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Sharp and Sony Tie Up in LCDs for Flat TVs

Posted by: Kenji Hall on February 26, 2008

Consolidation it wasn’t. But on Feb. 26 when Sony (SNE) said it would pick up part of the $3.5-billion tab for Sharp’s planned TV-panel plant, two of the world’s biggest TV makers seemed to be conceding that they can’t or won’t continue the frenzied pace of buildup of past years.

This being Japan, the topic of consolidation probably never even factored into the discussions. Indeed, Sharp and Sony executives took pains to emphasize that their agreement was for joint ownership of a plant in Osaka and joint production of other components, not the merger of their TV businesses. Sharp will own two-thirds of what will be the world’s most advanced liquid-crystal-display factory, while Sony will get the remaining one-third. They will produce both LCD panels and LCD modules that come with components such as a backlight and chips. Though their giant-screen TVs will share similarities inside, Sharp’s Aquos and Sony’s Bravia will remain separate brands.

The deal shows how TV makers are finally acknowledging their limits. By agreeing to a tie-up, both consumer-electronics makers are opting for the benefits of working together—even with close rivals—over the costs of struggling alone. “Of course, the investment burden will be lighter,” Sharp President Mikio Katayama told reporters.

Sharp is the world’s third-largest LCD TV maker. It wants nothing more than to close the gap with TV champ, Korea’s Samsung Electronics, and runner-up Sony. Every TV exec knows that the best way to get ahead in the fiercely competitive TV business is to be the first to invest in more efficient LCD plants. Samsung, Sony and Sharp have historically reaped the highest profits because they’re among only a handful of manufacturers that have cutting-edge plants capable of making the biggest LCD TVs.

The Sharp-Sony plant will be what’s known in the industry as a 10th generation plant, the first anywhere. It will pump out huge sheets of specialized glass measuring 2.8 meters by 3 meters, each of which can be cut into 15 40-inch, eight 50-inch or six 60-inch sets. Those are the sizes Americans want most. By the time new Sharp-Sony plant near Osaka is up and running in 2010, LCD TVs sporting screens of 40 inches and bigger are expected to account for 40% of global TV sales, according to iSuppli forecasts. (Matsushita Electric Industrial, known for its Panasonic brand, announced two weeks ago that it would build a new $2.8-billion LCD plant in western Japan by 2010, in a partnership with Toshiba and Hitachi.)

But does it really make sense for Sharp to share such precious technology with a competitor? Consider Sharp's deal with Toshiba announced in December. Sharp said it would supply LCD panels to Toshiba in exchange for chips used in TVs. That seemed more of an equal exchange of technology in which both sides benefit from each other’s know-how.

But fact is, the deal with Sony does benefit Sharp. One example: Sony engineers could help Sharp’s own team ensure steady output of high-quality panels, Katayama said. Another possible motivation: the economy. Sharp execs aren’t so reckless that they would place a multibillion-dollar bet on big gains for flat-panel TVs as a slowdown in the U.S., Japan and Europe looms. iSuppli’s Sweta Dash is quick to point out that LCD TVs are a volatile business, and here Sharp gets a buyer that can help keep the factories open even when hard times cause demand to drop off.

For Sony, the story is a bit different. President Ryoji Chubachi said Sony will get a stable supply of LCDs. The company aims to sell 10 million flat-panel sets this fiscal year through March, and recent media reports suggest the company might double its target for next year. To do so, it would probably have to secure another reliable source of panels. Currently, it gets the bulk of its panels from a joint venture it has had with Samsung since 2004.

But Sony is unlikely to be in a spending mood right now. For one thing, Chubachi is under the gun to restore Sony’s TV business to profitability, which he was supposed to have done by now. He won’t want to invest too much on current-gen TVs, especially after its announcement earlier this month of a $200-million commitment to next-generation TV technology called organic-electroluminescent displays. So the deal with Sharp offers a happy medium.

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