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Sharp Corporation: Developing a Technology Strategy1

"We do not ask merely to expand our business volume. Rather, we are dedicated to the use ofour unique, innovative technology to contribute to the culture, benefits, and welfare of peoplethroughout the world."2

In 1992, Sharp Corporation celebrated its 80th year of business. The company beganwith the invention of "Ever Sharp" mechanical pencils by the founder Tokuji Hayakawa.Sharp also built Japan's first radio, TV and microwave oven, as well as the world's first alltransistor-diode electronic desktop calculator and liquid crystal display (LCD). Sharp wasgaining market share in components as shown in Table 1. Sharp was the undisputed worldleader with over 39 percent of the $4.8 billion LCD market in 1993. Toshiba followed withonly 11.5 percent of the market. Sharp’s electronic devices, lead by its sales of LCDs, grew23.1 percent to $2.1 billion, or 33.7 percent of the company’s 1993 sales. Electronicdevices were expected to reach $5.4 billion in sales for 1994. Sharp estimated that themarket for LCD’s would reach a $10 billion by the year 2000.

Sharp’s strategy had been based around its developed of such components as theLCD. The company's president, Haruo Tsuji, had a clear vision of the company’s strategy asshown in Figure 1:

Sharp will continue to push development of proprietary devices and the creation of the nextgeneration of innovative new products. A key device is a component which serves as a sort of "key"for realizing a certain product or system. These include LCDs, which are expected to see explosivegrowth as key devices in new multimedia products now on the horizon, and devices such as flashmemory, optoelectronic components and solar cells. The development of key devices is particularlyimportant. This strategy makes it imperative and essential that we strengthen our capabilities inengineering and development.

Sharp’s strategy was to develop a key component like the LCD, develop the products thatuse it, and then to improve the components and products ahead of competition. In 1988,Tsuji committed Sharp to becoming a full-range electronic company with opto-electronics asits core technology. Opto-electronics, which fuses light and electronics, surpassesconventional optical data transmission technologies in terms of data compression, reliability,and transfer rates. Spin-offs include LCDs, solar cells, laser diodes, EL (electroluminescent)devices, CCDs (charge-coupled devices) and LEDs (light emitting diodes). Thesetechnologies provide the key to growth in fast expanding areas such as audio-visual and datacommunications. According to Dataquest, Sharp had become number one in the worldmarket for opto-electronics. Tsuji’s goal was to achieve a 60:40 balance between productsand devices.

1 Copyright 1994 by William R. Boulton, Olan Mills Professor of Strategic Management, Auburn University,and Kosei Furukawa, Professor of Management, Keio University. This case was developed with support fromKeio University's Graduate School of Business Administration.2 This quote is taken from Sharp's Business Philosophy.

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Figure 1: Sharp's Component-based Strategy

Sharp’s Component Strategy

Opticstechnologies

Materialstechnologies

Thin Glasstechnologies

ICtechnologies

High-densitymounting

technolgies

Signalprocessing

technologies

Dataprocessing

technologies

Tele-communications

technologies

Imageprocessing

technologies

Solar power stations

Unmanned light house

Solar cars

Unmanned seismographic stations

Solar power satellites

Solar air-conditioners

Communication satellites

Meteorological satellitesScientific observation satellites

Radio RelaystationsVSAT/Satellite

Communication equipment

Cordless/portable telephones

TVs & VCRs

TVs & VCRs with built-in BS tuner VCRs for HDTV

HDTV

Digital portable telephones

Ultra-compactantennas forsatellitebroadcasting

Data streamers

Inverter air-conditioners

VCRs

Personal computers & optical filing systems

High density Magneto-optical disks

Rewritablemusic disks

Laser beam printers

Large screen LCD

Cameras

Video camcorders

IC cards

Notebook PCs

Electronicorganizers

Memory cards

Radiocommunication

Solar cells

Compact discs

Magneto-optical disks

LAN, ISDN, CATV &data communication

Videodiscs

Compact projection stereoscopic TVs

Rewritablemusic disks

PCs and workstations

Factory automationequipment

Audio-video equipment (TVs, VCRs, compact discplayers, videodisc players, and tape recorders)

Office automation (copiers, faxs, PCs, WPs)

Home automation(Microwaveoven and inverter air-conditioner)

Remote control units

LAN, ISDN, CATV &data communication

Data transfer &Recording Components

Printed circuitboards

Laser diodesOpto-electronic

devices

Table 1: Market Share for Components in 1993LCD Panels (4,800 million yen sales) ↑23.1%1. Sharp 39.1%↑2. Toshiba 11.5%↑3. Seiko Epson 9.8%↓4. NEC 8.8%↑5. Optrex 7.1%↓

Integrated Circuits (24,570 million yen sales) ↑8.3%1. NEC 21.5%↑2. Toshiba 20.5%↑3. Hitachi 13.4%↓4. Mitsubishi 8.8%↓5. Fujitsu 8.3%↓

Light Emitting Diodes (LEDs) (90,550 millionyen sales) 1.1%↓1. Toshiba 21.1%↑2. Stanley 20.4%↓3. Matsushita 18.8%↓4. Sharp 15.5%↑5. Rohm 6.5%↓

Other Light Converting Devices (88,410 million yensales) 2.0%↑1. Sharp 34.5%↓2. Sony 11.3%↑3. Toshiba 9.0%↓4. Matsushita 7.9%↓5. NEC 7.5%↑

Source: Nikkei Sangyo Shimbun, June 22, 1994 and Market Share Dictionary (Yano Economic ResearchInstitute) 1994.

The company was putting particular emphasis on the development of devices whichlink electronic technology with opto-electronics represented by LCD. According to TetsuoTani, general manager of the corporate accounting and control group:

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Fortunately, the LCD has a strong market potential and Sharp has a 40 percent market share. Sharpis also the number one manufacturer in optical-devices, according to Dataquest. With those kinds ofcomponents, we can be profitable in the future. Beginning next July, 1995, we will open the largestLCD factory in the world. We are investing $530 million in our new LCD factory's first phase. Intotal, there are four phases planned that will cost over $1 billion.

Sharp’s strategy had provided continuing growth for the company with betterperformance than many of its much larger competitors. Table 2 shows financial performanceof Japan's key electronics firms during the first-half of 1994. Sharp shows pretax incomelevels that surpass companies with sales levels twice the size. With operating income of over$310 million in the first half of 1994, Sharp was surpassed only by Hitachi Corporation, acompany with over three times the sales revenues of Sharp. Hitachi, Toshiba and NECshowed the first gains in pretax profits in four years thanks to diligent cost cutting efforts andhealthy demand for high-tech equipment -- in particular personal computers, liquid-crystaldisplays and computer chips. Fujitsu, which lost $137 million in 1993, made a profit of $221million.

Table 2: 1994 1st-half Performance of Major Electronics Companies($ millions) SALES PRETAX PROFITSElectronics Companies 1st half

(end Sept.)FY1994

(estimate)1st half

(end Sept.)FY1994

(estimate)Matsushita

Hitachi

Toshiba

NEC

Mitsubishi

Fujitsu

Sharp

20,800(-3.0%)18,720(-3.0%)15,210(-0.9%)13,890(4.3%)11,650(2.0%)10,220(2.7%) 6,153(7.0%)

66,236(-6.5%)36,500(2.0%)33,000(1.0%)30,300(4.5%)24,400(2.0%)22,500(3.5%)12,400(5.0%)

190(5.0%)

430(44.0%)

247(10.2%)

202(184.1%)

270(80.0%)

221(n.m.)

