Samsung and Sony: mutually beneficial LCD partnership

Original author: Moon Ihlwan
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The manufacturing collaboration between the two tech giants is delivering tangible benefits in the ruthless market for large-screen flat-panel TVs.

On the one hand, a dynamically developing South Korean company that managed to rise to the highest level and achieve world recognition only in the last decade. On the other - the legendary consumer electronics giant from Japan. Samsung Electronics and Sony, ruthless competitors from an industry where success can often only be achieved through the failures of others. It was they who established one of the most interesting and fruitful cooperation in the field of high technology in the joint production of liquid crystal display panels (LCD panels). The emerging alliance has changed the balance of power throughout the industry.

The foundation for cooperation was laid in 2004, when the two companies created a joint venture S-LCD in Tangjeong, 88 kilometers south of Seoul. There were doubts on both sides, especially since Sony had to leave the Japanese government-sponsored LCD panel research and development team.

In the early stages, Sony had doubts about the quality. The company not only sent its specialists to a joint venture to carefully receive the LCD panels, but also insisted that each panel made for it be delivered first to the LCD TV factory in Inazawa (near Nagoya), Japan. Before adding the accompanying electronic components, such as digital tuners, power supplies, etc., the panels underwent another serious test and only after it were used to assemble televisions or shipped as modules to assembly plants in Spain and Mexico.

Oh wondrous, new Bravia

Panels are now shipped directly to S-LCD assembly plants, and even Sony executives acknowledge that the joint venture has played a key role in promoting the extremely successful Bravia LCD TV line, which has become one of Sony's few successes in recent times.

Samsung, in turn, has significantly advanced its own business of manufacturing and selling LCD TVs. Not without the help of Sony technology, which allowed for high-quality and clear images, the Korean company has become one of the trendsetters in the LCD panel industry. At the moment, Sony and Samsung, along with Matsushita Electric Industrial, which owns the Panasonic brand, are fighting for the title of leader in the production of thin wide-screen TVs.

“The Sony and Samsung alliance benefits both,” said Lee Sang Wan, managing director of Samsung's LCD division, with confidence. Sony's vice president, Katsumi Ihara, who led the television division and was recently appointed responsible for key consumer electronics products, also believes the alliance has helped revitalize and bring good luck back to the LCD TV business.

Plasma is inferior

In April 2006, at a meeting with a group of Tokyo journalists, he said: “If the joint venture S-LCD did not take place, we would not be able to take the place on the LCD TV market that we have.”

The created alliance has transformed the entire industry, especially in the segment of TVs with a diagonal of 40 inches (101.6 cm). Until S-LCD started offering LCD panels at prices comparable to plasma panels, plasma TVs dominated the large-screen market. In the third quarter of 2006, about 2.32 million LCD TVs were sold. This is the first time that plasma TVs sold in quantities of 1.96 million have given way to liquid crystal ones. DisplaySearch predicts that the gap will only widen in the fourth quarter: 3.68 million LCD TVs versus 2.65 million plasma TVs.

Worldwide sales in the LCD TV segment are growing faster than in other segments. According to DisplaySearch, in July-September 2006, the level of sales of LCD TVs doubled compared to the previous year, reaching 10.8 million units, and Samsung became the leader in sales for the first time.

New Heroes

In quantitative terms, LCD TV sales account for 24% of global TV sales and are up two percent from the previous quarter. Consumers continue to change bulky kinescope televisions to elegant models with large screens.

In value terms, the share of LCD TVs in global sales is 48%. Revenue growth compared to last year was 84%, and sales in the last quarter were a record $ 11.9 billion.

The birth of S-LCD has made a change in the current hierarchy of LCD TV manufacturers. Two years ago, the Japanese company Sharp and its Aquos models were the sole leaders. And although in analogue times Sony Trinitron models dominated the market for decades, the company underestimated the potential of flat panel technologies, which ultimately forced it to buy expensive panels on the side. This state of affairs caused Sony's ever-increasing losses in the TV market, which S-LCD helped stop and generally strengthen the business in the TV market.

