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Television makers of Asia, meet Michael Dell.

Every day, across Asia, thousands of liquid-crystal and plasma displays roll out of factories owned by Samsung, Matsushita (MC), Sharp (SHCAY), Pioneer (PIO), LG, and five Taiwanese companies. These are among the world's top suppliers of the elegant thin televisions that are now streaming into homes everywhere. The Asians have committed $35 billion in flat-panel capacity in 2004 and 2005. And as the TV manufacturers place their bets, legions of suppliers of glass, semiconductors, and other components are revving up their own production lines.

The surge in investment and proliferation of suppliers have driven panel prices down to levels unthinkable even two or three years ago. That has opened the door to a set of competitors the Asians never expected to face: Dell Inc. (DELL), Hewlett-Packard Co., (HPQ) and others in North America. They are making a concerted push in flat TVs, sourcing the panels from Asia and using the same global supply-chain wizardry they have employed so effectively in PCs, printers, and other products. Sylvania and Philco are long gone, and there is no sign that the mass production of giant flat panels will migrate to North America. But the American TV industry may be poised for a startling resurrection. "We're going to raise people's eyebrows this year," vows Gerry Smith, Dell's Singapore-based vice-president and general manager for displays. "We are going to be successful in this market."

Dell's low cost structure, peerless supply chain, and direct-sales model let it drastically undercut rivals' prices. In the fall it introduced high-definition 42-inch plasma sets for less than $3,000, with incentives, while Sony and others were selling similar models for more than $4,000. In a matter of months, Dell seized 10% of this important slice of the plasma market in the U.S., according to researcher DisplaySearch in Austin, Tex. The Asians dropped their prices quickly in response. But Dell intends to keep up the pressure.

Epic Battle

The return of American TV brands sets the stage for an epic battle between the forces of commoditization and manufacturing innovation. In the first camp, Dell and HP are already two of the world's biggest buyers of flat-panel monitors, semiconductors, and other parts for PCs, so they have great leverage over the same Asian suppliers when it comes to sourcing thin-screen televisions. In the innovation camp, Japanese, Korean, and Taiwanese companies will spend almost any sum to dominate flat-panel TV production. With their prowess in manufacturing, they gain an edge in design, engineering, and product innovation that the Americans may have trouble matching.

The speed and magnitude of these mostly Asian investments is without precedent in the history of television. A Seoul-based joint venture owned by LG Electronics and Royal Philips Electronics (PHG) is spending $5.1 billion to create the world's largest plant for liquid-crystal displays. Sony Corp. (SNE) and Samsung are teaming up in a $2 billion LCD venture. AU Optronics Corp. (AUO), partly owned by Taiwan's BenQ Corp., just started production at a new $2.5 billion complex big enough to house six Airbus A380 jumbo jets. Matsushita Electric Industrial Co., which has spent billions to ramp up in plasma screens, is sinking $1.3 billion more into a new plant just to provide the chips for thin TVs. "This is the chance of a lifetime," says Fumio Ohtsubo, a senior managing director at Matsushita. "Companies that lose out now will find it very difficult to recover."

Over time, companies that dominate the new TV market could take home unimaginable wealth. Last year flat-panel makers earned a combined $8 billion in profits, estimates DisplaySearch President Ross Young. They promptly poured so much back into their factories that LCD makers alone are in a position to crank out 140 million LCD TV panels a year by 2007, while still meeting demand for all other applications. That's enough to supply two-thirds of total global demand for televisions in that year -- if all those consumers actually decided to make the switch.

But this thrust into flat TVs won't be a replay of the 1960s and 1970s, when Sony, Matsushita, and other Japanese companies filled the world's living rooms with color TVs, driving American pioneers and most European makers out of the market. This time, many more companies are producing key components. The Chinese, who already dominate CRT production, now have flat panels in their sights, which will help force flat-panel prices down even lower.

Thanks in part to the arrival of all these commodity players, the flat-panel TV industry has already gone through its first bout of overcapacity and consolidation. Prices on 32-inch LCD TV panels are 44% cheaper than they were in the first quarter of last year, and they could drop 20% more in the year ahead, according to DisplaySearch. The Asians are feeling the pain. One example: Samsung's fourth-quarter profits from high-end LCDs dropped 99%, to about $7 million.