311(54.6%)

245(-35.0%)

860(20.0%)

650(21.0%)

600(88.0%)

590(96.0%)

700(142.1%)

640(41.0%)

Source: Nikkei Weekly, October 31, 1994, p.8. and company reports.

Leadership at Sharp

Sharp Corporation had had three presidents. Over the years, these presidents havecreated an organization that values both technology and market inputs. Tokuji Hayakawa,the company’s founder, emphasized products that competition would want to copy.Hayakawa founded Sharp in 1912 and invented the Ever-Sharp Pencil in 1915. In 1923,Sharp’s facilities burned down during the Kanto earthquake and Hayakawa moved to Osaka.In 1929, he developed and produced vacuum tube radios for export to Asia. He beganproducing televisions in 1953 and diversified into appliances and air conditioners in the1960s. In 1964, Sharp’s introduction of the world's first all-transistor desktop calculator,called Compet, signaled the beginning of the calculator wars.

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Akira Saeki emphasized new products that created new markets. Upon becomingpresident in 1970, Saeki canceled the company's participation in the Osaka "Senri" exhibitionin order to build a semiconductor plant in "Tenri," becoming the thirteenth semiconductormanufacturer in Japan. The central research laboratory was also established. As shown inFigure 2, Sharp had introduced the first IC electronic calculator in 1966 using high densityMOS ICs to reduce energy consumption and make smaller calculators. By 1973, thedevelopment of the COS electronic calculator incorporating a energy conserving liquidcrystal display. Using its LSI film carrier system for the production of its 7mm-thincalculator, Sharp became the market leadership in calculators in 1976. The company’s NewLife Products strategy began to target the baby boomer generation in 1976 with newproducts that emphasized colors and design and introduced the first calculator using solarcells. The application of the film carrier system for assembly lead to lower prices and thinnercalculators. As the calculator battles continued, new calculator models were being obsoletewithin a week of introduction by competition. The retail price of calculators had droppedfrom 350,000 yen in 1966 to 7,800 yen in 1979.

Haruo Tsuji, promoted to president in 1986, emphasized the need to meet customerrequirements. Tsuji became president in time to address Japan's endaka, the yen'sappreciation in value. As higher valued yen increased export prices, sales dropped 10% andprofits dropped 60%. According to Tsuji:

I became president of Sharp in June 1986 at the height of the “yen-appreciation shock.” Exportsaccounted for nearly 60 percent of Sharp’s sales at that time, and the production of consumerproducts accounted for nearly 70 percent of sales, so our company was deeply affected. Inaccordance with our company’s philosophy, we did not lay off employees or cut salaries, but didcarry out 116 emergency measures immediately, including cost-cutting measures and repricing ofexports.

However, a company that does nothing more than deal with immediate concerns has no hopes ordreams. We asked ourselves how we should change our operations and management over the nextfive to 10 years, formulated new scenarios, appealed for the support of our employees and set aboutthe accomplishment of our goals one step at a time. The first goal was to shift emphasis to suchgrowing fields as telecommunications and electronic devices even as we continued to seek growth inour consumer electronics business. We decided to bring our non-consumer electronics operations,which accounted for 32.6 percent of sales in 1985, up to 50 percent. This required a shift fromlabor-intensive assembly of physical input to knowledge-intensive production of products. Althoughwe were in difficult straits, to achieve this goal we adopted a policy of emphasizing research anddevelopment, whose costs amounted to 6.2 percent (59 billion yen) of sales in fiscal 1985, anddecided to bring them up to 10 percent.

As part of our increased emphasis on non-consumer electronics products including devices, wedevoted particular effort to development of our liquid crystal display business. We were looking foranother mainstay for our business besides semiconductors, and this is what we chose from amongmany options.

Between 1978 and 1984, Tsuji had been responsible for Sharp’s visual equipment businessand had recognized the need for a replacement technology for CRT displays.

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Figure 2: Sharp Corporation's Calculator InnovationsFirstSold

Features Size Weight Price MainComponents

1964World’s first alltransistor-diodeelectronic desktopcalculator (CS-10A)

W: 420 mm(16.5”)

D: 440 mm(17”)

H: 250 mm(9.8”)

25 kg(55 lbs.)

¥535,000 530 transistors2,300 diodes

1966

World’s firstelectronic calculatorincorporating ICs(CS-031A, withbipolar ICs)

W: 400 mm(15.7”)

D: 480 mm(18.9”)

H: 220 mm(8.7”)

13 kg(28.7 lbs.)

¥350,000 28 ICs553 transistors1,549 diodes

1969

World’s firstelectronic calculatorincorporating LSIs(QT-8D electronicabacus)

W: 135 mm(5.3”)

D: 247 mm(9.7”)

H: 72 mm2.8”)

1.4 kg(3.1 lbs.)

¥99,800 4 LSIs2 ICs

1973

World’s first COSelectronic calculator(EL-805; world’sfirst practicalapplication ofLCDs)

W: 78 mm(3.1”)

D: 118 mm(4.6”)

H: 20 mm(0.8”)

200 g(7.1 ox.)

¥26,800 1 LSI2 LCD drivers

1976First electroniccalculator with solarcells (EL-8026)

W: 66 mm(2.6”)

D: 109 mm(4.3”)

H: 9.5 mm(0.4”)

65 g(2.3 oz.)

¥24,800 Film carriersystem with1LSI

1977World’s first cardcalculator (EL-8130)

W: 68 mm(2.7”)

D: 124 mm(4.9”)

H: 5 mm(0.2”)

65 g(2.3”)

¥8,500 Film carriersystem with 1LSI

1979World’s first 1.6mm (0.06”)-thinelectronic calculator(EL-8152)

W: 54 mm(2.1”)

D: 96 mm(3.8”)

H: 1.6 mm(0.06”)

36 g(1.3 oz.)

¥7,900 Film carriersystem with1 LSI

1985Ultimate “thinelectroniccalculator”(EL-900)

W: 85.5 mm(3.7”0

D: 54 mm(2.1”)

H: 0.8 mm(0.03”)

11 g(0.4 oz.)

¥7,800 Film carriersystem with1 LSI

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Tsuji’s second goal had been to increase the percent of domestic sales 39.6 percent,in 1985, to 50 percent. This required Sharp to more closely address the needs of theirdomestic customers. According to Tsuji, meeting customer needs was not easy:

Even if one asks them, there is no reason why they should know. To put ourselves into customersshoes means observing and analyzing their lifestyles and ways of doing business, anticipating howthese might change and then taking products to them to see what they think of them.

Resulting new life products, included electronic organizers, dual-swing door refrigerators,home use facsimile machines, cordless telephones and answering machines, bolstered sales.

