The recent decision by Chinese CE manufacturer Hisense to buy Sharp's TV business in the Americas made complete sense for both companies: Japanese manufacturers continue to struggle in the global TV market, and Chinese TV makers continue their so-far fruitless efforts to gain a foothold outside of their home markets.
However, it's much too soon to say for certain that the move will work out for Hisense. After all, Sharp's TV business has been struggling in recent years. It's also proven to be fairly difficult for almost any new TV maker, outside of Vizio, to gain much traction in the United States. Indeed, it's been hard enough for established TV manufacturers to find success with new TV brands in the market. One needs to only look at Sony's failed introduction of the high-end Qualia line more than 10 years ago.
As part of Hisense's deal to buy all assets of Sharp's TV factory in Mexico for $23.7 million, the Chinese company is getting the rights to use the Sharp brand name and all of the Japanese manufacturer's channel resources in North and South America, Hisense said in a news release on July 31, 2015. The brand licensing deal between the companies will start in January. Until then, Sharp said it will continue to manufacture and sell its current Aquos TVs and "fully support" sales of those products into the first quarter of 2016 with its channel partners. (Check out our news post "Sharp to Exit U.S. TV Market, Sells Brand to Hisense" for more on this topic.)
Sharp's exit from the tough U.S. TV business didn't exactly come as a surprise--even though Jim Sanduski, president of Sharp Electronics Marketing Company of America, told reporters at a June news conference in New York that his company had "no intention of vacating the U.S. market." The TV market had become "brutal," and Sharp had been struggling financially, he told reporters. But he also said at the time that the company secured additional bank funding and expected to report an operating profit this fiscal year. Since that June news conference, however, Sharp reported that it rang up a significant first quarter operating loss of more than $230 million for this fiscal year.
Sharp, just like most Japanese TV brands, has "struggled" in the global TV market over the past five years, said Paul Gagnon, director of TV research at IHS Technology. Nearly all TV makers have been "moving toward a smaller-scale, asset-light business model," he said. Licensing is attractive because of the positive return on investment and reduced risk of financial loss associated with it, he said. Sharp's Japanese rivals JVC, Sanyo, and Toshiba, along with Europe's Philips, have already decided to take that path.
It's All in the Numbers
Sharp's North American TV revenue market share (the retail dollar value of shipments) was only 4.6 percent in 2014, making it the number-six brand, and it had only a 4.1 percent share in the first half of this year, said Gagnon. In stark contrast, South Korea's Samsung was far and away number one in 2014, with a 35 percent share, and its share grew to 40 percent in the first half of 2015. U.S. manufacturer Vizio was second in 2014, with a 16 percent share, followed by South Korea's LG Electronics, with a 12 percent share. Sony fared best among all Japanese TV makers last year, with a 7 percent share, followed by Japanese rival Funai (a key Walmart TV supplier) with 6 percent. The top five players remained the same in the first half of 2015.
Sharp's current North American TV market share is but a small shadow of the more than 50 percent share it enjoyed a couple of decades ago, said Ken Werner, principal at Nutmeg Consultants, which focuses on the display industry. The manufacturer's current share is "too low to sustain that business," he said. In one effort to boost its share, Sharp last year licensed its name to Best Buy for low-end TVs, he said. "Selling the remainder of the North American TV business to Hisense is a continuation of that painful but necessary strategy," he said.
Sharp missteps in recent years included its resurrection of the Pioneer KURO line of TVs under the "Elite" brand name in 2011. (See our article "Sharp Should Have Licensed The Name KURO - Not Elite" for more on this subject.) Sharp licensed the Elite name from Pioneer for a new line of high-performance TVs featuring full-array LED backlighting technology, 3D, and an upgraded, glossy look. But it would have made a lot more sense for Sharp to license the KURO brand name because, although the Elite brand was well-respected, enthusiast consumers were more likely to be attracted to TVs with the KURO name on them.
Meanwhile, no Chinese TV maker has been able to achieve a major impact on the U.S. TV market in revenue share yet. Hisense had only a 1.9 percent share in 2014 for a number-nine showing, and it had only a 1 percent share (number eight) in the first half of 2015, said Gagnon.
"In China, the brands are looking for export markets, as the local market is relatively stable," but competition is intense within China, said Gagnon. So far, the Chinese brands have "found little success" outside China, and their combined share was only 5.5 percent of units shipped outside China in 2014, he said. Therefore, for them to grow, "it makes sense to leverage the long history of the Japanese TV brands to expand distribution, gain local sales/service/support expertise, and improve local market credibility," he said.
