By Adam Aston
Peer into the window of any gadget store, and staring back at you will be a glowing constellation of colorful liquid-crystal displays (LCDs) mounted on everything from cell phones and palmtops to Game Boys and digital cameras. Made by the millions in Japan, Korea, and Taiwan, the screens have become so cheap that they're quickly displacing the hulking cathode-ray tubes in desktop personal computers and even some TVs.
For consumers, this tsunami of flat screens may be thrilling, but the economics are chilling for the Japanese electronics giants that unleashed the wave. Much like dynamic random-access memory (DRAM) chips, LCDs are made in factories that demand unrelenting capital investment. But as with memory chips, the core technology tends to leak quickly to other parts of Asia, where engineers are just as nimble and operating costs are lower. If the DRAM analogy holds up, the prognosis may be grim for Japan's screen makers. Tally up all the investment of the past few decades, "and Japan's cumulative profits from DRAMs would be minimal," says Joseph Osha, senior U.S. semiconductor analyst at Merrill Lynch & Co.
Osha says the analogy is not perfect. Unlike DRAMs, these screens come in many types and sizes, and some have the power to inspire new consumer applications such as cell phones that double as personal organizers. Like the chip industry, however, key segments of the display market are prone to violent swings between glut and shortage, which tax the talents of the industry's top managers.
In 2000, for example, a new crop of LCD factories scattered across Asia unleashed a flood of displays. The next year, street prices for 15-inch LCDs--the most popular replacement for desktop monitors--fell by half, to around $400, spurring unprecedented demand for the slender screens. It turned out that $500 was "a magic barrier" for switching from tubes to LCDs, says Paul Semenza, vice-president at iSuppli/Stanford Resources, a market analysis firm in San Jose, Calif. All told, sales of the desktop displays in 2001 more than doubled, to 13.8 million, accounting for $4.3 billion in industry revenue.
This should have been a huge coup for companies such as Sharp, NEC (NIPNY), and Toshiba (TOSBF), which pioneered flat panels for the PC sector. Trouble is, by 2001 the Japanese had begun to cede this market to Korea and Taiwan. Sharp, for one, threw its weight behind pricey flat-panel TVs--a high-end niche that's growing fast, but amounted to only $337 million in sales last year. Says Ross Young, president of DisplaySearch in Austin, Tex.: "High costs and the ongoing recession made it tough for [Japan's] LCD makers to keep pace."
Indeed, across the industry, volatility has sown a profitless prosperity. Despite a 46% pop in the total number of LCDs sold industrywide last year, price cuts reduced global LCD revenues by 9.4%, to $15.3 billion. In Japan, the ravages are obvious. Falling prices and rising development costs pushed Toshiba and Matsushita Electric Industrial to merge their once-mighty LCD operations, while NEC formed an alliance with Casio (CSIOY). By the start of 2002, only one Japanese company--Sharp--remained in the industry Top Three, just below Korea's Samsung (SSNLF) and a notch above LG.Philips, a Korean-Dutch joint venture. Now, even Japan's latest color LCDs for cell phones and other handhelds have been swept up in price wars.
Display prices may stabilize, but if the DRAM market is any guide, pressure to build fresh capacity is unlikely to dissipate. Sharp's next LCD plant may cost $1.7 billion, analysts say, promising as much as four times the productivity of existing factories. Korea and Taiwan are right behind, with six or so plants in the works, each costing $1 billion-plus. That's welcome news for consumers. But with investment stakes this high and the field so crowded, the bad news for producers is never more than one short cycle away. Aston is Industries Editor in New York.