Samsung and Sony's Win-Win LCD Venture
One is a South Korean upstart that has really only achieved premium, global-brand stature this decade; the other is a fabled Japanese consumer electronics titan. Samsung Electronics (SSNGY) and Sony (SNE) are also fierce industry rivals with killer instincts to succeed—often at each other's expense. Still, they have pulled off one of the most interesting and fruitful collaborations in global high-tech by jointly producing liquid-crystal display (LCD) panels. And it's an alliance that is reshaping the industry.
The two companies broke ground in 2004 for the joint venture, called S-LCD, in Tangjeong, about 55 miles south of Seoul. On both sides the alliance was controversial, all the more so since Sony pulled out of a Japanese-state-backed LCD-panel development group to make it happen.
Early on, Sony also had concerns about quality. The company not only dispatched its own engineers to the joint venture to vet LCD displays, it also insisted that every panel it used be shipped through its LCD-TV factory in Inazawa, near Nagoya, Japan. There the panels went through another rigorous quality check before electronics such as digital tuners, power units, and other components were added. Only then were they packaged into TVs or shipped off as modules to assembly plants in Spain and Mexico.
Bravia New World
Now, however, panels are being shipped directly from S-LCD to the assembly plants. And even Sony execs concede the venture has been instrumental in the company's introduction of the hugely successful Bravia LCD-TV lineup, a rare bit of good news at the Japanese company.
At the same time, Samsung's own LCD-TV business has made big strides. The South Korean giant has emerged as a trend-setter in the LCD-panel industry, aided by Sony technology that has helped ensure high-quality, sharp TV pictures. Now the two are vying for leadership in thin, widescreen TVs alongside Matsushita Electric Industrial (MC), which owns the Panasonic brand.
"The Sony-Samsung alliance is certainly a win-win," declares Lee Sang Wan, president of Samsung's LCD unit. Sony's Executive Deputy-President Katsumi Ihara, who has led Sony's TV division and was recently appointed to oversee key consumer-electronics product lines, also credits the alliance with helping revive the company's LCD-TV business fortunes.
LCDs Overtake Plasma
"If there had been no S-LCD venture, Sony's LCD-TV business would not be what it is today," he said in an interview with a group of Tokyo-based technology journalists back in April.
The alliance has also had an industry-wide impact, especially in the TV market for sets in the 40-in. screen class. The large-screen segment had been dominated by plasma TVs until S-LCD started providing LCD screens at a cost comparable to that of plasma panels. In the third quarter of 2006, some 2.32 million LCD TVs were sold and for the first time overtook plasma-screen sets, which sold 1.96 million units. U.S.-based researcher DisplaySearch predicts the gap will widen in the fourth quarter to 3.68 million for LCD vs. 2.65 million for plasma (see BusinessWeek.com, 10/4/06, "Big-TV Battle: LCD vs. Plasma").
The LCD-TV business is the fastest-growing segment for sets sold globally, too. In the July-September quarter, LCD-TV sales doubled from year-ago levels to a record 10.8 million sets, and Samsung led the way in terms of sales for the first time ever, according to DisplaySearch.
New Pecking Order
LCD TVs made up 24% of the world's set sales in unit terms, up from 22% in the previous quarter. Consumers have continued to trade in their bulky cathode-ray tube sets for sleeker, bigger screens. By value, LCD TVs accounted for 48% of the global market with revenues surging 84% year-on-year to a quarterly record of $11.9 billion.
The birth of S-LCD also changed the pecking order among LCD-TV makers.
Until two years ago, Japan's Sharp (SHCAF) was the clear leader with its Aquos models. Although Sony's Trinitron models ruled the industry for decades in the analog age, the company neglected to develop flat-panel technologies, which forced it to buy expensive panels from others—a formula that helped Sony rack up mounting TV-segment losses. But S-LCD improved the fortunes of Sony's TV business overall.
With a multimillion-dollar ad blitz promoting Bravia's high picture quality, the new models were a smash hit when introduced in the summer of 2005 in the U.S. By the end of last year, Sony's LCD TVs vaulted to the world's No.1 spot. It turned out to be temporary, however, and alliance or no alliance, Samsung and Sony are still vying for leadership in the widescreen TV arena.
Samsung countered with its new Bordeaux model that helped the Korean company take a 15.6% share of global LCD-TV revenues in the third quarter of this year, edging out Sony's 15.2% and Sharp's 11.5%. A year earlier, Samsung's share was all of 10.3% (see BusinessWeek.com, 6/13/06, "Sony's Color-rich Bravia"). That sales expansion has also translated into tidy profits for the South Korean company.
Samsung earned $167 million on sales of $3.14 billion in its LCD-panel business in the July-September quarter. That's a margin of 5%—not so impressive but still respectable in an LCD industry hampered by cutthroat competition that has forced rapid price declines. The profit is in stark contrast to a $341 million loss reported in the quarter by its crosstown rival LG.Philips LCD, which began mass-producing 42-in. and 47-in. LCD panels in January (see BusinessWeek.com, 6/8/06, "LCDs Display Their Flaws").
Samsung execs attribute the company's favorable performance to its partnership with Sony. "Our alliance with Sony allowed us to benefit from a virtuous circle: Bravia's success boosted sales of LCD panels, and volume meant lower costs which fed greater sales of LCD TVs," says Cho Yeong Duk, vice-president at Samsung in charge of the company's LCD business strategy. The "rivalry with Sony also helped Samsung to bring out better LCD products to the market," he adds.
Lg. Philips: Not So Hot
The S-LCD joint venture (and Samsung's own LCD plants) benefits from the fact that Sony and Samsung are the world's two biggest LCD-TV makers, with a huge appetite for panels. About 80% of more than 10 million TV panels produced at the joint venture (and at a Samsung plant) during its first 18 months of operation have been shipped to the Samsung and Sony TV operations.
Compare that to LG.Philips LCD, controlled jointly by Philips of Holland and Korea's LG Electronics. It ships only 40% of its output to its major shareholders. "Most of our clients are plasma specialists and their LCD TVs are not so strong," admits Vice-President Lee Bang Soo at LG.Philips, the largest LCD-panel maker until last year.
No doubt about it: the LG.Philips venture is struggling. Already the company has cut its capital spending program by more than $1 billion, thanks to weak demand. It has also put on hold a plan to build a so-called eighth generation plant aimed at cutting 50-in. or bigger panels. Instead, it is building a "5.5-generation" factory that will make a mix of computer monitors, notebook panels, and smaller TV panels, adjusting volume to demand.
Building a New Plant
By contrast, S-LCD is pressing ahead. The venture, which spent $2.6 billion for the seventh-generation plant designed to make 40-in. class panels, is now building a $3 billion eighth-generation plant. In a couple of years, it will throw down the gauntlet to the plasma camp in the 50-in. class market. "We expect at least 2 million LCD TVs will be sold in 2008 in the 50-in. class," says Samsung's Lee. "By then, consumers will be able to buy a 50-in. TV at the price of a 40 -in. TV now."
Analysts say a widening investment gap between S-LCD and the rest of the industry pack will likely give the Sony-Samsung venture a clear lead in LCD-TV screens. "It's a typical Samsung strategy of betting big, weathering industry consolidation, and then basking in windfall profits," says Rhee Namuh, Merrill Lynch head of research in Seoul.
Sony also stands to benefit, given the cost savings, if it can keep developing popular LCD-TV models such as the Bravia. That said, Sony is looking to procure small LCD panels outside the S-LCD joint venture. Still, this oddest of alliances between two cutthroat competitors so far seems to be working out for both sides.