Tsuji’s third goal was to increase the percentage of overseas production from 16.2percent in 1985 to 50 percent. According to Tsuji, “Our ideal is to carry out the entiregamut of manufacturing activities abroad, extending beyond production and sales to includeresearch and development as well.” By the end of fiscal 1993, Sharp had 52.8 percent ofsales in non-consumer electronics products, 51.4 percent in domestic sales and 51 percent inoverseas production.

Tsuji’s management team was a relatively young group with ages from 50 to 60. Itincludes Taizo Katsura for administration and finance, Atsushi Asada for technologyproduction, Kazuo Kubo for domestic markets, and Yutaka Wada for overseas markets.These four vice presidents and president Tsuji make up the executive committee.

Sharp's growing creativity was considered a function of its youthfulness. Accordingto Nikkei Sangyo's annual assessment of companies, it found Sharp to be the secondyoungest, behind Sony, amongst Japan's largest appliance companies. The measure is basedon such items as new products and the average age of executives and employees. WithSharp's continued growth in 1994, Nikkei Sangyo newspaper calculated Sharp's average ageat 33.7 years, down from 35.9 years in 1993. Rankings of major Japanese electronic makersin 1993 included:

Company Average 1993 Age (years change from 1992)Sony 33.6 years 1.0Sharp 35.9 years 0.5Matsushita 37.6 years 1.1Sanyo 39.6 years 1.2Hitachi 39.7 years 1.0Toshiba 41.0 years 1.5Mitsubishi Electric 41.5 years 1.7

Sharp's Changing Business Structure

When Tsuji became president in 1986, two-thirds of Sharp's business was inappliances. Operating profits were only 0.8% in 1986 and 1.2% in 1987 with 70% of beforetax profits coming from non-operating income. In May of 1986, Tsuji began restructuring

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the business to reduce the heavy reliance on appliances. While only 9% of non-consolidatedsales were in electronic devices (including ICs, electronic components, and LCDs) in 1985,nearly 30.5% of 1994 sales were in electronic devices with appliances accounting for only15.9% of sales. Non-consumer products (i.e. copiers, facsimile, electronic organizers, andelectronic components) had grown from about 32.6% of sales to almost 52.8% of salesbetween 1985 and 1993. Consumer products (i.e. color TVs, VTRs, camcorders, audioequipment, refrigerators, microwave ovens, and washing machines) had declined to 47.2% ofsales, down from nearly 70% in 1985. Sharp's sales mix is shown in Table 3.

Table 3: Sales by Product and Market SectorYears Ended March 31 1990 1991 1992 1993 1994Television & Video Equipment Sharp Of Net Sales Year-On-Year Growth

3,741,36027.8%- 0.5%

4,132,86027.6%

+ 10.5%

3,934,43025.9%- 4.8%

3,642,56024.7%- 7.4%

3,399,80027.8%- 6.7%

Audio & Communication Equipment Share Of Net Sales Year-On-Year Growth

1,826,13013.6%

+ 11.9%

1,928,40012.9%

+ 5.6%

1,716,33011.3%

-11.0%

1,509,05010.2%

- 12.1%

1,486,98010.0%- 1.5%

Home Appliances Sharp Of Net Sales Year-On-Year Growth

2,349,09017.5%

+ 2.3%

2,439,65016.3%

+ 3.9%

2,656,74017.5%

+ 8.9%

2,502,38016.9%- 5.8%

2,415,27016.2%- 3.5%

Office & Industrial Equipment Share Of Net Sales Year-On-Year Growth

3,414,15025,3%

+ 14.0%

4,020,72026.9%

+ 17.8%

3,890,91025.6%- 3.2%

3,889,71026.3%

+ 0.0%

3,750,90025.2%- 3.6%

Finished Products Share Of Net Sales Year-On-Year Growth

11,330,73084.3%

+ 6.1%

12,521,63083.7%

+ 10.5%

1,2198,41080.4%- 2.6%

11,543,70078.1%- 5.5%

11,052,95074.2%- 4.3%

Electronic Components Share Of Net Sales Year-On-Year Growth

2,117,26015.7%

+ 24.5%

2,439,48016.3%

+15.2%

2,976,97019.6%

+ 22.0%

3,232,89021.9%

+ 8.6%

3,848,14025.8%

+ 19.0%

Total Net Sales 13,447,990 14,961,110 15,175,380 14,776,590 14,901,090

In the future, consumer electronic, electronic devices, and information andcommunication related products were expected to each account for one-third of thecompany's business. According to vice president Katsura:

This restructuring effort is bearing fruit. The company culture that values creativity is becomingfirmly established and has helped our performance in recent years. The ViewCam and portableinformation tool which are related to LCDs where the company is beginning to earn a profit, hadsales of $470 million and is a big earner in 1993.

In fact, Sharp's LCD sales in 1993 were $1,875 million yen. LCD related products had totalsales of $3,461 million. In 1994, sales reached $2,450 million yen for LCDs and $4,452million for related products.

By 1994, Sharp did business in 135 countries, operated 20 sales offices in 18countries, had 27 production facilities in 17 countries and four research facilities in threecountries. Sharp's North American sales were over double the sales of either European orAsian sales as shown in Table 4. Most overseas operations were centered around the U.S.,

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England and Germany. Export dependence was a growing problem as Japan's yen continuedits appreciation. The Sharp brand was strong in overseas markets and exports had accountedfor as much as 60% of sales in the early 1980s. Today exports were under fifty percent.

Table 4: Sharp Corporation's Sales and Trends by RegionYears Ended March 31 1990 1991 1992 1993 1994Japan Share Of Net Sales Year-On-Year Growth

6,744,17050.2%

+ 7.8%

7,503,83050.2%

+ 11.3%

7,749,35051.1%

+ 3.3%

7,140,84048.3%- 7.9%

7,439,16049.9%

+ 4.2North America Share Of Net Sales Year-On-Year Growth

3,448,83025.6%

+ 15.9%

3,508,06023.4%

+ 1.7%

3,414,18022.5%- 2.7%

3,783,54025.6%

+ 10.8%

3,765,72025.3%- 0.5%

Europe Share Of Net Sales Year-On-Year Growth

1,782,21013.3%

+ 10.0%

2,182,51014.6%

+ 22.5%

1,863,02012.3%

- 14.6%

1,644,01011.1%

- 11.8%

1,540,46010.3%- 6.3%

Asia Share Of Net Sales Year-On-Year Growth

805,5206.0%

- 15.5%

1,085,0207.3%

+ 34.7%

1,372,7209.0%

+ 26.5%

1,539,03010.4%

+ 12.1%

1,535,96010.3%- 0.2%

South America & Others Share Of Net Sales Year-On-Year Growth

667,2705.0%

+ 15.6%

681,6904.6%

+ 2.2%

776,1105.1%

+ 13.9%

669,1704.5%

- 13.8%

619,7904.2%

- 7.4%Total Net Sales Year-On-Year Growth Overseas Sales Share Of Net Sales Year-On-Year Growth

13,447,990+ 8.6%

6,703,82049.9%

+ 9.4%

14,961,110+11.3%

7,457,28049.8%

+11.2%

15,175,380+ 1.4%

7,426,03048.9%- 0.4%

14,776,590- 2.6%

7,635,75051.7%

+ 2.8%

14,901,090+ 0.8%

7,461,93050.1%- 2.3%

Fifty percent of overseas sales today are supplied from local production. Sharp'sintegrated operation in Memphis, Tennessee, was producing color TVs, microwave ovens,and copier toner. Sharp began U.S. production of microwave ovens in 1979 and has been thenumber one selling brand since 1990. Sharp began making facsimile machines in 1985 inNew Jersey and has held the top market share for six years. In Camas, Washington, Sharpwas expanding LSI operations to include TFT-LCD production. Sharp had producedmicrowave ovens in the U. K. since 1985, appliances and components in Germany since1968, continued to expand color TV production in Spain, and copiers and facsimiles inFrance.

