Flat Chance

(2 of 3)

Those chunky margins have led just about every big name in electronics to pile into flat screens especially the production of the glass LCD panel that is the primary, and most expensive, component in an LCD TV. Asian companies in South Korea, Taiwan and Japan dominate this side of the business. Much like semiconductors, LCD panels are manufactured in clean-room factories that require massive investment. Ten new plants costing around $20 billion will start up between now and the end of 2005, increasing the industry's production capacity by 70% next year. Even more are on the drawing board. In August, Japan's Hitachi, Matsushita and Toshiba announced a $1 billion joint venture to produce LCD panels starting in 2006.

By early next year, Asian factories will be churning out more large panels for LCD TVs than customers will want to buy, and the oversupply will depress panel prices. The new factories, most of which will specialize in large-size panels, should be able to produce the panels at a lower cost. With cheaper panels, TV makers can afford to sell LCD TVs at lower prices. "Manufacturers [of LCD panels] will have to cut prices substantially, and that should be positive news for the TV business," says Ryota Sugishita, a technology analyst at Daiwa Institute of Research in Taiwan. Sugishita expects LCD-TV prices to plummet 30% a year.

But as panel prices drop, so will margins, potentially forcing some weaker players out of the business. There are already signs of a shake-out. In September, Taiwan's Chi Mei Optoelectronics halted construction on a panel factory. Japan's Mitsubishi Electric said it will phase out production of large LCD panels altogether, filling its TV sets with panels made by other companies. Even market leader LG.Philips LCD, a joint venture between Korea's LG Electronics and the Netherlands' Royal Philips Electronics, raised a disappointing $1 billion in a July IPO because of jitters about oversupply. Competition will only intensify as Chinese companies like BOE Technology expand their production next year. LG.Philips LCD and Korean rival Samsung Electronics, the two largest makers of LCD panels, may be best placed to weather any downturn because of their large market shares, strong technology and deep pockets. Analysts are most worried about smaller Taiwanese companies. Under current market conditions, "manufacturers have very little to gain," says Hitoshi Kuriyama, a consumer-electronics analyst at Merrill Lynch in Japan. "The winner is the consumer."

To get a look at where LCD-TV prices are headed, wander over to the PC side of your neighborhood electronics store and check out the flat computer monitors. You'll probably find that small LCD TVs are marked up 50% or more, compared with monitors of the same size. LCD TVs often have brighter screens and niftier designs that add to the cost of making them, but the real reason the TVs are more expensive is low volume. With fewer TV sets sold, retailers often tack on higher margins. Prices will also be brought down by competition between LCD and plasma screens. At very large sizes, plasma screens which use electrically charged pixels of gas to create a picture are cheaper than LCDs, and at sizes over 50 in., your only choice is plasma. But LCD technology, which involves creating a picture by passing light through charged crystals, is catching up. This month in Japan, Sharp wowed the crowd at a technology expo by unveiling a Ferrari-red 65-in. LCD TV, the world's largest. Prices of plasma TVs should fall as manufacturers build more efficient plants, but not as quickly as the prices of LCD TVs.