Panel makers bulk up for flat TV war, shakeout seen

[Gregg Lengling]

http://today.reuters.com/news/newsArticle.aspx?type=technologyNews&storyID=2006-02-07T034234Z_01_T329073_RTRUKOC_0_US-DISPLAY.xml&archived=False

By Nathan Layne and Kiyoshi Takenaka
TOKYO (Reuters) - Surging demand for flat televisions has Japanese panel makers stepping up investment in new plants, but they risk creating a supply glut while profit margins are likely to remain razor-thin.

Some of the industry's weakest players such as Pioneer Corp. (6773.T: Quote, Profile, Research) and Hitachi Ltd. (6501.T: Quote, Profile, Research) may find themselves marginalized or even pushed out of the market, unable to cut costs fast enough as TV prices tumble 30 percent a year.

With global combined sales of liquid crystal display (LCD) and plasma TVs forecast to quadruple to 100 million units by 2009, according to researcher DisplaySearch, producers have no choice but to invest aggressively.

Consumers are also eagerly snapping up large flat panel TVs to replace their bulky cathode-ray tube TVs as they become more affordable.

"If makers don't invest now it basically means they are giving up on the game. It's kind of like poker," said Mizuho Securities senior analyst Koichi Hariya. "But there is no way all of the TV makers will end up happy. At some point in the future, overcapacity will emerge and there will be a shakeout."

Matsushita Electric Industrial Co. (6752.T: Quote, Profile, Research), the top seller of plasma TVs with about one-third of the market, announced early last month it would spend 180 billion yen ($1.54 billion) on the world's largest plasma display factory, more than doubling its production capacity by 2009.

Sharp Corp. (6753.T: Quote, Profile, Research), which leads the LCD TV market with a 19 percent share, said it would invest 200 billion yen to boost output of LCD panels. Hitachi disclosed plans to bring forward by more than a year an expansion project at its plasma factory.

Plasma and LCD TVs offer competing technologies, with plasma dominant in larger sizes, although both are growing rapidly. Plasma TV sets use tiny pockets of gases to display images, while LCDs use crystals sandwiched between glass.

South Korean makers are also coming on strong, reviving memories of a similar high-tech battle in the 1990's when Samsung Electronics Co. (005930.KS: Quote, Profile, Research) and others drove most Japanese companies out of the market for dynamic random access memory (DRAM) chips.

In fact, some analysts predict that LG Electronics Inc. (066570.KS: Quote, Profile, Research) and Samsung SDI (006400.KS: Quote, Profile, Research), which together control more than half of the global plasma panel market, are in the best position to capture future demand and could see margins improve.

"The investment plans (by Japanese makers) look aggressive but it takes time to begin production from the new lines," said Lee Hak-moo, an analyst at Mirae Asset Securities. "South Korean makers are now seeing the benefits from their earlier investments. A drastic market share change is not likely."
SUPPLY GLUT ON HORIZON?

Analysts are generally reluctant to predict a major supply glut in the LCD TV panel market after earlier forecasts were proved wrong. When capacity fell short late last year, Sharp couldn't meet demand during the holiday shopping season and lost market share to Sony Corp. (6758.T: Quote, Profile, Research) and others.

Sony has acknowledged that it needs to invest in new capacity and according to the Nihon Keizai Shimbun is set to enter talks with LCD partner Samsung Electronics on jointly investing another 300 billion yen on another plant.

Given the strong demand outlook, Sharp Corporate Director Tetsuo Ohnishi said the market would not experience oversupply anytime soon. He also cited relatively low production yields at new factories and a difficulty procuring some raw materials.

"People have been talking about a collapse in the supply/demand balance since last year, but we expect the TV panel market to remain balanced through 2006," he said. "The factories are up and running but the yields haven't come up."

But a potential glut in the plasma market seems likely.

Plans by the top four plasma panel makers -- Samsung SDI, LG Electronics, Matsushita, and Hitachi -- show combined annual capacity of over 25 million units in 2009, far above DisplaySearch's demand forecast of 15 million in that year.

"Supply will likely remain quite tight in 2006 but should loosen from 2007 with all this new capacity coming on line," said Hisakazu Torii, director of TV market research at DisplaySearch.

NINE-INNING GAME

Oversupply would only intensify sharp price declines in the market and lead to a weeding out process, analysts say.

One major question is Pioneer, which has been bleeding red ink on its plasma business as it lacks scale and doesn't have the brand power to be a pricing leader. Recently, it was forced to shut down two production lines due to weak demand.

"I really want to know how in the world Pioneer expects to compete with one-tenth the production capacity of Matsushita," a Tokyo-based analyst at a foreign brokerage said, adding that it would probably need to form an alliance to survive.
Some analysts have doubts about Hitachi as well. It plans to treble its monthly plasma panel output capacity to 300,000 units by 2007, but the project is much smaller than Matsushita's and may not be enough to get its display business out of the red.

"When you have a small operation and try to compete with larger rivals in price, you often find yourself bleeding red ink," said Takeo Miyamoto, analyst at CLSA Asia-Pacific Markets.

But Hitachi, which is also losing money on LCDs, believes the battle for dominance in the flat TV market has barely started, and it will be many years before final winners emerge.

Cut-throat market conditions have already claimed victims in Taiwan. A plasma unit of the Formosa Group recently decided to end its operations while Chunghwa Picture Tubes (2475.TW: Quote, Profile, Research) has cut its plasma display output and is focusing more on LCD panels.

AU Optronics Corp. (2409.TW: Quote, Profile, Research) (AUO.N: Quote, Profile, Research) and Chi Mei Optoelectronics Corp. (3009.TW: Quote, Profile, Research) are also betting big on LCDs.

"Flat TVs account for less than 10 percent of the global TV market. In countries like China and India, cathode ray tube TVs still play a major role," Hitachi Vice President Makoto Ebata told Reuters in a recent interview. "We are still in the top of the second inning in a nine-inning game."

(Additional reporting by Rhee So-eui in Seoul and Baker Li in Taipei)