Sharp had also established operations in Asia. Malaysian operations, begun in 1990,produced over 20,000 VCRs per month. In Thailand, Sharp also produced microwaveovens, color TV, refrigerators, air conditioners and facsimiles for global export. In China,Sharp's joint venture in Shanghai produced air conditioners and was building a copier plant inChangshu. In July, Sharp acquired over 60 percent of an Indonesian licensee which willproduce 120,000 refrigerators and 130,000 televisions with hopes to produce 180,000 by1996.

In addition to expanding overseas, Tsuji was looking at further reorganization:

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We intend to revamp our sales and marketing organization to cope with changes in the market, anddevelop and train personnel to empower them and encourage creativity. Through this strengtheningof our operational capabilities and with a company-wide restructuring aimed at transforming Sharpinto a truly creative, truly international enterprise, we will work for even greater improvements incorporate performance in the future.

By 1994, Sharp had 63,900 employees worldwide, 29,500 were overseas and 34,400 wereemployed in Japan, including approximately 8,100 engineers in Japan and 900 overseasengineers. All of the 500 new employees hired over the past year were engineers.

Sharp's Vision and Strategy

All of the products created by Sharp have been the first of their kind in Japan. Thecompany's Business Creed, based on the principals of sincerity and creativity, is shown inFigure 3. The company's creativity has been driven by top management visions, now called"Hayakawaism" after the company’s founder. Hayakawa’s philosophy was to create productsthat others want to copy. His vision of the development of a new information age causedhim to develop the first crystal radio in 1925. Tsuji commented:

Throughout history the real driving force behind the technological revolution has been the dreamsand vision of human beings. I believe the building of a rich, comfortable future will depend onnurturing our imagination to envision new dreams, and extending technological creativity to makethese dreams come true. Mr. Hayakawa always used to say, "Make products that people will followand imitate." Our ex-president, Mr. Akira Saeki, now corporate advisor, always said, "you'll nevermake a contribution to society if you make the same thing as everybody else."

After seeing the impact of large scale integrated chips on the design of the Apollospace programs, Hayakawa believed they could be used to make calculators. Rather thanparticipate in Japan's expensive annual electronic show in 1970, Hayakawa and Saeki builtthe central research labs and factory for semiconductors in Tenri, Nara Prefecture. Byintroducing semiconductors into consumer products at such an early date, they laid thefoundation for Sharp to become the electronics company of today. Additional steps inSharp's development were related to making the calculator smaller and lighter by replacingbatteries with solar cells and developing smaller liquid crystal display panels.

Development of high technology has supported the advancements in consumer andindustrial equipment, and electronic components are considered to be the driving forcebehind such developments. Equipment that once had a single function now has multiplefunctions and is evolving into advanced systems with more sophisticated and integratedfunctions. As such development accelerates, more advanced performance, greater reliability,and further miniaturization are demanded of component engineers. According to Tsuji:

Rapid technological innovation is leading our civilization into a new era. Advances in electronics,in particular, have made life more comfortable than ever before imaginable, as well as contributinggreatly to improved operations at all levels of business. Electronics are also broadening the scope oftheir potential contribution to global society, through progress in areas like opto-electronics -- a newtechnology utilizing the power of light.

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Figure 3: Sharp Corporation's Business Creed

Business CreedSharp Corporation is dedicated to two principal ideals:

"Sincerity and Creativity"

By committing ourselves to these ideals, we can derive genuine satisfactionfrom our work, while making a meaningful contribution to society.

Sincerity is a virtue fundamental to humanity...always be sincere.

Harmony brings strength...trust each other and work together.

Politeness is a merit...always be courteous and respectful.

Creativity promotes progress...remain constantly aware ofthe need to innovate and improve.

Courage is the basis of a rewarding life...accept every challenge with a positive attitude.

Sharp's general manager of electronic components, Minoru Miyuki, further explained:

As electronics technology advances at a remarkably quick pace, more and more consumer andindustrial products become electronically controlled. We will continue to endeavor to spot thetrends, meet customer needs, and contribute to the well-being of people and society at large. To liveup to wide expectations from all over the world, we...will remain committed to creatingtechnological seeds for the future.

President Tsuji says the company must make things that meet consumer requirementsby looking at the products from the consumer's eyes.

Since we are a manufacturer, our business is to create products. Since many of our products aremature, out aim is to develop new products. It is the job of the LCD Group, the ElectronicsComponents Group, the Integrated Circuits Group, and the Printing and Reprographic SystemsGroup to help revitalize or to help remake the mature products.

Figure 4 shows the conceptual coupling between Sharp's technological developmentsand customer needs. Ichiro Fujimoto, general manager for Sharp's corporate R&D group,explained:

New product concepts come from the customers' viewpoint. Engineers have ideas, but they typicallylook down on users. It is very important for the engineers to have the users' point of view. Thattook 10 to 15 years to do accomplish. The LDC is a prime example of that. If you want to developsomething like that, you need a key component. You have to start applying that to come up withuseful products. That process takes 20 years or so. You have to start by thinking about the kinds of

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products you want. Sharp's president keeps the users point of view in the front of our thinking. Atthe same time, we need engineers working on key components that can be used to develop productsto meet their needs.

Components, like LDC, can take 10 to 20 years to develop. In 1964, we had the first electricallyoperated calculator. It had about 5000 parts which made it too heavy and too large. We had to haveICs and LCDs for this product to make it smaller and lighter. ICs were started with the idea ofmaking products lighter, not with the idea of making ICs and then trying to decide what to do withthem. EL (electro-luminescence) was developed because we needed a low energy device. LCD wasa device for making calculators thinner and lighter. That process is the key process for productdevelopment. The components were not the main focus, it was calculators that were our main focus.That means that it comes from the consumer's point of view, and not from technology first.

The first LCD was used on a calculator in 1973. It is now 1994. That is 21 years ago. We are nowtalking about more applications. It started as alpha-numeric -- numbers and letters only. With moreapplications, we developed a dot structure, then added color. We then added image. The first majorapplication is the ViewCam. There will be hundreds of more applications of this kind.

We started research on the laser in 1970 and produced the first laser diode in 1981. The firstbusiness application was the compact disk. It took 20 years to develop the component. We are nowdeveloping a readable/writable optical hard disc that will hold 100 megabytes of data.

