Matsushita's Wary Plasma Dominance

The company behind Panasonic is raking in profits, yet is concerned about falling flat-panel TV prices and LCD makers' latest offensive

Executives at Matsushita Electric Industrial should be gloating. On Feb. 1, the world's largest consumer-electronics maker said flat-panel TVs and digital cameras were responsible for one of its best quarters in more than a decade, putting it on track for a fifth straight year of big gains. It was sweet vindication of Matsushita's strategy of betting big on the plasma TV business.

Matsushita (MC), which has one-third of the plasma TV market, has been kicking the stuffing out of rivals and raking in profits despite sharply falling prices of TVs and other consumer electronics worldwide. The company said third-quarter operating profit rose 5% to $1.12 billion on a 2% uptick in sales to $20 billion. The division that makes TVs, digital cameras and SD memory cards posted operating margins above 6%—a first—thanks to brisk sales and a weak yen, which boosts the value of overseas earnings. The strong performance prompted the company to revise upward its full-year net profit and sales forecasts.

Still, Matsushita, best known for its Panasonic brand, isn't resting easy. Only a week ago, LG Electronics of Korea—the world's No. 2 plasma TV maker—reported that its digital display division had racked up a stunning $158 million operating loss in the fourth quarter and that it wouldn't expand beyond its current capacity of 550,000 panels a month. Also recording a quarterly loss was Samsung SDI, an affiliate of Samsung Electronics that specializes in plasma panels.

Plasma Worries

You would think Matsushita would be giddy at the prospect of being able to pick up additional market share from struggling rivals. But Executive Vice-President Tetsuya Kawakami doesn't see things that way. "Having just one plasma maker in the world—Matsushita—wouldn't be a good thing," he said.

Kawakami frets that if LG and Samsung SDI bow out of the race, consumers might get the impression that plasma is inferior to liquid-crystal displays, the other main flat-panel TV technology. Sales of flat panels have been surging at double-digit rates as consumers swap their clunky old picture-tube sets for sleek new ones. Now that TV broadcasts are changing from analog to digital and movies are being shot and stored in dazzling high-definition formats, consumers are also craving ever-larger screens to get the most out of the experience. Traditionally, the market has been divided into big plasma TVs and small- to medium-sized LCD sets. But these days LCD makers are thinking big and chasing after fatter margins, putting plasma makers on the defense.

This year, LCD sales could jump 56% to 69.7 million units, vs. a 33% gain to 12.8 million for plasma, according to market research firm DisplaySearch. The giant screens will be where the pitched battles occur in coming years. By 2010, DisplaySearch predicts nearly half of all TVs sold in the U.S. will be either an LCD or plasma screen measuring 37 in. or larger. In that period, Matsushita thinks sales of 50-in. TVs will quintuple and 40-in. will triple, while everything else grows at a more moderate pace. "Consumers are shifting rapidly to bigger screens," said Kawakami.

Investment Plans

Matsushita is already heavily invested in what it hopes will be a booming big-screen TV market. In January, President Fumio Ohtsubo unveiled plans to set aside $2.35 billion for a fifth plasma panel plant in Japan, even before the fourth facility, located on a nearby plot, has been finished. The new plant will make larger sheets of glass than any of the older plants, which means more panels for TVs can be cut from each sheet (see, 1/11/07, "Matsushita Sees a Flat-Screen Future"). By next year, Matsushita's plants are expected to be churning out a half-million sets a month—more than 11 a minute.

Not all analysts are certain that Matsushita's big wager on plasma will pay off. In a Jan. 29 report, Credit Suisse (CS) analyst Koya Tabata downgraded the company's stock from outperform to neutral. He cited sharp 30% annual price declines on TVs worldwide, possible unfavorable currency swings, and weak results from electronics subsidiary Victor Co. of Japan for his cautiousness over the near term. "To resolve the dilemma it's found itself in, Matsushita has to play up the merits of plasma and sell its TVs at a premium," said Goldman Sachs (GS) analyst Yuji Fujimori. "But given the current market conditions, it will be hard to pull off."

Matsushita's top brass is waking up to the fact it must do more to proselytize for plasma. Kawakami even spent the last few minutes of the earnings news conference rehashing the company's pitch: Plasma screens consume less energy, are cheaper to make, are better suited for fast on-screen action than LCDs, and don't tire out the eyes the way an LCD backlight can. It remains to be seen whether these selling points will convert consumers, though.