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Tuning Out of Plasma

By Burt Helm In the land of high-tech TV, manufacturers are learning a lesson all too familiar to computer makers: Keep up with plummeting prices -- or get out of the way.

One major player is sending signals that it's doing the latter, at least in one key part of the high-tech TV business. On Feb. 2, consumer electronics giant Fujitsu (FJTSY) announced that it will sell the majority of its interest in Fujitsu Hitachi Plasma, a joint venture formed six years ago with Hitachi (HIT) to manufacture plasma TV panels. In addition to unloading 30.1% of its stake, giving Hitachi 80.1% of the outfit, Fujitsu also is transferring several plasma patents.

COLOR ME DISCOURAGED. Fujitsu is the latest big consumer-electronics company to demonstrate how uncomfortable it has become with the high-tech TV market's plummeting prices. NEC (NEC) sold its business to Pioneer (PIO) last year, after deciding it couldn't run production lines that were efficient enough to be competitive. The move made sense, since prevailing wisdom in the industry says prices of many high-tech TVs could drop by as much as 30% in 2005 -- with the possibility that some models may even slip beneath the $1,000 barrier.

Does this mean Fujitsu, one of the plasma market's pioneers, is throwing in the towel? Not altogether. Its subsidiary, Fujitsu General, will continue to sell plasma TVs via retail outlets. The raw panels that go into those sets will come from other suppliers, however.

Fujitsu execs say they are no longer comfortable in a market now shaped by plummeting prices and fast-eroding margins. "The prices are lower by about 20% each quarter -- that's serious competition," says Nick Hayashi, deputy general manager of Fujitsu's New York City office.

High-tech TVs are following the same pattern of price-cutting and consolidation that began to hit the PC market 10 years ago. Dozens of manufacturers once vied for position, but rapid price declines forced out most by the end of the 1990s. Today, Dell (DELL) is the only consistently profitable major PC manufacturer. Even mighty IBM (IBM) is backing out, with the recently announced plan to sell its PC business to China's Lenovo (LNVGY).

HOPPING MARKET. The high-tech TV business is still in its early days when compared to PCs, of course. But it's clear that the economics of the business aren't all that different. As high-tech TV prices drop, plasma-makers in particular are finding themselves in a squeeze between two other types of high-tech TVs.

On the high end, there are liquid crystal display (LCD) units, traditionally the most expensive TV technology. The manufacture of these sets has a lot in common with the economics of computer-chip production. Just as semiconductor plants usually produce ever-faster chips at the same prices as earlier models, each new generation of LCD factories turns out larger volumes of bigger models at the same margins.

On the market's cheaper flank, the success of micro-display rear-projection TVs "was way beyond what anyone expected," says Riddhi Patel, an analyst with electronics market-research firm iSuppli. Plasma sales, which now dominate the market for 42-inch screens -- considered the "sweet spot" size for high-tech TVs -- are being pressured by the smaller LCDs and the larger rear-projections. "What was an undersupply situation is now an oversupply one," says Patel. "Plasma was squished."

Adding to plasma's problems is that fact that, unlike its rival technologies, the manufacturing process is less flexible .

TOP PLAYERS. All of this means a shakeout. Within the plasma industry, Korean panel manufacturers like Samsung and LG (LG) are doing well. While Fujitsu Hitachi Plasma was the leading plasma supplier early in 2004, it fell to fourth place in the last two quarters, according to iSuppli. Samsung and LG, which have aggressively ramped up production and slashed prices, now top the market.

First-to-market Fujitsu "has had the best-looking plasmas to date, but they've also been extremely expensive," says Bob O'Donnell, an analyst at market researcher IDC. "Fujitsu may not want to play in a market that's all about price."

Fujitsu isn't the first to bow out of panel-manufacturing -- and it certainly won't be the last, as this business becomes increasingly cutthroat.

"It's a big gamble for companies to pick their strategic directions within HDTV," says Ted Schadler, an analyst at Forrester Research. "You'll see a lot of manufacturing consolidation. The companies that think they can make money will stay in. Those who don't will get out."

With dozens of players and several different technologies crowding the market, the outfits that can't manufacture on the cheap are likely to do exactly that. Helm is a BusinessWeek Online reporter in New York.

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