Solar batteries have been under development for over 30 years. It started drawing attention from theconsumer with the oil shock in 1970, but with the decline in energy prices it lost momentum. Nowenvironmental issues are driving it. Farmers need clean energy for warming green houses. It hasn'ttaken off as a big business yet, but the possibility is there. There are three types: single crystal,polysilicon, and amorphous. Sharp is the only company certified as a single crystal solar batterysupplier for satellites. You need decades of enduring efforts.

Figure 4: Sharp Corporation's Seeds and Needs Coupling

Seeds

Needs

DevelopedTechnologies

DevelopedMarkets

UndevelopedMarkets

UndevelopedTechnologies

Areas for productdevelopment

Areas for research

Source: JMA Management Center ed. Sharp no Gijutsu Senryaku (Technology Strategy of Sharp) Tokyo: JMA, 1986, p. 47.

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Sharp's Research and Development Activities

As shown in Table 5, it was management's aim to have R&D at 10 percent of sales.R&D expenditures for 1994 were budgeted at 108 billion yen. Tani explained:

The year 1985, about ten years ago, was a turning point for the corporation. Until then, Sharp wasjust an assembler. We purchased the parts and assembled them into products. We then realized thatwe needed to make our own components like LSI and LCD components. We then started to increaseour R&D expenses.

Sharp is a real engineering and R&D oriented company. Last year, R&D expenses were 9.3 percentof sales volume. Depreciation expenses were about 8 percent of sales. Together, is was 17.3 percentof sales for such expenditures. While R&D is currently down, we know it is really important for ourfuture.

Table 5: Sharp's R&D ExpendituresYear ending R&D (%)change As % of March 31 amount from prior year sales 1987 590,220 99.9% 6.8% 1988 594,700 92.9% 6.8% 1989 671,560 112.9% 6.8% 1990 782,470 116.5% 7.4% 1991 893,510 114.2% 7.8% 1992 981,290 109.8% 8.2% 1993 1,035,320 105.5% 9.0% 1994 1,083,110 104.6% 9.3% 1995 planned 1,100,000 101.5% 8.9%

As shown in Figure 5, Sharp's R&D organization comprised 19 research laboratories, eightdirectly managed by the corporate research and development group, eight affiliated withmanufacturing groups, and three reporting to the production technology group. Additionalurgent project teams intersect the work of the research organizations.

The corporate research and development group had responsibility for developing newmaterials and devices at the central research laboratory, and developed next generationdevices at the functional devices laboratory. The energy conversion laboratory developedtechnologies for solar cells, air conditioning, refrigeration and noise-reduction systems. Thesoftware research laboratory developed next generation software. There were four overseasresearch laboratories. Sharp also had three production technology development laboratories.

Sharp anticipated that the 21st century would be the age of multimedia, thecombination of audio, text, graphics and animation. Sharp's new multimedia systemsresearch and development center at Makuhari is focusing on next-generation imageprocessing and communications, including integrated media, image systems, andtelecommunications developments. Multimedia systems included integrated medialaboratories for advanced human interface technology like virtual reality, image systems

14

laboratories for digital imaging, and telecommunication research laboratories for satellite,mobile and ISDN devices.

Sharp's manufacturing groups carried out applied developments of existingtechnologies and devices. This included the development of audio/video systems, digitalaudio equipment and data communications devices, home electronics equipment, opticaldevices, LCDs, modems, VLSI circuits and SRAMs, modems, digital telecommunications,consumer appliances, information and office automation equipment, and related software.Sharp was developing flash memory for its next generation products to make them morecompact and cordless with longer battery lives. The company had also developed high speedLSI image processing for use with CCDs (charge-coupled devices) which convert light intoelectrical signals to make intelligent visual systems.

Figure 5: Sharp's Research and Development Organization (April 1, 1994)

Sharp Laboratoriesof Europe, Ltd. (U.K.)

TelecommunicationR&D Center (Chiba)

TelecommunicationR&D Labs. (Chiba)

“Gold Badge” Special Projects Teams

Liquid Crystal DisplayLaboratories (Nara)

Electronic ComponentsLaboratories (Nara)

VLSI DevelopmentLaboratories (Nara)

Appliance Systems ProductDevelopment Lab (Osaka)

Communication & Audio Systems Product Development

Lab (Hiroshima)

TV and Video SystemsProduct Development Lab

(Tochigi)

Product Development

Production TechnologyDevelopment Center

Information TechnologyLaboratories (Nara)

Central ResearchLaboratories (Nara)

CAE Center

Production TechnologyDevelopment Center

Precision TechnologyDevelopment Center

Functional DevicesLaboratories (Chiba)

Sharp MicroelectronicsTechnology, Inc.

(Washington)

Sharp Digital InformationProducts, Inc.

(California)

Sharp Technology Taiwan Corporation

(Taipei)

Results Commission Work

Research Laboratories at the Manufacturing Groups

Research Laboratories at the Corporate Research and Development Group

Source: Sharp Corporation

Energy ConversionLaboratories (Nara)

Software ResearchLaboratory (Nara)

Image SystemsLaboratories (Chiba)

Integrated MediaLaboratories (Chiba)

Multimedia Systems R&D Center

Fundamental Researhand Development

Information Systems ProductDevelopment Lab (Osaka)

Printing and ReprographicSystems Product

Development Lab (Osaka)

Environmental TechnoologyLaboratories (Nara)

Materials Research &Analysis Lab (Nara)

Overseas, the integrated circuits group's operations included Sharp MicroelectronicsTechnology, Sharp Digital Information Products in the United States, and Sharp Technologyin Taiwan. Taiwan designed and developed integrated circuits and related components. Theoperations in Camus, Washington are for LSI and LCD research and production. SharpLaboratories of Europe in the United Kingdom, the R&D development company in Oxford

15

Park was established to commemorate the 80th anniversary of Sharp. It focuses its researchon artificial intelligent applications for a seven language translation system for Europe.

Sharp's production technology development group was responsible for advancedproduction and factory automation technologies. Sharp's intelligent manufacturing systems(IMS) linked various processes of design, production control and manufacturing viacomputer to rapidly accommodate changes in market activity and new technology trends.IMS had improved reliability and productivity, shortened development times, kept costsdown and reduced inventory. Sharp's engineering global networked linked headquarters toall operating centers worldwide. This allowed for technical and engineering data to beshared with improved design and efficiency.

The majority of funds for R&D were spent by the business units. About one third ofthe funds were spent for longer range projects. Fujimoto explained:

We used to have a factory based system, but shifted to a division based system last year. Eachdivision has its own product development organizations that works on tomorrow's developments.The budget for these developments account for between 65 and 70 percent of the total R&D budget.The lower half is the divisional responsibility. The divisional R&D is for day-after-tomorrowdevelopments. Corporate R&D focuses on long term developments. The corporate R&D group isresponsible for the upper half of the R&D organization chart. The solar battery, software research,and multimedia all fall into the corporate R&D group. The multimedia center, at Makuhari, is new.These account for between 30 and 35 percent of Sharp's R&D budget. So there are three levels,tomorrow, day-after-tomorrow, and long term.

