Will Korean liquid crystal display (LCD) makers be outgunned by their Taiwanese rivals? To hear Derek Lidow, of researcher iSuppli, tell it, the Taiwanese have already seized leadership of the industry. In the first quarter of this year, Taiwan accounted for 52.2% of LCD panel shipments, while Korea had a 37.4% share. A year earlier, Korea had a lead of 48.8% against Taiwan's 41.8%. "Taiwan will remain the leader in LCD panel production for the foreseeable future," Lidow predicted in a Seoul forum last month.
More importantly, Lidow points out that the loss of market share in the sophisticated, capital-intensive, business highlights the dangers for Korea of losing high-tech competitiveness. "To remain competitive, the nation must change its approach to the high-tech industry, focusing more on entrepreneurial innovation and less on lower-margin, or commodity, products," he said at the forum.
While some of Lidow's concerns are well founded, they don't take the complete picture into account. Two Korea-based companies, LG.Philips (LPL) and Samsung Electronics, remain the world's top manufacturers in the industry, and experts expect them to remain key players.
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One big reason for the fall in their market share is their strategy to reduce sales of small LCD panels, that have become widely available and cheap, in favor of bigger ones, particularly TV screens measuring 40 inches or more diagonally but thin enough to be hung on the wall.
In recent years LG.Philips and Samsung have been spearheading an aggressive campaign to ramp up output and adopt new technologies that will boost productivity and lower costs. In January, both companies started mass production of large TV panels from new seventh-generation plants. That meant slow sales in the first quarter as they tried to enter a market so far dominated by plasma technology. No Taiwanese company has the latest-generation factory.
With the computer market saturated, TVs have become the hope for future growth in LCD panels. Consumers are trading-in fat cathode-ray-tube TVs for sleek, thin models as the broadcasting standard shifts from analog to digital technology (see BusinessWeek.com, 11/7/05, "Dive Into HDTV").
DisplaySearch, another research firm tracking information technology trends, expects demand for large LCD panels used in PCs to rise 50% over the next three years, while demand for LCD panels for TVs is projected to jump more than threefold.
In fact, tapping into the new flat-screen TV market takes on greater importance as LCD panels have become a commodity business. Taiwan's strength as a PC production base has created demand there for LCD panels for monitors and notebooks. But the country's presence in flat-TV manufacturing doesn't come close to matching its standing in the computer industry, and it lacks any established global brand.
April's agreement by AU Optronic (AUO), Taiwan's largest and the world's No. 3 maker of LCD displays, to acquire smaller cross-town rival Quanta Display signals a change in the contour of the industry. The merger will give AU Optronic economy of scale matching the Koreans, who have announced plans to spend billions on next-generation plants that will enable them to cut prices further.
Industry execs say the acquisition will probably trigger a new wave of consolidation among smaller Taiwanese LCD makers, including Chunghwa Picture Tubes, HannStar Display, and Innolux Display, a unit of Hon Hai Precision Industry. "We expect Samsung, LG.Philips, and AU Optronic to become strong players in the industry, with Sharp and another Taiwanese company, probably Chi Mei, serving as niche players in the industry," says Cho Yeong Duk, Samsung's vice-president in charge of strategy for the LCD business.
Analysts note that as demand picks up for big LCD TVs, revenues for the Korean companies are likely to grow faster than they will for the Taiwanese. DisplaySearch forecasts the two Korean leaders will represent 47.6% of total global sales for thin-film transistor liquid-crystal displays in terms of value in the third quarter of this year.
That's up from an estimated 45.8% in the second quarter of 2006 and 41.8% in the first quarter. By contrast, the two largest Taiwanese LCD companies—AU Optronic and Chi Mei Optoelectronics—together are expected to account for 25.4% in the third quarter, down from 27% in the first quarter, according to DisplaySearch.
Of course, the projected growth in market share doesn't mean smooth sailing for the Koreans. A race to add new capacity among LCD makers and a fierce battle with plasma-panel makers for a bigger share of the flat-TV prize have led to a dramatic fall in prices, making it hard for all the participants in the market to make a profit (see BusinessWeek.com, 09/12/05, "War of the Screens"). DisplaySearch expects the average price for a 32-in. LCD TV panel to drop 21%, to $435 in December from $552 in January.
Demand for LCD panels isn't growing fast enough either. Share prices of all LCD manufacturers—whether they are Taiwanese, Korean, or Japanese—took a bad beating on June 7 after AU Optronic scaled down its second-quarter growth target for LCD TV and PC monitor shipments to 6% to 8%, from an earlier projection of a 20% increase (see BusinessWeek.com, 06/8/05, "LCDs Display Their Flaws").
The slower than expected growth in demand is hurting the Koreans more severely, at least in the short-term. Their multibillion-dollar investments in seventh-generation production facilities mean a write-off of hundreds of millions of dollars annually as depreciation for the next couple of years. This comes at a time of a high won that eats into margins. The Korean currency has gained in value against the dollar by about 22% in the past two years.
This may be a penalty for past success. Joo Dae Young, director of the electronics industry division at state-funded think tank Korea Institute for Industrial Economics and Trade, says the Taiwanese will have to invest in new plants as well, to stay competitive.
But as the Koreans used to do against Japanese market leaders, Taiwanese companies can play an easier and cheaper game of catch up. "Now, with the Japanese no longer ahead of them, the Koreans will have to pay for developing new technologies and production equipment," Joo said.
Some analysts believe Korean high-tech players are at the crossroads. "I don't think Samsung and LG.Philips are outshined by their Taiwanese competitors, at least not yet," says Chung Chang Won, electronics analyst at Daewoo Securities in Seoul. "But with the business environment getting tougher, their leadership will be tested." The Koreans have still to prove they can keep pulling away from the pack and differentiating themselves.