Sakai plant opened.
His timing was unfortunate. Much of the world was struggling after the global financial crisis . LCD prices were tumbling fast, and the yen’s exchange rate had shot up, making exporting from Japan crushingly expensive. Sharp fell into the red.
Sharp has since been through two restructurings and bailouts by its banks. About 6,000 full-time jobs have been cut through voluntary buyouts, equivalent to nearly one-quarter of its work force in Japan.
Monaliza Lastimoza came to Japan from the Philippines eight years ago to take a job at a Sharp factory in Taki, near Kameyama in central Japan. There she cut sheets of glass into palm-size rectangles for smartphone displays.
Last year, she said, she and her husband, also from the Philippines, were fired along with dozens of other foreign workers at the plant. Ms. Lastimoza was pregnant at the time and was about to go on maternity leave, she said.
“The factory seemed busy, but then suddenly they gave us a termination notice,” she said.
Sharp said the agency that provided the foreign workers in Taki should ensure that labor standards were followed in hiring or dismissing them. Sharp also declined to provide figures for the number of contractors and other irregular workers whose jobs have been eliminated.
Mr. Gou, of Foxconn, has made vague promises to protect jobs at Sharp, which employs about 20,000 people in Japan and thousands more worldwide. Foxconn also says it does not plan to break up Sharp.
The Innovation Network Corporation had different plans. In 2012, it combined LCD businesses it purchased from Toshiba, Hitachi and Sony into a new company, Japan Display. The company has struggled, and its backers hoped that adding Sharp’s production volume would make it more competitive. The network corporation was also negotiating with Toshiba to have Sharp sell Toshiba its home appliances division.
The fund offered to invest about $2.7 billion but said the real value was larger because it could use its influence with Japanese banks to secure additional financial support.
Yet the banks appear to favor Foxconn. Two members of Sharp’s board installed by the electronics company’s biggest lenders, Bank of Tokyo-Mitsubishi UFJ and Mizuho Corporate Bank, supported Foxconn’s offer.
“The banks lent too much money, and this saves them the embarrassment of writing it off,” said Atul Goyal, an analyst at Jefferies, a brokerage firm.
Should Sharp strike a new deal with the Innovative Network Corporation, that would suit the agenda of officials in Japan’s powerful ministry of industries who think its operations could be saved. But Prime Minister Shinzo Abe has been preaching the virtues of foreign investment, and using taxpayer money to bail out Sharp could be awkward.
“Sharp’s technology is not essential to Japan’s industrial structure today,” said a senior Abe administration official, who asked not to be named to discuss a private business matter. “If it was, Japanese companies would have put up money to buy it.”