As shown in Figure 6, Sharp is known for its technological developments. In 1963,Sharp was the first in Japan to succeed in mass-producing solar cells that now power lighthouses, radio relays, highway signs, and other devices. In 1973, Sharp introduced theworld's first commercial application of an LCD in an electronic calculator, and introduced itinto word processors and PCs in 1986. Sharp was the first to mass-produce thin-film electro-luminescent display panels. Sharp is the world leader in development of magneto-opticaldisks for mass information storage -- a 5.25" disk can hold over 325 million characters.Sharp was the first in the world to use a holographic element in the laser pickup for MiniDisc (MD) players, dramatically reducing the size of the read head and leading to thecreation of the world's most compact MD player. Sharp produced the smaller CCD for usein compact 8mm camcorders.

Sharp's typical response to crisis had been to develop the new components. After theoil shock of the early 1970s, the company decided to develop integrated circuits internally, aswell as energy efficient LCDs. After the second oil shock of the late 1970s, a new factoryfor solar batteries and other technology for electronic components were built. Each crisisbrought some new development and production of key components through clear objectivesand the overall orchestration of corporate efforts. A new integrated circuit plant waslocated in Fukuyama, in Hiroshima prefecture. High speed image processing and voicesynthesis LSIs are among the many kinds of integrated circuits now produced at this plant.Looking to the next generation of LSIs, Sharp is taking a special interest in flash memories.Even in plants where advanced LSIs and LCDs are being incorporated into finished products,

16

the most advanced computers are used to provide integrated system controls. A vast amountof design know-how is needed and valuable data is used in all aspects of programming. TheCAD design is sent to a rapid product machine where a mold is produced automatically.

Figure 6: Sharp's Technological Developments (* Japan's first, # World's first)Year Development1912 * Approval of the Tokubijo snap buckle crafted for utility (designed by T. Hayakawa).1915 # T. Hayakawa's invention of the Ever-Sharp mechanical pencil.1925 * Assembly and marketing of crystal radio sets.1929 * Production of first AC vacuum-tube radio sets called Sharp Dyne.1953 * Development and mass-production of television sets.1962 * Development and mass-production of microwave ovens.1964 # Development and mass-production of the all transistor-diode electronic desktop calculator,

Compet.1966 * Development and marketing of Japan's first microwave oven with a turntable.

# Development of electronic desktop calculators incorporating integrated circuits (ICs).1969 # Development of the negative resistance light-emitting diode (GND).

# Development of electronic calculators incorporating Extra Large Scale Integration (ELSI).1973 # Development of the COS electronic calculator incorporating a liquid crystal display (LCD).1976 # Mass-production of CMOS LSIs facilitated by the LSI Film Carrier System. Production of

7mm-thin electronic calculators utilizing these LSIs.* Development of solar cells for use in the outer space utility satellite Ume.

1979 # Development and marketing of the 1.6mm-thin electronic calculator.* Development and marketing of the electronic translator of words and dialogues between

Japanese and other languages including English.1981 # Development of the long-life laser diode.

* Development and marketing of stereo player with automatic both-sides disc playing.1982 # Development and marketing of the personal computer-television set, the result of

integrating the computer with a TV set.1986 # Development of the low power for emission quantum well laser diode.

* Development and marketing of the VHD video disc player capable of 3-dimensional image reproduction.

1987 # Development of a highly sensitive magnetic sensor using ceramic high-temperature superconductor.

# Development and marketing of the magneto-optical disk system.* Development of an electronic organizer using Chinese characters.

1988 # Development of the 14" TFT color liquid crystal display.1989 # Development of the 110" color LCD projector compatible with Hi-Vision HDTV system.1990 # Development of the 15" TFT color LCD panel with multi-media compatibility.

# Development of the single-transverse-mode high-power laser diode.1991 # Development and marketing of a series of 8.6" wall-mount TVs.

# Development and marketing of a 8.4" color TFT LCD unit.1992 # Development of the 16.5" wide-vision and multimedia compatible color TFT LCD panel.

# Development and marketing of HDTV set with "Simple-type MUSE Decoder" at a price of 1 million yen.

# Development and marketing of LCD camcorder with 4" color LCD monitor.1993 # Development and marketing of the world's smallest, lightest headphone MiniDisc players.

* Development and marketing of TV/VCR combination model VT-24WS1.# Development and marketing of world's lightest personal plain paper copier.

1994 # Development of world's first prototype 21" color TFT LCD display for multimedia use.

17

Machinery designed and investigated by computer for heat and stress analysis arereflected in the favorable results of the production process. At the plant, computers keepconstant watch over the needs for parts at each work shop and see that they are supplied byrobot or other automated devices. A three dimensional, cognition robot produces an airconditioner. On the microwave oven line, the ovens go through a series of strict tests. Onthe copier line, repeated product quality tests are conducted by computer.

Sharp's LCD Based Innovations

To make the calculator smaller meant tackling the biggest problem, making thedisplay smaller. The principles used in liquid crystal displays had been known for some time,but had not become a reality. Sharp engineer’s decided it could be done and developed theworld's first electronic calculator, better, smaller and lighter. In a single stroke, thecalculator was miniaturized. Sharp engineers wanted to use LCDs to display more thannumbers and letters, by displaying images. In order to make advanced displays, Sharpneeded the technologies to mount thin-film transistors on the 0.2 millimeter wide pictureelements (pixels) that make up the unit. LCD production requires ultra-high precisionproduction technology similar to those of LSIs. These ultra-high precision mountingtechnologies presented a huge challenge.

In October, 1986, Tsuji made what was known as the "LCD shift." According to Mr.Saruda of Nikkei Research Center, "In addition to facing the technological challenge, it wasthe internal development of these key components for future applications that wasenvisioned." The idea was to give liquid crystal a new role as a kind of electronic paper thatcould accept electronic input. The dream then grew to include larger and larger sizes, andbetter and better image quality. The LCD division was established within the electric partsbusiness unit and an LCD research center was established within the corporate developmentcenter. Located within this center is an LCD plant whose facilities are at the leading edge oftechnology. Because LCD's hate dust particles, at this factory the amount of dust particles islimited to less than 10 particles, each three ten-thousands of millimeter in diameter, within avolume of one cubic foot. That is 300,000 times cleaner than a typical office.

In 1986, the first TFT-LCD color TV was successfully introduced. In 1987, the 3-inch color LCD TV using TFT was introduced. In 1988, the world's first 14-inch LCDdisplay was developed. In 1989, the 100-inch LCD projection system was introduced. In1992, the Sharp’s LCD ViewCam was introduced. Sharp’s LCD developments have include:

1970: set up the development center in Tenri1973: 1st calculator using LCD display1986: established LCD division and LCD research center1987: introduced 3-inch LCD color TV1988: developed the 14-inch TFT color display1989: introduced the 100-inch LCD projection set1991: built a new LCD plant at Tenri and in the Washington state, U.S.A.1992: developed 17-inch TFT color display and introduced the LCD ViewCam.1993: began construction of new LCD plant in Mie Prefecture.1994: developed 21-inch TFT color display for multimedia use.

18

The 3-inch color TV resulted in the development of advanced image technologycalled "normally white," meaning that the LCD looks white when the power is off. It wasapplied to the LCD projection set to get larger picture sizes. LCD parts were applied to theTV set projector and the ViewCam. New technology helped the company to create newsegments and hold a dominant position in those markets. According to Tsuji,

In order to expand our LCD business, I am working to achieve breakthroughs in threecomplementary areas. First, we intend to push development of high-level LCD technology. Second,we intend to make a breakthrough in production technology so we can offer reasonable prices.Third, we intend to push development of products that use LCDs.

