Sharp's Mega-Wager on LCD TVs

The Japanese consumer-electronics outfit is spending $3.2 billion on a next-generation facility to produce LCDs and meet demand for big TVs

Japan's Sharp (SHCAY) is a master of one-upmanship. And why wouldn't it be? To survive and stay profitable in the flat-panel TV business, manufacturers have to pour billions into new technologies and factories that pump out ever-bigger TVs more efficiently. On July 31, President and Chief Operating Officer Mikio Katayama showed why Sharp remains a moneymaker despite its relatively small size: a $3.2 billion investment to build the world's most advanced plant for liquid-crystal displays (LCDs).

The new facility in Sakai city, near Osaka—Sharp's seventh for LCDs (fourth for TV panels)—will be what's known in industry-speak as a 10th-generation plant. Translation: Every glass panel 3 meters by 2.8 meters in size that's produced can be cut into six 60-in. or eight 50-in. LCD sets. By contrast, Sharp's facilities in Kameyama, central Japan, are better suited for TVs in the 40-in. range.

Sharp also wants to stay ahead of Sony (SNE) and Samsung Electronics (SSNKF), which jointly own a panel-making shop in Korea and will be firing up their newest plant, with technology rivaling Sharp's Kameyama facilities, next month. When Sharp's new plant opens in 2010, it will be capable of cranking out 864,000 panels, or more than 5 million 60-in. TVs, every year.

Challenging Big Plasma

What you're witnessing is Sharp's deeper push into turf once owned by rival technologies, plasma and rear-projection sets. And here's why: 40-in. TVs and larger are expected to become a growing chunk of the market. That's got plasma manufacturers, once dominant in larger flat-panel sets, on tenterhooks.

Last week, April-June results for Matsushita Electric Industrial (MC), which has a third of the world's plasma TV market, showed the company could fall short of its target of shipping 5 million sets this year and that TV revenues in Japan and North America had unexpectedly declined. One reason its revenues are down is the encroachment from LCDs. Already, LCD makers sell more TVs in the 40-in. range than plasma producers, which used to dominate in that size, says Sweta Dash, an analyst at market research firm iSuppli.

Last year, the big screens, 40 in. and up, accounted for 14% of the 44.5 million LCD TVs sold worldwide. This year that figure is expected to rise to 25% of LCD sets, and in 2011 it could be as much as 40%, according to iSuppli's forecasts.

LCD Sales Expected to Soar

With the LCD TV market expected to reach 72 million units this year, 100 million by 2009, and 120 million by 2011—when LCDs could dominate flat-panel TV technology, with a 90% share worldwide—Sharp is running its crew ragged to meet demand.

To wait would be to risk missing out on the bonanza. The Japanese manufacturer knows firsthand what that's like. During the 2005 yearend holiday season, the Osaka company's supply shortfall allowed other producers to snatch precious market share. Sony, Samsung, and Philips (PHG) all benefited from Sharp's misfortune. Even last year, with Sharp's factories going full bore, the company slipped in the TV rankings, from No. 1 in the first quarter (15.2% share) to fourth (11.4%) in the final quarter, iSuppli says. (Sharp says unit sales topped 6 million LCD sets globally in the fiscal year ended March, 2007, and forecasts sales this year at 9 million. It doesn't break out figures by calendar year.)

Sharp also hopes to milk the LCD TV market before these sets are merely consumer-electronics commodities. Gigantic high-end, high-definition TVs, Sharp's specialty, still command a higher price than ordinary, smaller LCD sets.

As Sharp migrates to large screens, it's able to stay a step ahead of low-cost Asian manufacturers, which can't match the top-tier makers in technology for big screens but nevertheless are pumping out TVs and driving down global prices and industrywide profit margins.

Suppliers Next Door

The new factory won't just be another cog in Sharp's TV-making machinery. The company has loftier ambitions. The plan is to build two plants on a plot spanning 1.27 million hectares (3 million acres): one making LCDs, another making thin-film solar cells, which could add another $1 billion to the cost. In the quarter through June, roughly 70% of Sharp's $6.6 billion in operating profits came from LCD panels and TVs, while around 8% was from selling the cells that absorb the sun's rays and convert it to energy.

Building the two production facilities on the same property means they can share materials and machinery. Solar panels and TV panels have a few things in common, including the glass and gases used during production, which will make it easier for Sharp to afford a buildup of two fast-growing, investment-heavy businesses.

The plot is so big that Sharp has invited materials and parts makers to set up shop next door. Corning (GLW), which makes the glass, Dai Nippon Printing (DNPCY), which makes the color filter layer on the glass panel, and utility Kansai Electric Power (KAEPF) have all agreed to build facilities there. All told, the price tag for the development will top $8 billion, and could be even larger if Sharp invites more companies join or if it adds a TV-making facility on the premises.

The company seems to have learned from—call it just-in-time-manufacturing economics—having suppliers in close proximity. Its Kameyama plant similarly benefits from a sprawling supplier network known as Crystal Valley, which quickly sprung up around that facility. Having suppliers close by gives greater flexibility in responding to sudden demand downturns, though growth is the more likely scenario at this point. And that's just the kind of production innovation that Sharp needs to move up in the TV business.

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