Apple may have quietly shored up Sharp with a $2bn display order fudge, one market analyst has suggested, in an attempt to stabilize the struggling Japanese firm and reduce reliance on arch foe Samsung. An unforeseen $2.3bn extra in Apple’s capital expenditure in 2012 – the bulk of which wasn’t reported as cash flow – caught the eye of Asymco‘s Horace Dediu, who speculates that the money could’ve been used to take control of an ailing Sharp production plant and pay for it by pre-purchasing displays for iPhones and iPads.
After a few record quarters, $2bn may not seem like a vast amount in the context of Apple’s cash flow. However, it’s how that $2bn was recorded and summarized that is prompting speculation of a helping hand for Sharp. Apple’s financial report said that overall expenditures were predominantly classed as “product tooling, manufacturing process equipment and infrastructure” but that cash payments were $2bn lower, indicating that Apple had “paid” for the extra in some other way.
“Circumstantial evidence points to the asset being production equipment (or even a whole plant) previously owned by Sharp. Sharp is a key supplier of screens to Apple but is also in financial distress. Sharp has also been the object of an intended investment by Foxconn [Hon Hai]. That deal fell through as Sharp’s finances deteriorated. My guess is that these attempts to shore up Sharp are directed by Apple to ensure both continuity of supply and a balanced supplier base (offsetting Samsung, another supplier.)” Horace Dediu, Asymco
Pumping $2bn into Sharp by purchasing a plant and paying for it in pre-ordered components is one possibility, Dediu suggests – though he couches it in the warning that it’s “strictly hypothetical” and based on evidence “hinting at an explanation” – and would represent an Apple stance that a reliable source of components that weren’t entirely from Samsung is better than $2bn in the bank. Should Sharp collapse, as its recent financial performance has indicated is a possibility, its production lines might be sold off and the supply of displays for key Apple products halted.
“I believe that Apple’s late and unprecedented expenditure was to secure this asset. I further believe that the financing for this deal was done through a swap of “pre-orders”. Stepping even further into the hypothesis, I believe Apple arranged to move a Sharp screen production line onto its books and “paid” for it through a pre-payment of components. This being a pre-payment it would be in the form of an “off balance sheet” commitment” Horace Dediu
It’s worth remembering that, if the situation did in fact pan out this way, Apple isn’t spending any money it didn’t envisage paying out in the longer-term. Instead, the company would basically have agreed to pay in advance so as to keep Sharp’s creditors at bay.
Sharp had been the subject of acquisition chatter by Foxconn, but stumbles in the display company’s performance supposedly soured that possibility. However, Apple is increasingly reliant on Sharp – as well as AUO and LG Display – as an alternative source of components to Samsung, a company Apple is increasingly looking (with mixed success) to dilute as a key supplier.