Advanced components produce a group of new products that generate the next generation ofproducts out of mature products.

In response to the current recession, Sharp was focusing again on the development ofkey components. In R&D, the central focus was on improving the light characteristics ofLCDs through semiconductor developments for use in next generation products. Whilemultimedia business opportunities were still unclear, Sharp planned to continue developingnew and better selling products related to LCDs. The real test would come as the battle formultimedia business brings in many new competitors.

TFT Improvement Efforts

TFT-LCD is Sharp's core technology. For LCDs to challenge the $10 billion CRTmarket, Sharp is looking to develop the next generation thin-film-transistor by the year 2000.Between 1993 and 1995, Sharp planned to invest one billion dollars in LCD-related productR&D including the construction of the next generation of TFT-LCD. The objectives of itsnew development theme included reducing the thickness by half, increasing the brightness,and increasing the picture size. Sharps "next generation LCD display kinkyu project"included 42 people selected from across the organization. Eight of the 42 were immediatelytransferred to their new post under the supervision of the video business division manager.Team members were selected from the information technology research center, the opto-electric business division, and the IC business division. They were not necessarily replaced intheir old organizations.

LCDs are already much thinner and lighter than traditional CRTs. Efforts to makeTFT screens even thinner were steadily producing results. The 9.5 inch color TFT forpersonal computers is 10 millimeters thick and weighs 590 grams. Compared to 1990, it isone half the thickness and one-third the weight. The thinnest TFT is Mitsubishi's 9.5 inchLCD with 8.9 mm thickness and 550 grams in weight. It incorporates a 3 mm diameter coldcathode tube for backlight and uses automated tape bonding for automated assembly. At the6.4 inch size LCD, Sony builds 6.8 mm thin models. This is the thinnest product everdeveloped and may be used for "color" information terminal applications.

19

Since LCD doesn't generate its own light, it needs a light source, called backlight, togive its brightness. More backlight increases power consumption which detracts from themerits of LCD. The final brightness level represents only a few percent of the original lightsource. Light emitting tubes have 300 candela per square meter but TFT emits only 100candela. Brightness depends on the area of one pixel that is "open" for light to emerge.Half of the light source's output is absorbed in the process. Metal parts used in TFT devices,the color filter, and polarization all restrict or absorb light. Miniaturization and micro-fabrication cannot solve this problem.

Continuing Pressure on Performance

Despite strong international sales of Sharp's new ViewCam and electronic devicessuch as LCDs and semiconductors, consolidated overseas sales declined by 2.3 percentbetween fiscal years 1993 and 1994. During 1993, the world economy continued to havemixed results. While business activity in the U.S. was showing signs of recovery, ASEANcountries and China exhibited growth rates around ten percent. Japan's economy remainedflat, depressed by limited personal spending and restrained investment in new facilities andequipment. The continuing rise in the value of the yen, and the effects of an unseasonablycool summer of 1993, had further dampened Japan's economic growth.

Despite favorable overseas conditions, Sharp's overseas sales were down from $7.6billion in 1993 to $7.3 billion in 1994 as shown in Table 6. In the Japanese market, wherethe economy had yet to recover, innovative products like the ViewCam showed healthygrowth along with electronic devices. Domestic sales increased by 4.2 percent, up from $7.1billion in 1993 to $7.4 billion in 1994. Consolidated sales increased 0.8 percent, from $14.8billion in 1993 to $14.9 billion in 1994. Net income increased 7.4 percent, up from $296million in 1993 to $318 million in 1994.

In response to the continued recession in 1994, Tsuji further adjusted theorganizational structure so that each manufacturing group had associated productdevelopment laboratories. According to president Tsuji:

We also prepared for the next generation of key products by further reinforcing our businessorganization to promote mobile communications products and new portable information terminals,in our ongoing effort to create outstanding new products that meet the ever-changing needs ofconsumers. We developed progressive new ways of conducting business company-wide, bolsteringour domestic and overseas production technologies, enriching the marketing system, revitalizingcorporate personnel and organizational systems, and trimming costs wherever possible.

Sharp also attempted to compress total assets to make the company more efficient.Total assets were reduced in the first half of 1993, ending in September, by $245 million ascompared to $500 million in the prior year. Inventories were reduced by $132 million in sixmonths compared to $163 billion over 12 months. Inventory amounted to 1.2 monthssupply. As shown in Table 7, capital investments was being held around $800 millionthrough 1993 and 1994, keeping investments within the depreciation range. For the yearsfrom 1990 through 1992, capital investment had been held around $1.1 billion. Interest

20

bearing liabilities increased from $1.9 million to $2.3 billion by September, resulting in anincrease from 51.9% to 55.1% in the debt to equity ratio as compared to 40.6% in 1985.

Table 6: Sharp's Consolidated Financial Highlights (Years ending March 31)($ 000)Net SalesOverseas SalesIncome B/TNet Income

Net Income per ShareDividends per Share

Shareholders' EquityTotal Assets

Acquisitions of Plant and EquipmentDepreciation and AmortizationR&D expenditures

Number of Shares Outstanding (000)Number of Employees

199414,901,0907,461,930

610,830317,920

.2875

.1100

8,184,24020,322,190

1,049,9801,086,8401,106,910

11,056,360428,830

199314,776,590

7,635,750581,720296,120

.2773

.1100

7,669,03020,999,190

1,016,2601,080,7201,062,020

10,683,830418,360

199215,175,380

7,426,030831,030390,570

.3666

.1100

7,555,61021,476,800

1,313,7301,001,0701,011,120

10,667,030410,290

199114,961,110

7,457,280996,480469,180

.4422

.1100

7,267,63020,770,300

1,226,700896,250909,800

10,631,130365,390

199013,447,990

6,703,820935,110417,200

.4151

.1100

6,853,51020,325,980

1,166,750750,320799,490

10,543,590340,170

Source: Sharp Corporation Annual Report for 1994.

Table 7: Sharp's Capital InvestmentYear ending Investment amount Change from Depreciation/AmortizationMarch 31 ($ 000) prior year (%) ($ 000) % of sales 1987 516,390 74.9% 1988 479,900 92.9% 1989 721,810 150.4% 1990 1,113,620 154.3% 750,320 5.6% 1991 1,089,640 97.8% 896,250 6.0% 1992 1,119,010 102.7% 1,001,070 6.6% 1993 807,700 72.2% 1,080,720 7.3% 1994 869,690 107.7% 1,086,840 7.3% 1995 1,100,000 planned 126.5%

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Appendix

LCD Technologies

Liquid crystal displays (LCD) was considered to be the second semiconductorindustry and was seen as the industry to sustain Japan's prominence in hi-tech products intothe 21st century. If semiconductors were equated to Japanese rice, then flat panel displays,like LCDs, were like a new strain of rice. It was considered an indispensable part of Japan'ssustained economic growth.