The Challenges Facing Hisense
Hisense hasn't been able to penetrate the U.S. market fully without a brand name that's recognizable to consumers, said Stephen Baker, vice president of industry analysis at NPD Group. Sharp will now provide it with the more recognizable brand name it needs, he said. Hisense is also "hopeful that the Sharp brand has enough pull in the U.S. to deliver Hisense additional, more premium market share in the large-screen segment of the industry."
But the "biggest challenge" is that Sharp and the other Japanese brands have been "under assault in the marketplace for years and have seen their position erode away to practically nothing," with the exception of Sony, said Baker. The decline of Toshiba and Panasonic, as well as Sharp's deal with Hisense, "shows the struggles these brands are under," he said. Hisense "has to hope" that it can "revive the Sharp brand with better pricing and more marketing backing that Sharp corporate could not afford," he said, predicting Hisense will try and position Sharp against Vizio as a "high-quality value brand" in the large-screen TV category.
The purchase price of about $24 million means Hisense is buying Sharp's brand recognition "fairly cheaply," said Werner. It remains to be seen, however, if Hisense will wind up devaluing the Sharp brand to Hisense's "traditionally modest level of quality, or whether it will make premium products" for the North American market that honor the Sharp brand and "allow Hisense to raise itself from the commodity-product swamp," he said.
For the record, Sharp declined to elaborate on the news release it issued about the sale, and Hisense didn't respond to an interview request.
If Sharp wasn't in "severe financial trouble," the purchase price would have likely been steeper, said Bill Gardner, a consumer electronics industry veteran who has worked at companies like Panasonic. Like the analysts, Gardner said the deal made perfect sense for Hisense and Sharp. Hisense is gaining a "somewhat valuable LCD TV business stronghold," he said. Buying an established player like Sharp offers a "shortcut" for Hisense to make inroads in the U.S. market, he said. "I am not so sure they can hold that distribution system together, but if they can, then it is a win-win," he said.
It sounds as if Sharp "cannot compete in the TV commodity business, but then none of the American nor Japanese [manufacturers] seem to have the stomach for this any longer," said Gardner.
Don't Believe the Apple Rumors
That commodity nature of the current TV market represents one major reason why Apple has not opted to jump into the category yet, despite ongoing rumors that it plans to do so.
Why would a company that's become accustomed to mobs of fans lining up outside its stores to happily hand over premium prices for the latest iPads and iPhones--and also don't seem to mind paying a lot more for Macs than comparable Windows PCs--want to enter a category where customers only line up for products once a year, on Black Friday, to get the cheapest model possible?
Gagnon doesn't expect Apple will enter the TV market for three reasons. First, margins on TVs--even for the highest-end models--are "unacceptably low" for Apple products, he said. The refresh cycle, meanwhile, is too long to for a "sustainable growth product segment" at the price points Apple would be expected to charge for a TV, he said. TVs costing more than $1,000 only make up about 10 percent of total TV sales, and Apple would only be able to get about 20 to 30 percent of that, he estimated. Once Apple fans bought a TV from the company, a replacement model would be six or seven years away, he said. Lastly, the keys for Apple are subscribers and installed base, and the Apple TV set-top streaming box "serves this purpose nicely" already, Gagnon explained.
"Apple will never do a television," predicted Baker. Even if Apple once considered entering the TV market, "that time has now passed" due to the state of the hardware market and the "small window of opportunity open there," he said. Instead, the huge growth being seen in over-the-top services provides Apple with a "much more logical entre into providing TV services to the market, without the exorbitant cost of building their own hardware," he said.
"Apple has succeeded by developing beautifully designed products supported by elegant software for which they are able to obtain very high profit margins," said Werner. It's "doubtful" whether Apple will be able to apply that same strategy to TVs, an area in which the company is "very late to the party." Werner couldn't think of anything Apple could do that's not already being done or under development by Samsung, LG, Sony, Vizio, or Panasonic. "Will Apple ever make a TV set? Not if Tim Cook is smart," he said.
I think that Cook and Apple are smart enough to avoid the same troubled waters of the U.S. TV market that Sharp is now swimming away from. As for Hisense, time will tell if and for how long the company can remain afloat.
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