Apple May Be Behind Sharp-Foxconn Deal

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) -- Rumors about the launch of Apple TV have been gaining strength with some even claiming that the new iProduct could be arriving as soon as in the second half of 2012.

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Until now, however, we have not seen any evidence strong enough to support the claims. But with recent reports that leading Apple ( AAPL) contract manufacturer, Foxconn's parent Hon Hai Precision Industry, has decided to buy a 11% stake in LCD display maker, Sharp, we finally see some credence in the rumors. Add to this the fact that Apple CEO, Tim Cook, is in China and has reportedly visited Foxconn's assembling unit and with this the possibility of Apple's own involvement in the deal becomes substantial.

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Foxconn/Sharp to Take On Samsung

Hon Hai's Foxconn is one of the leading assemblers of Apple's mobile devices, including the iPhone and the iPad. On the other hand, Sharp is a struggling supply chain partner for Apple and is rumored to have fallen significantly short of Apple's expectations, manufacturing only 2.7 million Retina display panels for the new iPad.

Under the terms of the deal, Foxconn will gain a 46.5% ownership in Sharp's LCD plant in Sakai, Japan, and will jointly run the operations with Sharp, laying claim on a proportionate part of the revenue as well. Through this deal, Foxconn will hope to gain greater access to the supply of rumored Apple TV's display parts, which it doesn't manufacture currently.

As for Apple, it is probably trying to decrease its dependence on Samsung, which is not only one of Apple's major supply chain partners but also its chief competitor. Samsung and Apple are locked in smartphone patent battles around the world and the latter could therefore be looking to diversify. Samsung, well known for its LCD as well as AMOLED screens, is however a very strong contender for securing orders for the Apple TV, if in the works. Sharp, on the other hand, hasn't been able to meet Apple's quality requirements when manufacturing on a large scale and has therefore ended up playing second fiddle to Samsung's manufacturing might.

Together with Foxconn, however, Sharp could have greater leverage in negotiating the prices of parts and gain know-how to manufacture Apple TV displays on a wider scale without compromising on quality. If Foxconn/Sharp can form a partnership potent enough to compete with Samsung on a sustained basis and meet Apple's lofty quality standards, Apple can finally hope to reduce its dependence on Samsung and foster greater competition in its supply chain. This would subsequently lift the company's gross margins, especially on the iPad which is costlier to produce than its predecessors due to the expensive retina display and LTE support.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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