The liquid crystal phenomenon was discovered by F. Reinitzer, an Australian, in1988. He found an organic substance which was between a solid crystalline and liquid statewithin certain temperature ranges. Unlike usual liquid substances, liquid crystaldemonstrated a crystalline structure and related refraction characteristics. Depending on thecrystalline states, different refraction's are possible.

1. In the pneumatic phase, the long axes of the molecules lie in a largely parallel orientation with arandom distribution of molecules.

2. In the smectic phase, the parallel orientation of molecules are structured into layers.

3. In the cholesteric phase, the layers of parallel structures are stacked in a spiral structure.Reinitzer found this phase to act as a thermo-sensor.

4. In the discotic phase, a structure of plate-style molecules are combined like cylinders. This phasewas discovered in 1977, but has yet to find an application.

Calculators, digital watches, portable word processors, and note PCs all use nematic liquidcrystal which change their structure with the application of electric voltage. The LCD panelis formed by sandwiching liquid crystal between a set of super thin glass plates attached toelectrodes and polarized films.

The twisted nematic (TN) technique is the basic method used for liquid crystaldisplays. The nematic liquid crystal properties are used to obtain two parallel orientations ofmolecules. The polarizing films that sandwich the liquid crystal are criss-crossed when thecurrent is off, and the liquid crystal aligns its molecules in parallel with the polarized film.Thus the molecules are twisted at right angles between the films. Incoming light twists atright angles through the molecules and penetrates the other side. If voltage is applied to thecell, the molecule's orientations are straightened and light can no longer penetrate the film.

The segment electrode method is applied in calculators and digital watches.Generally seven electrodes are placed to indicate one digit number. Depending on thecombination of electrodes that are activated, a number is created. Dot matrix techniques areused to display more complicated patterns of alphabets, symbols, and graphics used in wordprocessors or PC notebooks.

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Passive matrix, or simple matrix techniques are composed of vertically andhorizontally paneled slim belts or electrodes and an intersection of a pair of perpendicularelectrodes called dots or pixels. When both axes of electrodes get voltage, the pixel showsan "on" status. Active matrix techniques utilize a separate switch for every pixel. Thisprovides a better image contrast than the passive matrix. The application of thesetechnologies results in three LCD types:

1. Super Twisted Nematic (STN) is a passive matrix system that uses a twisted angle of more than180 degrees. It is capable of making larger size LCDs than TN types.

2. Thin-Film Transistor Twisted Nematic (TFT-TN) has transistors switches located at every pixel.Its production cost is much higher than passive matrix, but it provides a much higher, sharper imagethat is more suitable for color displays. The larger the display, the greater the perceived differencein display quality.

3. Metal-Insulated-Metal Twisted Nematic (MIM-TN) is essentially the same as TFT-TN, exceptthat it uses a thin-film diode for its switching device. The quality is relatively lower than the TFT-TN type, but is cheaper to manufacture.

In comparing the quality and cost of these three types of LCDs, the Table 8 providescomparisons of STN, TFT, and MIM displays.

Table 8: LCD Technology ComparisonsType of LCD STN

PassiveTFT

ActiveMIMActive

Quality:display contrastviewable angleresponse speed (ms)brightness (candella/m2)flickeringvoltage leaks (crosstalk)

20:160

30060

stronghigh

150:11205060

weakalmost none

100:11005080

weaklittle

Cost: (yen)glass cuttingcolor filter and assemblyyield percentagemodule costtotal cost

2,0008,00050%

28,00048,000

25,0008,00050%

30,00096,000

2,00010,00050%

35,00079,000

Source: "Flatpanel Display 1992," Nikkei Business Publications, p. 73.

The TFT-TN display uses a combination of traditional nematic liquid crystal andmicroscopically small, thin film transistors. These transistor switches are located on eachindividual picture pixel and have a function of improving deficiencies in twisted nematic. TNcannot store the picture data without continuos electric voltage to keep the image on thedisplay. This voltage is only supplied by the transistors.

TFT-TN is expensive to produce and are difficult to produce in larger sizes. A singlepixel that does not work will cause the display to be scrapped. With market demand growingfor more and larger LCDs, the number of pixels per square inch must also increase, making

23

the problem more serious. Screens of standard personal computers comprise about 300,000pixels. Modern television sets have 600,000 pixels. High resolution systems, like those usedfor CAD applications, require as many as 10 million or more pixels.

An Alternative Technology

One alternative to TFT-TN technology is called ferroelectric liquid crystal (FLC).FLC applies a passive matrix structure and the structure is far less complicated. Forexample, in case of a display with 1000 x 1000 pixels, FLC needs only 2000 electrodescompared to 1,000,000 TFTs. FLC also allows for rapid switching, vivid pictures and canstore data. No voltage is needed to maintain the picture. The costly TFT transistor isreplaced by the material itself, thereby reducing the cost of production. This allows for highquality, high resolution applications. FLC technology has several technical hurdles toovercome before it is commercially applicable. The most significant problem is the quality ofalignment of the smectic phase, on which the technology is based. It is more sensitive tomechanical stress than the nematic phase used for TFT displays. Development of practicalferroelectric LC mixtures will be key for its technical success.

The major players in the LCD market are currently concentrating on TFT-TN displaytechnology. As shown in Tables 9 and 10, they are investing heavily in production facilities.It will be a number of years before LCDs will displace CRT displays. However, if FLCtechnology is developed, it could quickly displace TFT with a lower cost, high quality displaythat could be used for most CRT applications.

Table 9: Production capacity of large size color LCDsCompetitors TFT sheets/month STN sheets/month Planned capacitySharpNECToshibaSeiko-EpsonHitachiSanyoKyocera

45,00020,00020,000

-5,000

--

45,000-

10,0005,000

-15,0001,000

90,000 TFT, 90,000 STN84,000 TFT30,000 TFT, 25,000 STN10,000 STN---

Source: Yano Report, June 10, 1993.

Table 10: Investment for Production by Major LCD Manufacturers (billions of yen)1990 1991 1992 1993 1994 1995

Sharp 3.2 3.5 4.0 8.0Toshiba 2.5 1.5 2.0 8.0NEC 1.0 2.0 1.2 2.0Hoshiden 2.0 4.0 2.0Casio .6 1.3 3.8Fujitsu 1.0 2.7Canon 1.5Source: Yano Report, June 10, 1993.

Sharp had about 40 percent of the LCD market. Production sites were in Nara andTenri Japan. Investment was planned at 80 billion yen between 1993 and 1995, to primarily

24

increase TFT production. Capacity of TFT production was to increase to 95,000 sheets permonth in 1995, with the opening of the world's largest flat panel display factory in MiePrefecture. Growth in STN production was being increased from 45,000 sheets per month.

Toshiba was producing a full range of displays. Small and medium sized TFT andSTN displays were produced in Himeji; TFT and STN at Fukaya, and large sized TFT atwere being produced in a joint venture with IBM for PC and workstation applications. NECspecialized in TFT for PCs, and planned to produce small and medium sizes for car TVs andnavigation systems. In-house consumption accounted for 90 percent of use. Seiko Epsonproduced monochrome STN and TN in its Toyoshima factory, but was expanding into MIMand TFT in its Suwa facilities. Small TFTs were supplied for viewfinders.