It's not the first time Asian makers have seen wild swings like this in high tech. Heavy capital spending followed by gluts and droughts are typical of the commodity-chip industry that Asians have come to dominate. And just as many Japanese players exited the memory-chip market when the competition got too hot, some display makers are bending under intense consolidation pressure. In January, Hitachi, Toshiba (TOSBF), and Matsushita pooled their efforts in high-end LCDs of the sort used in TVs. Japan's Epson and Sanyo have joined forces, too. And in February, Fujitsu Ltd. (FJTSY) announced plans to reduce its stake in a joint venture in plasma displays -- a technology Fujitsu helped launch.

Enter the Americans. For years, U.S. companies have talked about the convergence of consumer electronics and computing. Some have made successful forays into audio and video -- notably TiVo Inc. (TIVO), a pioneer in digital video, and Apple Computer Inc. (AAPL), with its lucrative iPod franchise. But the big computer companies mostly just watched from the sidelines, in part because of high panel prices.

Now, with the market glutted with flat-panel displays, PC companies such as Dell can draw on a number of strengths. Teams of Dell engineers can co-develop Dell-branded TVs with suppliers of panels and other parts, several of which are in-house units of rival TV makers. Traditional TV makers say consumers will want to compare televisions in a store before buying. But experts once made the same predictions about PCs. "The flat-TV market, like the PC market, is moving to standard technologies, best price, and more commoditization. We do that very well," says John Hamlin, Dell's senior vice-president for the U.S. consumer business. And for shoppers who feel they must see a TV in action before handing over a credit card, Dell has set up kiosks in U.S. shopping malls to display its line of flat TVs. Even some Japanese acknowledge that commoditization favors the Americans. As long as they stay focused on a narrow range of products, "Dell may actually have a chance to succeed," says Fujitsu Chairman Naoyuki Akikusa.

HP is hoping to put its supply chain to work, too. In January, at the consumer electronics show in Las Vegas, the company announced a range of plasma and LCD televisions, and Shane V. Robison, executive vice-president and chief technology officer, says HP will be able to deliver low-cost models. "Volume matters, and we have a $50 billion purchasing engine," he notes. That means companies that make the panels for PCs and TVs must come to HP with their best devices, at the best price.

Asian TV makers have already mapped out a response to commoditization and the Dell effect. For at least the next year, they figure, much of the flat-TV business will still go to top-tier Asian TV makers such as Sony, Sharp, and Samsung. They have the best reputations for picture and sound quality, and for now they also offer some of the most appealing designs. The new models "are like clothing and fashion," says Takuji Okawara, general manager of the division at Sharp Corp. that oversees the company's TV designs. Choi Gee Sung, president for digital media at Samsung Electronics, puts it this way: "Design of the products will be a differentiating factor." The last remaining European players have similar priorities. Philips, for example, has brought out a line of Ambilight flat TVs that emit ambient light that changes depending on what's being displayed on the screen. Executives at Philips Consumer Electronics like to refer to the technology as "surround sound for your eyes."

To avoid seeing their products commoditized by Dell and other newcomers, traditional TV companies are also trying to steer viewing habits in new directions. Their success will depend on how well they utilize the digital capabilities of the new televisions. Over the next three years, millions of U.S. homes will upgrade their video systems to digital formats, including high-definition television. Many of those sets, including flat-panel models, are designed to work with Microsoft Corp.'s (MSFT) Media Center PCs, which run all the usual suites of PC programs and also let the user control audio and video gear from the computer.

Asian set makers aren't trying to avoid the Media Center phenomenon. But many have their own strategies for the digital living room. Samsung, among others, will enable viewers to insert a card containing their photo and music collections into a TV, then organize them through easy-to-follow menus on the screen without ever having to boot up a PC. Several companies are building digital video recorders right into their sets, and they may also embed Wi-Fi links so users can shuffle content from one set to another, also without involving a PC. Ultimately, according to this strategy, the desktop PC becomes unnecessary because "everything will be connected through the TV," says Makoto Kogure, president of Sony's TV group. At Matsushita's plasma-TV business unit, director Masaaki Fujita calls his new TVs "total information terminals."

The compelling part of this strategy is that it confronts the competition -- Dell and HP -- with a classic innovator's dilemma. Both are capable of positioning their new TVs as replacements for home PCs. But they're unlikely to do so if that undercuts their successful PC products.

TVs That Look Like Work

The unpersuasive part is that the idea of a do-everything television isn't new and has never won over many fans. Over and over, Microsoft and others have tried to hijack the television to perform PC-like activities. Microsoft succeeded with the Xbox -- following a path blazed by Sony and Nintendo Co. (NTDOY) But other than for games, not one such crossover scheme has ever caught on. Meanwhile, there's a long list of reasons most people don't want their TVs to converge with their computers, starting with crashes and viruses and ending with the simple fact that computers remind people of work.

