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Terry Gou's concentration of power holds danger for Hon Hai

Some at Sharp see familiar risk in Taiwanese parent's aggressive LCD investments

TAIPEI -- As Hon Hai Precision Industry and Japanese subsidiary Sharp look to vastly expand LCD panel production, some insiders are nervous about the ambitious endeavor being spearheaded by the Taiwanese company's strongman leader.

A local weekly publication ran an article in November that claimed Hon Hai Chairman Terry Gou was considering a run for Taiwanese president in 2020. Gou rejected the claim, which drew much attention.

Even without him denying it, however, few people who know how Hon Hai operates believed the story. "It is simply impossible considering Gou's way of single-handedly running a business," a veteran stock analyst at a local brokerage said.

It's personal

Much of Gou's personal fortune is tied up in Hon Hai -- better known as Foxconn -- illustrating the chairman's deep involvement with the company he founded, which has grown to become the world's leading electronics manufacturing service provider.

Gou has put up 666.8 million of his Hon Hai shares, worth around $1.76 billion at market value, to secure personal loans, according to a financial disclosure. Some of the money has been deployed through his own investment company for Foxconn's strategic ventures. Gou holds a 12.2% stake in Hon Hai overall.

For instance, Gou's money was used to realize Foxconn's acquisition of Japanese consumer electronics maker Sharp last year. Many at Hon Hai opposed the purchase, but Gou overcame their objections, partly by funding 36.9 billion yen ($324 million) -- about 10% -- of the acquisition cost through the investment company.

If Foxconn's stock price drops sharply, Gou may have to provide more collateral or repay loans secured with his shareholdings. His business style, which exposes him to a high degree of personal financial risk, is rare among major Taiwanese companies.

Blurred line

The line between Gou's personal affairs and those of Foxconn is blurred to an extent that would raise questions at other large multinationals. Not everyone is concerned about a laxity toward the principles of good corporate governance. "Mr. Gou would never betray shareholders," one female shareholder in Taipei said, placing her trust in a company whose information disclosure leaves a lot of room for improvement. Hon Hai does not even hold earnings briefings.

"LCD-related matters are all decided by Chairman Gou himself," a midlevel manager at Sharp's liquid crystal display operations said. Sakai Display Products, a Japanese joint venture between Hon Hai and Sharp, announced late last year a plan to build a new plant in the Chinese city of Guangzhou. The news surprised many Sharp employees, since even senior executives had been kept in a dark about the project until shortly before the announcement.

Deja vu

Gou has since revealed a vision of new factories in the U.S. and elsewhere, but some at Sharp are worried about his ambitious proposals.

"It would be difficult to launch multiple production lines at different locations at the same time because we do not have enough engineers," one person at Sharp said.

The chairman has said he does not speculate or gamble. Gou made Foxconn what it is by patiently refining its contract manufacturing business, investment plans for which are relatively simple to make. But a different approach is needed for the LCD panel business, which must deal with sometimes wild fluctuations in market conditions.

Gou says that success depends not on size but on speed. Still, his aggressive LCD investment drive reminds some Sharp employees of their former leaders who brought the company to its knees with an overly ambitious buildup in the sector. They see a risk in Sharp letting its investment strategy be guided by one of the charismatic leader's hunches.

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