Quotes of the Day

It's easy for Katsuhiko Machida, the president of Sharp Corp., to look back and laugh now, given that he's running Japan's hottest electronics company. But for years he was despondent, wondering if Sharp would forever be overshadowed by giants like Sony, Matsushita and Samsung. When he ran Sharp's television business in the 1980s, Machida says the firm had trouble competing because it didn't manufacture the most important TV component, the cathode-ray tube. Forced to cobble together parts bought from competitors, Sharp was essentially an assembler, cranking out televisions that were always a little too expensive and too poorly engineered to attract many customers. It was a dispiriting struggle, says Machida: "If you are in electronics manufacturing and you are not strong in TVs, your business and your brand image will suffer."

But when Machida became president in 1998, it all began to change. Sharp, he knew, had long excelled at developing products featuring liquid crystal displays (LCDs). It released the first mass-market LCD calculator in 1973, developed its first flat-panel LCD television in 1987, and dabbled in LCD televisions throughout the 1990s. Building on this head start, Machida moved LCD TVs to the forefront of Sharp's strategy. He spent heavily over three years on the design, manufacture and marketing of a new flagship TV brand dubbed Aquos—and his bet paid off. Launched in January 2001—a moment referred to inside the company as "the Big Bang"—Aquos quickly became the coolest name in TVs since the Sony Trinitron in the late 1960s. Sharp is now the world's biggest seller of LCD televisions, accounting for one in four of all the LCD sets sold globally each year. And while almost every other Asian electronics manufacturer has been hit lately by plummeting prices and oversupply, Sharp continues to gather momentum. Last week, Sony reported a loss of $320 million in its consumer electronics division, while Sharp announced all-time record operating profits of $1.4 billion.

Machida's strategy of focusing on businesses in which the company has a significant edge is surprisingly rare in corporate Japan, where a bias toward bulking up still reigns. Says Gerhard Fasol, president of Eurotechnology Japan, a tech consultancy in Tokyo: "The Toshibas and Hitachis of this world are in about 20 or 30 different industry areas. There is no focus." Even in secondary business lines, Sharp tries to develop what it calls "one-of-a-kind" products. A recent example: the new Healsio oven that reduces fat and salt content by cooking with superheated steam. The oven is a smash in Japan, even though it's small and retails for more than $1,000.

Likewise, in his core business of manufacturing LCDs, Machida is playing to Sharp's technological strengths instead of diversifying into areas where it's doomed to defeat. Taking on Goliaths like LG Electronics and Samsung Electronics across every LCD product line would be suicide, he says. They're dominant, for example, in mass-market LCD panels used in smaller, cheaper TVs and in laptops. Rather than engage them in a murderous price war, Sharp concentrates almost exclusively on ever-larger TVs or on small, high-quality panels found in cell phones, car navigation systems, and hand-held game players like Sony's PSP and Nintendo's DS. This strategy has enabled Sharp to withstand the margin pressure that's ravaging its rivals. Sharp's small-panel market, says Lehman Bros. analyst Yuki Sugi, is particularly lucrative, as its clients tend to place long-term orders for highly specialized, high-margin goods. Similarly, at the other end of the spectrum, Sharp has profited richly by being the first company to bring extra-large LCD TVs to market: it rolled out a 45-in. model last year, which it plans to follow later this year with a 50-in. set. While the price of flat-panel TVs overall has tumbled 30% in the past year, Sharp's TV prices have slipped only 3%, not least because margins on these high-end products have not yet been eroded by competition.

To stay one step ahead requires a lot of spending on research and development and on cutting-edge factories. Sharp just opened a $1.5 billion plant in Kameyama, in central Japan, capable of pumping out 45,000 sheets of glass per month, with each sheet providing glass for eight 32-in. TV screens. And right next door, the company is building another $1.5 billion factory that will be able to produce 100,000 sheets of glass each month, with each sheet yielding eight 45-in. screens. But Sharp's competitors have also joined the race. A joint venture between LG Electronics and Royal Philips Electronics is spending $5.1 billion to create the world's largest plant for LCDs, while Sony and Samsung are teaming up for a $2 billion LCD venture. Hitachi, Toshiba and Matsushita have similarly joined forces, and even Dell, the American computer maker, is getting into the flat-panel game. For now, however, Sharp is happy to go it alone, hoping that it's strong enough technologically to maintain its leadership position without a partner. It's a gamble, but not an unreasonable one, says Gartner analyst Paul O' Donovan: "Sharp is able to stand alone because it has unique intellectual property. Being that much more advanced, they don't want to share that with anybody else."

Despite the current gloominess in the electronics market, the ultimate rewards for the winners in these global TV wars could be vast as viewers upgrade their tube sets to flat panels and as broadcasters gradually shift from analog broadcasting to higher-quality digital. Japan has already begun digital broadcasting, and all broadcasts will be digital by mid-2011. In the U.S., every new TV will be required to come with a digital tuner by July 2007, and in Germany, digital broadcasts will commence in time for the 2006 World Cup soccer tournament. During this sea change, Sharp intends to use Aquos as the product that burnishes its reputation as a top-tier global brand. Already, international business accounts for about half of Sharp's overall revenues, with buoyant sales of its high-end TVs in the U.S. and Europe driving these gains. The company has also benefited abroad from the launch last fall of a worldwide branding campaign, including ads produced by Wieden+Kennedy, an agency that's famous for managing Nike's advertising. Since the spots began airing, brand recognition for Aquos in the United States has jumped from 30% to 57%, say Sharp executives.

But as limping behemoths like Sony have discovered, staying ahead in electronics is a relentless challenge. A host of new technologies on the horizon could disrupt LCD's emergence just as easily as LCD has begun to supplant cathode-ray tubes. And even against existing technologies, Sharp faces a formidable battle. Junzo Masuda, director of iSuppli, a market-research firm in Kyoto, says the real test is how Sharp's big-screen TVs ultimately fare against a technology called plasma display panel (PDP), currently the dominant type of large-screen, flat-panel displays. Sharp may have better technology, but Masuda wonders whether it can reduce costs enough to defeat the makers of PDP sets, which are significantly cheaper. "There is a real price battle going on," says Masuda, as Sharp jockeys for position. Sharp executives downplay such claims, saying the market is big enough for sellers of both types of large-screen TVs to prosper. "That is the benefit of being relatively small and targeted," says Toshishige Hamano, Sharp's international business director. "We are not aiming at all users."

However this contest between PDP and LCD plays out, Machida and his team are—for now—relishing their moment in the sun. Hisakazu Torii, a director of research at DisplaySearch, a consultancy in Tokyo, says Sharp's foresight in LCDs has completely transformed the TV business and Sharp's position in the corporate landscape: "Sharp can sell its TVs for $200-$300 more than Sony, which is a total reversal of the old situation." Sharp's Hamano agrees: "In the long history of the electronics market, all companies have their moment of prime time. And for Sharp, I think this is our moment."

• Jim Frederick | Osaka
• While rivals like Sony are struggling, Sharp has become Japan's hottest electronics firm by playing to its strengths