Passing The Screen Test
Katsuhiko Machida's big bet on LCD TVs turned Sharp into Japan's most profitable electronics maker.
By Mariko Mikami

(Business 2.0) – An 800-seat hall in Tokyo's New Otani hotel is packed with international journalists. Onstage, two white panels pull back to reveal a 65-inch liquid crystal display (LCD) television, the world's largest production model. In years past, the star of the show would probably have been a Sony or a Panasonic, but the oohs and ahs here are for the newest Sharp Aquos. "When you get employees headed in the same direction," says Sharp president Katsuhiko Machida, "they demonstrate power you can't even imagine."

The 65-inch Aquos, announced in June, is indeed an engineering marvel. More important, it's the latest in a long line of LCD TVs that have turned Sharp into Japan's hottest electronics maker. After practically launching the worldwide LCD TV market by itself, Sharp is the top brand, with a 23 percent share. And while competitors like Sony have seen profits evaporate as rivals have siphoned off their customers, Sharp boosted its operating margin to 5.9 percent, the highest among Japanese electronics makers in the fiscal year that ended in March. Its 2004 LCD TV sales of more than $2.5 billion propelled Sharp to a record net profit of $715 million.

How Sharp's Machida beat his bigger rivals to dominate a crucial new product category offers lessons for any company in a cutthroat market. In 1998, when he committed to making LCD TVs, even Sharp insiders questioned whether big LCDs would ever work for anything beyond PC monitors. But he was willing to go to great lengths to carve out a niche for Sharp. "Profits drop when there is competition," he says. "You have to build something that no one else has."

Taking It Up a Notch

As only the fourth President in Sharp's 93-year history, Machida is a big admirer of company founder Tokuji Hayakawa, whose motto was "Create products that others will strive to imitate." Sharp took its name from its invention of the Ever-Sharp mechanical pencil, which became a huge hit in the United States in 1915. It sold Japan's first radio in 1925 and the country's first TV nearly 30 years later.

But during the decades when Machida was rising through the company's ranks, Sharp was sometimes slighted in Japan as a "1.5-tier" brand, a notch below the likes of Sony and Panasonic. As the head of Sharp's TV operations in the 1980s, Machida became convinced that the only way to overcome that stigma would be for Sharp to become a stronger force in TVs. "I came to believe that the brand image of its TVs determines the overall brand image of an electronics company," he says.

Unfortunately, Sharp didn't manufacture its own cathode-ray tube, the critical component of the traditional TV, making it difficult for the company's sets to match the quality of Sony's popular Trinitron. But even back then, Machida believed that Sharp could transcend the 1.5 label by perfecting LCDs as TVs. Sharp had expertise in the area, having been the first in the world to market a handheld calculator with an LCD, in 1973. During the years that followed, "I used to visit our research labs in Nara Prefecture and check in on how the technology was progressing," Machida says.

Seven years ago, when he became Sharp's president, Machida decided that the company was ready to make its LCD move. At the time, Sharp was channeling much of its investment cash into semiconductor manufacturing. "There was a conviction in the industry that you had to be strong in all key devices in order to compete," Machida says. But to free up resources for LCDs, he scaled back that business, contracting out Sharp's chip manufacturing to others. Then he invested $1.3 billion--roughly 75 percent of Sharp's annual capital outlays--to build a state-of-the-art, 330,000-square-meter LCD TV plant in rural Kameyama. Able to churn out 45,000 LCD panels a month, it's the world's only facility that can produce LCD TVs from panel to finished product. "I didn't want to farm out the building of a core competence," Machida says. A second Kameyama plant is set to come online in October 2006.

Going All Out

By bucking the outsourcing trend and keeping production in high-cost Japan, Sharp has been able to take the technology lead. Initially, 40 inches was widely believed to be the limit for LCD TVs, but Sharp has since developed glass that's thin and smooth enough for screens much larger. In addition, the Kameyama plant is the center of Japan's new Crystal Valley, a hub of LCD-related suppliers. And by keeping production under one roof, Sharp has been able to gain efficiencies fast. The 45-inch Aquos that made its debut in 2004 initially cost $9,000; a year later Sharp had driven the price down to $6,200. "Sharp is showing the industry how to invest in a niche and then execute," says Eiichi Katayama, head electronics analyst at Nomura Securities.

To be sure, with other global giants jousting in the big-screen flat-panel market--Samsung, for instance, recently announced an 82-inch LCD that is not yet slated for production--the game isn't over. For one thing, sales of ever cheaper plasma sets, which still dominate in the largest screen sizes, are expected to grow 68 percent this year. But a rising tide of demand for high-definition flat-panel sets should lift many boats. The 2006 World Cup is expected to boost interest in Europe, while the 2008 Beijing Olympics will be China's first HDTV broadcast. As a result, flat-panel sales are expected to grow by double digits during the next five years, positioning Sharp as a dominant player in one of the most important electronics categories of the future.

Of course, anyone who knows anything about business knows that it's a bad idea to build expensive plants in one of the world's most developed nations, it's silly to hold on to manufacturing operations when you could just do design, and it's utterly stupid to put a lot of your eggs in one basket. "It's management's responsibility to go all out to build a unique product at least once a decade," Machida says. Lucky for Sharp, its president is not just anyone.