http://www.businessweek.com/stories/2004-12-05/will-plasma-revive-pioneer

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Will Plasma Revive Pioneer?


For years, Pioneer Corp.'s (PIO) products have been a staple of road trips worldwide. Its car stereos sound great pumping out everything from Schubert to Snoop Dogg, and the company has a long string of achievements to its name, including the first in-dash CD player and the first satellite-based navigation systems -- which have helped make the company the world's top manufacturer of high-end car stereos. But in the living room, Pioneer hasn't been as successful, struggling to climb out from the shadow of brands such as Sony (SNE), Panasonic (MC), and Philips (PHG).

Now, Pioneer believes it can prosper with a technology better suited to the den than the dashboard. The company is betting billions on plasma display panels, or PDPs -- superbright TVs thin enough to hang on a wall. After buying out NEC Corp.'s (NIPNY) PDP business earlier this year for $341 million, Pioneer is one of only five companies that produce them -- and it's the leading maker of PDP TVs larger than 40 inches, usually used for home theater systems. Since launching its first PDP in 1997, Pioneer has expanded production aggressively to four factories, all located in Japan. Its latest, a $245 million facility in Yamanashi prefecture west of Tokyo, opened in September. "People want bigger and bigger TVs, and that means flat panels," says Pioneer President Kaneo Ito.

Such expansive video real estate today will set you back $3,000 or more, but as prices fall by 20% per year, more and more consumers are buying. By 2007 the global market for PDP TVs is expected to grow to 6.3 million units, from 2.4 million this year, according to the Photonics Industry & Technology Development Assn. So Ito plans to ramp up production to 1.1 million units by 2007, from 480,000 today. PDPs accounted for about 8% of Pioneer's overall sales of $6.4 billion last year, and it's aiming to make that 16% this year. Although he won't disclose profits from PDPs, Ito says the business is in the black.

FEELING THE PINCH

That's still not enough to compensate for shrinking margins elsewhere. Profits for once-lucrative Pioneer products such as DVD recorders, cable set-top boxes, and computer hard drives have hit the skids as competitors have flooded in. Even Pioneer's mainstay car electronics business is being pinched. In the quarter ended on Sept. 30, sales of Pioneer's car stereos, navigation systems, and other auto-related products grew 11.9%, to $679 million, but income from the segment dropped 26%, to $42 million.

That could spell trouble. Despite its PDP ambitions, car electronics still make up 42% of Pioneer's sales, while home electronics (which includes PDPs) account for 40%. Sales rose in both areas in the first half of the year, but profits fell steeply -- spurring Pioneer to scale back shipments of many products, including DVD and hard disk drives for computers. On Oct. 28 the company slashed its profit forecast by 60%, to $91 million on sales of $7.3 billion for the full year through March. Just four months earlier, Ito had said he was confident Pioneer would meet its profit targets. "[That] left a very negative impression," says Yuki Fujimori, an analyst at Goldman, Sachs & Co. (GS) in Tokyo. No kidding: The stock dropped 10% in one day of trading.

The bet on plasma, meanwhile, won't start paying big dividends anytime soon -- if ever. Although buying NEC's PDP unit will boost sales by about $273 million, the deal won't do much for profits because NEC had big inventories sitting in warehouses. And while it's true that only a handful of companies make PDPs, Pioneer is small fry compared with the others: Matsushita Electric Industrial (MC), LG Electronics, Samsung SDI, and a Hitachi (HIT)-Fujitsu (FTJSY) joint venture. The danger is that the profits Ito is banking on won't materialize even as sales mushroom. Morgan Stanley analyst Masahiro Ono notes that Pioneer was one of just two electronics makers to come out with new plasma TVs and DVD recorders in time for the Athens Summer Olympics. But while the other -- Matsushita -- posted better-than-expected quarterly profits, Pioneer came in below estimates. On Nov. 22, Deutsche Bank analyst Yasuo Nakane lowered his target price for Pioneer stock by 10.5% on fears that growing competition in PDPs will further squeeze margins.

There's another problem: The other players have all hedged their plasma bets by also manufacturing liquid-crystal-display-panel TVs. That rival technology is better suited to smaller screens -- under about 40 inches. But advances in technology may allow LCD makers to some day challenge PDPs on size and bring down costs to levels that undercut prices of PDPs. Pioneer execs, though, say the company is making enough improvement in both its manufacturing processes and the underlying technology to stay ahead of LCD screens both in terms of image quality and price. "There's no doubt that LCD screens are growing larger, but we aren't worried," says Masaru Saotome, chief of Pioneer's PDP operations.

CHINA MOVES

Pioneer execs concede that the pace of the price declines for PDPs has been faster than anticipated. But Ito says the company is on track to boost profits overall in line with sales as it reins in costs. Over the past decade, Pioneer has shifted 62% of its production overseas, much of it to China. To wring more profits out of the DVD-R business, Ito says Pioneer will consolidate manufacturing in Shanghai over the next six months and source key parts locally instead of shipping them from a plant further inland. The company is also working to trim costs across the board by reducing the number of parts it uses, and it's continuing to look for cost savings through technical innovation. Pioneer's latest-generation PDPs, for instance, require just two layers of specialized glass instead of three, which Ito says has resulted in savings of 30%. "We've cut the number of parts used in PDPs in half compared to our first-generation products," he boasts. Of course, there's no guarantee that the likes of Matsushita and Samsung Group won't beat Pioneer at the cost-cutting game. But if Ito can keep a lid on costs as production volumes mount, the flat-screen bet may make Pioneer's road trip a whole lot smoother.

By Chester Dawson in Tokyo


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