The LCD TV giants, through their joint venture, hope to stay ahead of rivals by moving faster to bigger TV segments, where profits are fatter
TV buyers around the world have benefited hugely from a fierce battle among Korean, Taiwanese, and Japanese manufacturers to dominate in the liquid-crystal display panel industry. Despite the recession, consumer appetite for svelte TVs has stayed strong thanks in part to the continually dropping prices of LCD panels caused by cutthroat competition among panel makers. Prices for those panels have dropped below manufacturing and distribution costs, sending all of the world's manufacturers of LCD panels into the red.
Now, just as recession-battered economies are showing signs of life and LCD prices are beginning to pick up, two electronics giants are launching state-of-the-art plants that could prolong the industry's woes. On June 2, Sony (SNE) Chief Executive Officer Howard Stringer flew to Korea to attend a ceremony with his Samsung Electronics counterpart, Lee Yoon Woo, marking the start of volume production at a $1.5 billion new factory run by an LCD joint venture between their companies. The new plant, when fully ramped up by the end of this year, will double the venture's production of screens for giant TVs bigger than 46 inches. Less than three months ago, another Korean LCD maker, LG Display (LPL), began mass production in a similarly advanced factory, known as an eighth-generation facility.
So could consumers planning to buy new LCD TVs for Christmas benefit from another round of major price drops? Not exactly, unless they want to buy ultra-large models. "LCD panels for 42 inches or smaller are in tight supply now," says Song Myung Sup, electronics analyst at brokerage HI Investment & Securities in Seoul. Song and other industry watchers believe the tight situation likely will continue until at least early autumn; by then TV makers will have already purchased panels and other parts to assemble them into sets in time for the holiday season.
A major reason for the supply crunch is an upsurge in flat-panel TV sales in China. As part of an economic stimulus package, the Beijing government expanded its 13% subsidy to farmers buying TVs and other home electronic devices and appliances to all provinces and cities, from a limited number of areas before. "This will create ample LCD TV sales in China over the next four to five years," says H.P. Chang, head of research at Taipei researcher WitsView, which specializes in display devices.
Another factor pushing up panel prices in the past few weeks is a low inventory level. Panel makers cut back their production from late last year to early this year—to as low as less than 50% of capacity at second-tier Taiwanese manufacturers—to respond to a dramatic plunge in prices as the global financial crisis spread from the U.S. around the world. The price of an LCD panel for a 32-in. TV, for example, plunged to $160 at one point in the first quarter of this year, from $330 at the end of 2007. It hovers around $190 now after it started picking up toward the end of the first quarter, according to WitsView. LCD factory utilizations have since increased.
Problem is, even with the recent bounce-back in price, they are still too low for many panel makers to make profits. Chang reckons that Korean plants, which are benefiting from more advanced factories and a weaker Korean currency, could start making profits now, but the Taiwanese would only break even when prices for a 32-in. panel rise to $193. The Taiwanese would also have to fully utilize their production facilities, which currently are operating at 80% to 90% capacity. (The Korean won has lost almost a quarter of its value against the U.S. dollar since the end of 2007 while the Taiwanese dollar has stayed more or less flat.)
TV Sales Growth Revised Higher
So why are Samsung and Sony adding more production capacity that could further delay a panel industry recovery? The LCD TV leaders want to stay ahead of competitors by moving faster to bigger TV segments where profits are fatter. Samsung is the No. 1 LCD TV maker with a global market share of 22%, and Sony is No. 2 at 16.7% in terms of revenue for the first three months of this year, according to market researcher DisplaySearch. The joint venture has its parents as locked-in clients who want large panels "in a timely manner," says Lee Jungyul, Samsung vice-president for business planning at the LCD unit.
While the main volume is in TVs 32 in. or smaller, overall global TV sales remain fairly robust. Brokerage Mirae Asset Securities in Seoul has revised its forecast for global TV sales this year to 125 million sets, up from an earlier projection of 120 million and the 2008 sales of 105 million. One big challenge facing premium brands like Sony and Samsung is the fast commoditization of LCD TVs that enabled low-cost specialists such as Vizio to emerge as major TV vendors. In North America, Vizio surpassed Samsung as the top LCD TV seller in the first quarter, grabbing a 21.6% share, up from 13.8% in the previous quarter. Samsung's share dropped to 19.9%, from 20.6% three months earlier.
Samsung and Sony see answers in differentiating their products in the higher-end segments. With the introduction of thinner, lighter, power-sipping, high-performance sets, "brand manufacturers can now serve mid- and high ends of the market where profit margins are higher," says Sweta Dash, TV analyst at market researcher iSuppli. Another trick is to attract consumers to bigger-size screens before second-tier companies catch up. "We believe our new advanced facility will spur the expansion for the large-screen TV market," says Samsung's Lee.