In the summer of 2005, an intensive advertising campaign with a multi-million dollar budget focused on the high image quality of Bravia models. New models have become the undisputed hit of the season in the United States. By the end of 2005, Sony soared to first place among manufacturers of LCD TVs. As it turned out, the palm switched to Sony only for a while. In the alliance or not, but in the arena of widescreen TVs, it is Samsung and Sony who are fighting for the right to be called the leader.

Noticeable Profit

Samsung's response was the new Bordeaux model, which helped the Korean company get 15.6% of global LCD TV sales in the third quarter of 2006, ahead of Sony from 15.2% and Sharp from 11.5%. A year earlier, Samsung's share was only 10.3%. The expansion of sales has brought noticeable profits.

In July-September 2006, Samsung LCD panel division earned $ 167 million in sales of 3.14 billion. Thus, the profit was 5% - not very impressive, but quite worthy of respect for the industry, in which merciless competition led to a rapid drop in prices. Such profit contrasts sharply with $ 341 million in losses from the competing LG.Philips LCD company, which in January 2006 began mass production of 42 and 47-inch LCD panels (106.7 and 119.3 cm).

Samsung management pays tribute to Sony for good performance. “Collaboration with Sony allowed us to take advantage of a combination of circumstances: the success of Bravia TVs spurred the sale of LCD panels, the increase in volumes led to lower costs and prices, which in turn increased sales of LCD TVs,” says Cho Yeong Duk, Samsung’s vice president, responsible for developing the LCD panel business, adds, “And the competition with Sony has helped us offer the market better LCD models.”

LG.Philips: Could Be Better

The S-LCD joint venture (and Samsung’s own LCD panel plants) benefit from the fact that Sony and Samsung are the largest manufacturers of LCD TVs and their need for panels is huge. Of the 10 million panels produced by the joint venture (and another Samsung factory), 80% were supplied to the Sony and Samsung divisions that manufacture televisions.

Compare these numbers with the performance of LG.Philips LCD, which is jointly controlled by the Dutch company Philips and Korean LG Electronics. Only 40% of its production goes to major shareholders. “A significant portion of our customers are plasma specialists, and their LCD TVs are not very confident in the market,” admits Lee Bang Soo, vice president of LG.Philips, the largest manufacturer of LCD panels a year ago.

There is no doubt, the joint venture LG.Philips has a hard time. Due to reduced demand, the company has already cut its capital investment program by more than $ 1 billion. Plans were also postponed for the construction of the so-called eighth generation plant, which will focus on the production of 50-inch (127 cm) or even large LCD panels. Instead, the company is building a "fifth and a half generation" plant, which will manufacture a mixture of panels for computer monitors, for laptops and for televisions with small screens, adjusting output to market demand.

Building a new plant

For comparison, the S-LCD only moves forward. The joint venture, having spent $ 2.6 billion to build a seventh-generation plant to produce 40-inch panels, is currently building an eighth-generation plant for $ 3 billion. In a couple of years, the S-LCD will throw a glove in the face for plasma TV manufacturers in the 50-inch model class. “We expect at least 2 million LCD TVs to be sold in the 50-inch class in 2008,” says Lee Sang Wang. “By then, consumers will be able to buy 50-inch televisions at current 40-inch prices.”

Analysts believe that the emerging investment gap between S-LCD and all other competitors from the industry will surely ensure the confident leadership of the joint venture of Sony and Samsung in the market of panels for LCD TVs. “It's Samsung’s typical strategy to bet on a major industry partnership and then enjoy guaranteed returns,” says Rhee Namuh, head of research at Merrill Lynch in Seoul.

Sony also benefits. Due to lower production costs, the company has the opportunity to constantly improve such popular models of LCD TVs as Bravia. Although Sony is now trying to find a supplier for small LCD panels outside the S-LCD joint venture, it seems that this strange alliance between arrogant competitors is working fine for both sides.




Published November 28, 2006. Despite the fact that there was a delay of half a year with the translation and the original on the BusinessWeek website is almost unreadable, the article, as it seems to me, is still interesting and somewhat relevant. I will be glad to any comments.

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