As American and Asian players circle each other, component makers with the most distinctive technologies stand to profit. Chipmaker Texas Instruments Inc. (TXN) sells devices used in one of the most popular approaches to flat TVs, a rear-projection system based on TI's digital light-processing (DLP) semiconductors. Such TVs are available in more than 50 brands, including Toshiba, Mitsubishi, Panasonic, Samsung, and RCA (TMS).

A host of lesser-known chip designers could also cash in on flat TVs, which depend on semiconductors to detect the TV signals, decode them, decompress them, and add extra features such as multiple windows, multichannel surround sound, and pictures accompanied by text. "These functions require lots of computation power -- we are talking about billions of operations per second," says Levy Gerzberg, president and CEO of Zoran Corp. (ZRAN), a Silicon Valley chip-design company that sells digital TV processors to Mitsubishi, Pioneer, and Sony.

If the market takes off the way many analysts anticipate, demand for advanced materials could also soar. The glass used in LCD panels is so sophisticated that only three companies make it: America's Corning and Japan's Asahi Glass and Nippon Electric Glass. Corning, with over 50% of the market for flat-panel glass, expects to spend $1.8 billion expanding capacity in the three-year period ending in 2007, primarily in Asia. James B. Flaws, Corning Inc.'s (GLW) vice-chairman and chief financial officer, predicts that flat panels could account for 20% of TVs sold around the world by 2007. For that to happen, he concedes, TV makers must push flat TV prices down to the point where they are only 50% more expensive than CRT models. That means accepting lower prices for glass, too, but Corning says lower manufacturing costs and higher volumes should offset that.

China could play a major role in reaching these lower price levels. But much hinges on how long it takes Chinese companies to master complex flat-panel manufacturing processes. For now, the Chinese aren't much of a threat. But TCL Corp., China's No. 1 TV maker, is eager to produce key components rather than buying them from others. "If TCL wants to become a huge company, an international company, we have to have [the ability to make] the chipset and the panel," says Zhao Zhongyao, CEO of a joint venture between TCL and France's Thomson (TMS).

Many Japanese, Koreans, and Taiwanese claim there's no way the Chinese can close the gap in key display technologies. "Producing a panel is like making pottery," says Yasuo Sakuma, general manager for plasma product planning at Pioneer, one of the world's top makers of the panels. "Until you open the door of the oven, you don't know how it's going to turn out." Japanese dominate the plasma game, and, he adds,"unless we give the Chinese the technology, they can't catch up."

Maybe. But as the Chinese are showing in semiconductors, lots of government support -- and billions of dollars in investment by local and overseas companies eager to get a piece of the world's fastest-growing market -- can help close technology gaps. The same may happen with LCD and plasma panels. A possible harbinger: China's BOE Group, which took over the LCD business of Korea's Hynix Semiconductor Inc. in 2003, will start making LCD TV panels later this year.

Over time, new technologies such as organic light-emitting diodes could drive flat-panel prices down further. Championed by Eastman Kodak (EK) Co., Seiko Epson Corp., and a host of others, they're made of polymers that emit light in different colors when tweaked with a voltage, so they don't need clumsy backlights and filters. In theory, that means they could be produced cheaply, thus narrowing the price gap with CRTs. But this type of panel may not be ready for use in large televisions for a decade.

The most radical shift would be to eliminate the glass panel altogether. In some households, that's already happening. Visit any big TV retailer, and you'll find high-quality projector systems from HP, InFocus, Mitsubishi and others priced under $1,500. These aren't televisions exactly, but they can display the same programming in good resolution on 100-inch screens. You place the projector on a stand, or hang it from the ceiling, hitch up a DVD player, or string cables from your TiVo or cable box, then project the image on a large, roll-down movie screen. Another issue: The culture of television viewing is changing. With video streaming into cell phones, handheld game machines, and all manner of Internet devices, the time any family has free to stare at a single monolithic screen -- flat or fat -- is limited.

Can Sony, Sharp, Samsung, and the rest withstand the price pressures, shifts in TV viewing patterns, and disruptive challenges from the likes of Dell? Some of the Asian champions will surely lose their shirts in cyclical downturns, and American interlopers will skim off part of the profits. But over time, Asia's flat-panel survivors will wind up with revenues, manufacturing expertise, jobs, technical insights, and an edge in innovation. The rewards may well justify the risks.

By Bruce Einhorn

With Moon Ihlwan in Seoul, William C. Symonds in Boston, Andrew Park in Dallas, Stephen H. Wildstrom in Las Vegas, and Hiroko Tashiro in Osaka


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