Sharp's Foxconn Miracle Is a Mirage

(Bloomberg Gadfly) -- Foxconn's Terry Gou may be patting himself on the back for quickly turning around the company he spent four years chasing. After three years of losses, Sharp Corp. now expects operating profit to reach 25.7 billion yen ($245 million) in the year ending March 2017, double the figure analysts had estimated.

But cost cuts won't keep the Japanese company profitable. While operating income will beat predictions, revenue will fall short

The tacit understanding between Foxconn and Sharp's stakeholders was that along with painful reductions in staff and expenditure would come an increase in sales, thanks to the Taiwanese company's extensive client list. The only thing Foxconn has brought to Sharp this first year is a knife.

Sharp's display business, cited as a major reason Gou chased the company, accounted for 62 percent of impairment losses while contributing only 37 percent of sales.

It would be easy to dismiss this as a one-time effect -- the cost of cleaning up a company and turning it around. Yet Sharp's other display business, Sakai Display Products, jointly owned with Gou himself, forced the parent to write off almost 8 billion yen in equity losses for the second quarter alone. That's more than Sharp's operating loss from its in-house Display Devices unit over the same period.

So Foxconn took over and failed to boost revenue, with no expectation of doing so in the immediate future. Yet quick cost-cutting helped reduce expenses enough to turn an operating profit (but not a net profit.)

This "Foxconn Effect" may make for a pretty income statement, but without growing revenue it's not sustainable. And a reversal of fortunes that can't be sustained isn't a turnaround, it's a mirage.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.