THE FRONT LINE: MAY 18, 2007
Doesn’t Anybody Around Here
Know How To Play This Game?
Casey Stengel’s immortal comment fits perfectly after hearing the 2007 fiscal year results from several of the display industry’s heavy hitters in Japan and Korea. Most of those results were not good, and in some cases the company’s financial losses were substantial.
Sony Corporation reported a net loss for fiscal 2007 of just under $2B in their games division, mostly due to missed sales targets and excess inventory of the company’s flagship PlayStation 3 product. While their other divisions (including TVs and other displays) did reasonably well, they couldn’t prevent a company-wide 68% drop in operating income from fiscal 2006.
Pioneer Electronics (which at the time of this writing had not “officially” released its fiscal year results) managed to flip analyst’s expectations on their heads and turn a projected $40M profit into a $56.3M loss for the past fiscal year. The company blamed the loss primarily on a steep downturn in plasma prices, which was also exacerbated by an overall decline in plasma shipments for the first quarter of this year.
Matsushita Corporation, the parent company of Panasonic, has made heavy investments in plasma fabrication and expects to manufacture 11 million panels a year by 2008. They managed to increase net income by 18% to $1.8B for the most recent fiscal year, but missed their target of $2B. Former subsidiary JVC (which should be sold to the TPG Group by the time you read this) rang up $64M in losses for the same time period.
How about the Koreans? LG Electronics, which proudly bills itself as the largest manufacturer of flat panel HDTVs in the world, incurred more than $140M in net losses from plasma manufacturing in 2006. Samsung SDI (the company subsidiary that manufactures plasma) reported a net loss of $77M for the first quarter of 2007, while Chinese LCD manufacturing giant AU Optronics racked up a $152M loss in the same time period.
Hitachi Electronics’ fiscal 2007 net loss of 32.8B yen (about $271M) was no doubt a contributing factor in the company’s decision this past February not to expand capacity at their Kyushu plasma operations (Fujitsu Hitachi Plasma Display Ltd). The decision was also driven by 20% annual decreases in ASPs of plasma HDTVs. (Pioneer also shelved plans to expand their plasma manufacturing capacity any time soon.)
Yikes! Is there nothing but bad news coming out of Asia these days? It certainly seems so, given how all of the once-legendary Japanese consumer electronics brands are struggling to maintain profitability. While Sony’s drop in net income is directly attributable to losses incurred both in manufacturing and selling PlayStation 3 consoles, the company still posted an operating profit and remains strong in sales of rear-projection and LCD HDTVs.
Matsushita, under pressure from investors to push profit margins up above 5%, finally agreed to put its 52% stake in JVC up for sale and will likely see a $600M+ boost to their bottom line as a result. In the meantime, JVC is likely to be broken up and sold off, most likely to Chinese interests who see tremendous value in the JVC brand.
Pioneer’s losses are directly attributable to their position at the high end of plasma HDTV pricing. With a small share of the North American plasma market (about 8% in 2006) and less manufacturing capacity than the other four plasma manufacturers, the company is being slammed by the dog-eat-dog flat panel pricing wars.
Yet, they continue to bring out high-end plasma products, most notably four new Elite-brand plasma HDTVs shown in May. Two of them offer full 1920x1080 resolution, albeit at a substantial premium over competitive products from Panasonic and Samsung. And in what must be characterized as a state of complete denial, there will be two new 42-inch XGA (1024x768) plasma sets for 2007, selling for $27,00 and $3,200 (MSRPs) respectively.
These products completely ignore the fact that 42-inch XGA plasma is on its way out the door, pushed by 42-inch 1080p LCD HDTVs that are already selling for less than $2,000. And it doesn’t help matters that Panasonic has brought out a 42-inch 1080p plasma for under $2,500 as part of their 2007 lineup.
LG’s financial hemorrhaging is directly attributable to playing the “race to the bottom” game. In addition to cutting margins to the bone, the company experienced a 36% decline in market share for the fourth quarter of 2006, which is the all-important holiday selling season. Samsung SDI was subjected to a 14% decline during the same time period.
But the saving grace for both companies is that they have a “Plan B”, which is their ability to pull the plug entirely on plasma and concentrate on their bread and butter business — LCD panel manufacturing. (And you can expect that to happen by the end of the decade.)
Unfortunately, Hitachi and Pioneer don’t have that option, and must sink or swim in large flat-panel manufacturing with plasma technology — unless executives in each company can be convinced to private-label large LCD panels as a complement to the existing plasma HDTV products.
Sony, who once sourced plasma HDTVs and monitors from former fabber NEC (who sold their fabs to Pioneer), now concentrates on getting LCD panels from their S-LCD partnership with Samsung and from Chinese supplier TPV. That decision might look like pure genius right now — Sony’s brand name is still exceptionally strong and has helped the company overcome several missteps in consumer electronics the past few years.
Panasonic, who is building their 6th plasma assembly line, seems to feel they can stay competitive on volume and pricing. The company has taken the lead in annual production from Samsung, and although overall plasma shipments declined in the first quarter of this year, Panasonic still held the lion’s share of that business with 31% of the market.
So, what lies ahead? Today’s flat-panel HDTV and monitor business is driven by high manufacturing volume, aggressive pricing, and (perhaps most importantly) distribution channels. Pricing flat panel displays at the high end of the market is not a wise strategy in this day and age. Plasma (and LCD) sales are essentially driven by three factors — screen size, resolution, and price.
If you can make enough product, you can also get it onto store shelves with market-sensitive pricing. LG, Panasonic, and Samsung are in a strong position to do that, while Hitachi and Pioneer aren’t — otherwise, they would also be adding PDP manufacturing capacity. It may well turn out that a round of consolidation is in order for the plasma business over the next two years as PDP technology continues to lose ground to LCD below 50 inches.
This article appears in the July 2007 issue of Pro AV magazine.
