Asia's Liquid Crystal Profits
Executives at Taiwan television manufacturer Teco Group are not used to getting much attention. After all, for most of its three decades in television manufacturing, the company has been stuck in a low-margin, commodity business without much glitz or glamour. But that was before the advent of the new Big Thing: flat-panel televisions made with sleek, liquid-crystal diode (LCD) displays. Now Teco, which started making LCD TVs last year, is at the center of one of the planet's hottest electronics businesses. And Frank Wu, head of the group's home electronics division, boasts that his company is well positioned to profit. Last year Teco sold 3,000 LCD TVs; this year it expects to sell 40,000. "We have the technology," he says. "We have the experience. We can move faster."
In fact, a host of Asian companies is moving fast to profit from the boom in LCD TVs. Some, such as Sharp (SHCAY ), Matsushita (MC ), and Samsung, make money two ways: They both make the LCD panels and assemble LCD TVs themselves. Others, like Teco, purchase the panels from suppliers such as Samsung, LG.Philips, and AU Optronics (AUO ), and then make TVs under their own and other companies' names. Meanwhile, computer makers eager to diversify, including Gateway Inc. (GTW ) and Dell Inc. (DELL ) in the U.S., are selling TVs under their names too.
As production rises, prices are dropping, further increasing demand from television shoppers willing to pay $1,500 or so for the lightweight and space-saving sets afforded by LCD technology. According to researcher iSuppli Corp., the worldwide market for the televisions this year will total $3.5 billion, up 50% from 2002, and will rise to $9.2 billion by 2005. The price drop is transforming LCD TVs from a plaything for the rich into an affordable item for middle-class consumers in Asia, Europe, and North America. Because of the TV boom, growth in the sale of LCD panels, says Cho Yeong Duk, vice-president for LCD Strategy at Samsung Electronics Co., is "surprisingly fast." Teco's Wu says he has heard rumors that an LCD TV price war might break out during the Christmas selling season among big U.S. retailers such as Best Buy and Circuit City.
Liquid crystal display technology first hit consumer markets in the 1960s in the form of tiny screens for watches and calculators. By the late 1990s, LCD screens were widely used in notebook PCs, cell phones, and personal digital devices, most of which are made in Asia. That has given companies in Korea and Taiwan a leg up on the competition to make LCD TVs. They're also benefiting from the entry of U.S. computer companies, who are looking to diversify away from the PC business. That's putting more pressure on Japanese TV makers to cut costs by outsourcing to players such as Teco, which recently snagged an outsourcing contract from a big Japanese consumer electronics company it won't name.
Indeed, Taiwanese manufacturers, which already dominate the notebook computer industry, have jumped into the LCD TV business with both feet. Quanta Computer, the world's biggest maker of notebook PCs, is now in the business, as are smaller companies including Sampo, BenQ, and Amtran. While the companies won't disclose their clients, citing confidentiality agreements, analysts say Sampo is making TVs for Gateway, BenQ is producing for Sanyo, and Quanta for Sharp (SHCAY ).
All those LCD TV companies are driving up demand for LCD panels. "Companies just can't supply enough panels to the market," says K.Y. Lee, chairman of Taiwan's largest producer, AU Optronics Corp., which has 11% of the market. Analyst Brian M. Alger of Pacific Growth Equities Inc. in San Francisco, wrote after a recent trip to Taiwan that "we were repeatedly amazed at how fast the panel manufacturers are shifting allocation to LCD TV." But the Koreans are still the big powers. LG.Philips -- a joint venture of the Dutch electronics firm and Korea's LG Electronics -- boasts 21.5% of the LCD panel market and Samsung Electronics 21.2%, according to Austin-based market watcher DisplaySearch.
Making LCD panels -- a sandwich of glass, liquid crystal, and thin film transistors -- is expensive, with the tab for a factory easily topping $1 billion. Moreover, it's especially hard to make panels large enough and with the high picture quality required for a living room TV. So, as the LCD TV revolution starts, increasing the supply and quality of panels is a top priority. Industry leaders Samsung and LG.Philips last year opened so-called Generation 5 LCD fabrication plants, which produce individual sheets of glass large enough to make three 30-inch LCD TVs. A Gen5 plant costs about $1.5 billion. The two companies each produce about 2 million panels a month.
Meanwhile, Taiwan's players are building their own Gen5 fabs. This month, Quanta Display Inc., a venture between Sharp and Quanta Computer, starts production at a Gen5 fab that'll turn out 30,000 sheets of glass a month. AU Optronics is working on a $2.3 billion Gen6 plant, due to open in 2005. Samsung is skipping Gen6 and moving straight to Gen7 fabs, which cost $3 billion each and will produce panels that can make screens for a dozen 30-inch TVs, or eight 40-inch sets.
Despite falling prices -- the lowest-cost 22-inch LCD model now sells for about $1,400, half the price of a year ago -- profit margins in every aspect of the business remain high. That's why Gateway, an also-ran in the PC business, has tried to gain a first-mover advantage in TVs. But in September, Dell announced plans to market an LCD TV of its own. Hewlett-Packard Co. (HPQ ) and ViewSonic Corp. are likely to jump in as well, say industry sources, with Taiwanese contract manufacturers winning the business as their subcontractors. Taiwan companies are also selling more TVs under their own brand names in Asia. Taiwanese producer Sampo Corp. recently launched an upscale brand called Claire in Taiwan: A 30-inch model sells for about $2,800.
Diving headfirst into this hot new market is not without risks, of course. As the market is flooded with the pricey new televisions, the traditional TV manufacturers may find themselves struggling to make money in a crowded field, while the PC-turned-TV makers may find that it's not as easy to make cutting-edge TVs as it is to make commodity PCs. For all of them, there's always the threat that Chinese manufacturers -- who for now aren't a force in LCDs -- will enter the business and swamp them all. That's one reason Sampo President H.C. Ho says his company is hard at work developing more advanced models -- one, for instance, would link up with DVD players and digital still cameras. "If we just provide generic LCD TVs, we have no chance to compete with China," he says. All signs point to an eventual glut. But for now the picture is clear -- it's moneymaking time for a hot product.
By Bruce Einhorn in Taipei and Moon Ihlwan in Seoul, with Irene Kunii in Tokyo