May 12, 2016 / 7:57 AM / a year ago

Foxconn founder tells Sharp staff layoffs needed to begin revival

Sharp Corp Chief Executive Kozo Takahashi (R) speaks to the media after a company results news conference in Tokyo, Japan, May 12, 2016.Toru Hanai

TOKYO/TAIPEI (Reuters) - Foxconn founder Terry Gou said there would have to be layoffs at Sharp Corp to turn around the ailing Japanese company, but pledged that wages would rise and profit-sharing would again be the norm.

"Unfortunately, a close review of the company's operations makes it clear that the level of inefficiency throughout Sharp means that a turnaround ... can only take place if there is a reduction in costs, and that comes with a very regrettable need to reduce Sharp's workforce," Gou wrote in an open letter, seen by Reuters, to Sharp staff late on Thursday.

Sharp earlier reported its annual losses trebled from a year earlier.

Taiwan's Foxconn, the world's largest contract electronics manufacturer, has battled to seal a $3.5 billion deal to give it a two-thirds stake in Sharp as the Japanese display maker seeks a return to profit in the face of slowing smartphone sales.

The letter said staff cuts would be carried out "responsibly and sensitively," but didn't provide figures. A person familiar with the matter said cuts could total 3,000 in Japan, and more when Sharp's global operations are included.

Foxconn confirmed the letter was a personal note to all Sharp employees from Gou and Tai Jeng-wu, Foxconn's vice chairman and the newly-appointed CEO at Sharp.

Sharp named Tai on Thursday to succeed Kozo Takahashi, becoming the first outsider to lead a company that started out making belt buckles and mechanical pencils a century ago.

Tai's 30-year Foxconn career includes running its vast operations at Shenzhen in China. He also played a key role in the Sharp stake negotiations, people at Foxconn told Reuters.

"Tai is No.2 at Hon Hai. He speaks Japanese. He was selected from a comprehensive perspective," Takahashi said at an earnings briefing, referring to Foxconn by its formal name, Hon Hai Precision Industry Co.

Tai will be one of nine new board members at Sharp, Takahashi said, adding Sharp aims to finalize the stake sale to Foxconn by the end of June, earlier than an initial Oct. 5 deadline.

PERSONAL GUARANTEE

Gou's letter underscores how last month's signing of the stake deal was just the start of a turnaround at Sharp, which has struggled even after two bank bail-outs.

The billionaire Foxconn founder will personally guarantee the buyback of 25 billion yen ($230 million) worth of preferred shares that Sharp issued to a corporate turnaround fund last year in exchange for a bail-out. Gou said his move was aimed to speed up a merit-based stock reward program for Sharp employees.

Gou believes profit-sharing is key to retaining talent, said a person familiar with his thinking.

"I can also assure you that the wage cuts and reductions in year-end bonuses are a thing of the past," Gou wrote to Sharp staff, saying pay and annual bonuses would return to their original levels as of this month.

SMARTPHONE SLOWDOWN

Sharp and Japanese peers such as Sony Corp, once synonymous with cutting-edge electronics, have in recent years been out-manoeuvred by upstart Asian rivals.

A takeover by Foxconn should help Sharp expand sales channels for its displays. In return, Foxconn will gain control of Sharp's advanced display technology, and strengthen its pricing power with Apple Inc, a major client of both companies.

Foxconn's display-making affiliate Innolux Corp will also benefit from cooperation with Sharp, Innolux Chairman H.C. Tuan said on Thursday. Tuan, who announced his resignation, will take on a role as technology adviser to both Innolux and Sharp, Foxconn said.

Even with Foxconn's support, Sharp will find it tough competing with Chinese display makers aggressively expanding capacity, analysts said. Sharp also lags South Korean rivals in organic light-emitting diode (OLED) technology, which Apple is widely expected to adopt in future iPhones.

Gou, though, has expressed a preference for Sharp's strength in indium gallium zinc oxide (IGZO) technology. "IGZO is Sharp's pride," said Tuan. "I'm hopeful we can cooperate with Sharp in this area."

For the year to end-March, Sharp reported an operating loss of 162 billion yen ($1.5 billion), more than triple the previous year's loss.

Takahashi said an over-reliance on smartphones was partly to blame. "We've failed to move fast enough" to shift focus to larger panels, he said.

Apple posted its first drop in iPhone sales in January-March, and, in figures issued on Thursday, Foxconn's quarterly net profit fell 9.2 percent from a year ago to T$27.58 billion ($847 million). Its January-March revenue slipped 5.5 percent.

Foxconn subsidiary FIH Mobile Ltd, whose clients include Sony and Xiaomi Inc [XTC.UL], has warned its first-half profit may fall as much as 92 percent as smartphone sales growth slows to a single digit this year.

Reporting by Makiko Yamazaki in TOKYO and J.R. Wu in TAIPEI; Additional reporting by Junko Fujita; Editing by Christopher Cushing and Ian Geoghegan

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