Global Economics

Flat Panel, Thin Margins


Rugged competition from smaller brands has made the TV sets cheaper than ever

Like just about everyone else checking out the flat-panel TVs at Best Buy in Manhattan, graphic designer Roy Gantt came in coveting a Philips (PHG), Sony (SNE), or Panasonic (MC). But after seeing the price tags, he figured a Westinghouse might be a better buy. At $800, the Westinghouse 32-in. set seems like a steal compared with $950 to $1,400 for better-known brands. Plus, the name sounds comfortingly familiar. "I think they make home appliances—things like that," says Gantt.

He's right, but that's a different Westinghouse. In fact, the name didn't appear on U.S. TVs for more than three decades. Then in 2003, a startup founded by two Taiwanese-American entrepreneurs licensed the brand and distinctive W logo from CBS Corp. (CBS) subsidiary Westinghouse Electric Corp. Today, Westinghouse Digital ranks No. 5 in liquid-crystal-display TVs in North America, with 7.7% of the market, according to researcher iSuppli Corp. But it is just one of more than 100 flat-panel brands jamming the aisles of retailers such as Best Buy (BBY), Target (TGT), and Costco (COST). The names on the sets range from the obscure (Sceptre, Maxent) to the recycled (Polaroid).

The free-for-all is a boon to the millions of Americans who want to trade in their bulky analog sets. Thanks to the likes of Westinghouse, which undercut the prices of premier brands by 20% to 40%, LCDs are no longer a luxury item. Nearly one-third of the 30 million TVs sold in North America in 2006 had LCDs, and by yearend they're expected to account for half of all TV sales. The average 27-in. LCD set now retails for less than $650, compared with $1,000 in early 2006, says iSuppli, while 40-in. models have plunged to about $1,600, down from $3,000 during the same period.

Anyone who can hold out a few months will get an even better deal: iSuppli projects that 40-in. sets will sell for less than $1,000 by yearend, and 27-inchers may hit $500. Sure, budget brands lack the cachet and features of a Sony or Samsung, but to most eyes the difference in picture quality is negligible. And reliability, analysts say, is improving.

For many in the industry, though, the competition is brutal. Prices for LCD sets are falling so rapidly that retailers who place orders too far in advance risk getting stuck with expensive inventory. Circuit City Stores Inc. (CC) cited plummeting prices in its Feb. 8 announcement that it will shutter nearly 70 outlets. The Asian companies that make the LCD panels that go into the TVs are getting slammed, too. Korea's LG.Philips LCD Co. (LPL) attributed a $186 million loss in the fourth quarter to the 40% drop in display prices last year. With panel prices expected to fall 20% in 2007, the world's dozen or so makers of displays are scrambling to sell at almost any price just to generate the cash to survive. "The cuts have stressed everybody in the supply chain," says Paul Semenza, the vice-president for display research at iSuppli.

Chalk it up to the new dynamics of TV manufacturing in the age of globalization. The wide availability of standardized digital components from Asian suppliers has ushered in virtual manufacturers such as Westinghouse Digital, Vizio, and Syntax-Brillian. In the old-line TV business, the key technologies for cathode-ray tube sets were controlled by a handful of makers who owned their own brands.

ALL OUTSOURCED

Nowadays, LCD makers will sell to anyone, and the rest of the needed parts—tuners and computer chips—are available from multiple suppliers. Contract manufacturers will happily assemble all the pieces at factories in China, Mexico, or Taiwan. So the only things you need to become an instant player are strong relationships with suppliers, connections at big retailers, and a handful of engineers to design the sets.

With annual sales of $650 million and just 120 employees, Westinghouse Digital typifies the model. "When we started, we saw the whole ecology of the TV industry was changing—and saw an opportunity," says Chief Executive Richard Houng. Based in an office park near Los Angeles, the company owns no manufacturing facilities. What it does have is close ties with Taiwanese flat-panel maker Chi Mei Optoelectronics, where founder Houng once worked. Marketing? Westinghouse's ad budget is virtually nonexistent: Best Buy and other retailers do most of the promotion. "They have a business model that has brought us great, low-cost products," says Mike Mohan, consumer electronics vice-president at Best Buy, Westinghouse's biggest customer.

Westinghouse rival Vizio Inc. is even more spartan. The brand didn't exist three years ago, but now it's No. 6 overall in LCD sets, iSupply says, with 7% of the North American market. Vizio has a mere 55 full-time employees, but saw sales of $700 million last year. The private company claims its overhead costs are just 0.7% of sales, compared with 10% to 20% for big, diversified electronics conglomerates, and that it gets by on profit margins of just 2%.

With LCD prices falling by 3% to 5% a month, Vizio's biggest challenge is making sure it doesn't pay too much for orders placed months in advance. The company negotiates flexible terms with suppliers and manages to keep only two weeks of inventory on hand by constantly monitoring retailers' shelves. "The critical thing is to never forecast too much or buy anything before you need to," says Vizio Marketing Vice-President Jeff Schindler, a veteran of computer maker Gateway Inc. (GTW)

HEALTHY HEAVYWEIGHTS

That's a big challenge given that Vizio says it has enough orders from retailers to sell nearly 3 million TVs this year, which would triple its revenues. If Vizio accomplishes that, it could rank among the top three brands in the U.S. Some in the industry take such forecasts with a grain of salt. "Sustaining that kind of growth will be difficult," says Rosemary Abowd, an analyst with market watcher Pacific Media Associates.

Some elite brands, meanwhile, seem to be weathering the storm. Both Samsung and Philips have nearly doubled their U.S. share since early 2005, while Sony has held steady. Others are having a tougher time. Sharp has seen its share of the U.S. market dwindle from 18.6% to just 12%, mostly because it was slow to bring out the huge screens that consumers crave, and Hitachi and Toshiba have also ceded ground.

The biggest players say they still enjoy decent margins because they're getting more efficient as they boost output. For that reason, most industry heavyweights have room to slash their prices further this year. "Many of the smaller brands will get squeezed during the next 12 to 18 months," says Tim Farmer, Costco Wholesale Corp.'s vice-president for merchandising.

By then, sales growth will probably slow because most consumers will have converted to digital sets. And that's when the real shakeout will begin.


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