To outsource or not to outsource. That's a question TV manufacturers face these days as they revamp their supply chains to cope with the drop in demand caused by the global downturn.
The trend is toward outsourcing. Market researcher DisplaySearch says one in four flat-panel TVs sold globally from January to March were made by a contract manufacturer, not the company whose brand is on the set. By next year nearly a third of all TVs will be outsourced, DisplaySearch predicts.
TV makers are betting they can save a lot by letting someone else spend huge sums on new factories filled with state-of-the-art equipment. They figure it doesn't make sense for top brands to add factories only to sell small, low-cost liquid-crystal-display TVs—the sector of the market where TVs are a commodity, competition is the most cutthroat, and prices are most attractive to consumers.
Ramping Up Production
Consider the diverging paths of two companies: Sharp and Sony. On July 9, Sharp said it was ramping up production in Japan of LCD panels for flat-screen TVs. By August, the company will boost monthly output by 11% at one of its panel-making plants in Kameyama, in central Japan. That plant is already running at full steam, producing 90,000 of the huge specialized glass sheets each month. Each of the 2.2-meter-by-2.5-meter sheets is cut to make 18 32-inch, eight 46-inch, or six 52-inch displays.
Sharp wouldn't specify how the company expects to accomplish this feat. But a company spokeswoman did say why: "We've been getting requests from other LCD TV makers," says Miyuki Nakayama. Sharp realized that its current output falls short of meeting those demands. By October, Sharp will rush a gargantuan new factory in Osaka into service to keep the supply of panels flowing to its customers.
Sharp has said its unit sales of TVs will be flat at 10 million this year despite its panel-making buildup. That's partly because roughly half of the panels Sharp will make are expected to end up in other companies' TVs. Last year the company sold 20% of its panels to others. The focus on panels helps to blunt the declining volume sales and sinking prices that have hit every TV maker in the industry. Here's the evidence: Sharp expects revenues from LCD panels to dip 5% from last year but predicts that revenues from TVs will fall 10%. (Analysts expect operating losses from TVs of nearly $350 million but $250 million in operating profits from LCD panels.)
Sony (SNE) sells more TVs than Sharp—and is less insulated from the pain. Although the panel factory it runs in a joint venture with Korean rival Samsung Electronics is thought to be profitable, Sony has to share the output, unlike Sharp. And Sony's TV business continues to lose money: A DisplaySearch graph showed that Sony likely outsourced about 15% of its TVs in the first quarter of 2009. In recent months, Sony and Samsung added an assembly line to their factory in Korea.
But unlike Sharp, which makes nearly all of its own sets, Sony appears to be looking to outsource more of its TVs. Macquarie Securities analyst David Gibson has done some digging and has come up with an estimate: Sony could outsource as much as 50% of its LCD TVs, compared with 10% to 20% last fiscal year.
Outsourcing won't solve all of Sony's problems. Although last year's $1.32 billion loss from TVs could shrink this year, it won't disappear. Gibson predicts that this year's loss is likely to be $580 million.