LCDs Display Their Flaws

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For anybody in the LCD TV industry, two words of advice: buckle up. Share prices for companies like Sharp, LG.Philips, and other producers of thin-film transistor liquid-crystal displays, TFT-LCDs in industry jargon, have been hammered in recent trading sessions. The trigger: The June 7 announcement by Taiwanese company AU Optronics (AUO), the world's third-largest producer of these sophisticated LCD displays, that shipments and average selling prices will be worse than expected this quarter.



The carnage has been considerable for investors. AU Optronics' Taiwan-traded shares have fallen 11% since the announcement, while Taiwanese rival Chi Mei Optoelectronics' stock is down 7%. In Japan, Sharp's share price is off 7% this week. The story is the same with Korean manufacturers such as Samsung SDI and LG.Philips LCD, whose displays are used in LCD televisions. Worse, the latest sell-off follows stock market declines in recent months.



The investor disenchantment may seem puzzling given that more and more consumers are trading in their old-fashioned cathode ray tube televisions for sleek thin-screen models. There's no denying that the consumer electronics industry is in the midst of a major transition -- and that LCD TVs are only going to become more popular in the years ahead.



DISAPPOINTING GROWTH.

But the TFT-LCD industry is prone to wild swings of excess capacity or severe shortages. Since producers must invest billions of dollars to add new capacity, they are financially vulnerable if demand doesn't increase as quickly.



Demand is growing -- just not fast enough. AU Optronics says that shipments of panels for TVs will increase 6% to 8% this quarter. Not bad, but very disappointing given that the company earlier had projected an increase of 20%. And, at $369, the average selling price for TV panels is 9.3% lower than what the Taiwanese player had originally projected.



Panel makers earlier this year were talking about a big surge in TV sales because of the World Cup. "So far, we are not really seeing any big pickup from it," says Frank Lee, an analyst for Deutsche Bank (DB) who covers the industry from Taipei.



PRICE DROP.

With big producers like Samsung, LG, and AU Optronics having aggressively opened large new factories, look for the mismatch to continue in the short term. "TV inventory of the panel maker is likely to increase, leading to more price pressure" in the third quarter of this year, according to a June 7 report by Liang-Chun Lin, an analyst at JP Morgan.



Bad news for the panel makers could translate into good news for consumers. Panel prices have dropped by about 25% since January. And since the TFT-LCD panel accounts for about one third of the cost of an LCD television, the fall in prices should make it easier for TV makers to cut prices more. "We have seen an over 25% cut in panel prices in the last couple of months and we could see something similar in the retail level as well," says Lee.



Leading the way might be smaller TV manufacturers from Taiwan. They have been struggling lately because big-name players like Sony (SNE) cut prices last year. One reason the panel makers have inventory problems, Lee points out, is that the Taiwanese TV makers haven't been able to respond to the price cuts by the Japanese and Koreans. So the Taiwanese haven't been buying as many panels from the TFT-LCD makers. With panel prices now falling, though, the Taiwanese will have more room to cut.



NEW FACTORY.

One example of an aggressive newcomer is Taiwan Kolin. The company has a well-established brand name in Taiwan, where it has been a leading producer of household appliances for decades. It lost money in 2004, but turned profitable last year thanks to a big push into televisions.



LCD sales accounted for 56% of Kolin's $350 million in 2005 sales, and as a result of the boost from TVs, the company earned $9 million last year, compared to a loss of $4 million in 2004. On June 5, a Kolin-owned subsidiary, DigiMedia Technology, opened a new LCD TV factory in the southern Taiwanese city of Tainan.



The additional capacity in Tainan should boost Kolin's efforts in the U.S., where the company's TVs are now on sale in Kmart (SHLD), Radio Shack (RSH), and other big retailers. "For us, LCD TV is the hottest item right now," says Eric Liu, a deputy manager at Kolin. Liu says that the company has started more heavily promoting its own brand, Olevia. Kolin purchased commercials promoting the brand on high-profile broadcasts like the Academy Awards and the NBA playoffs.



SCANNER SLUMP.

Kolin is even starting to look beyond LCDs to other television technology. The Taiwanese company last year bought a 12% stake in Syntax-Brillian (BRLC), a California company that specializes in LCoS [Liquid Crystal on Silicon], a type of rear-projection technology that is used in large-screen TVs and competes with DLP televisions that use chips from Texas Instruments (TXN).



The TV market has attracted other Taiwanese IT companies that have fallen on hard times. For instance, Microtek Intl. has long been a leading producer of scanners and is No. 3 worldwide, behind Hewlett Packard (HPQ) and Epson. But sales and profits have slumped and Microtek lost almost $6 million last year. So, starting in late 2005, Microtek began selling televisions [both LCD and plasma] under its own brand name.



Today Microtek is selling 42-in. and 50-in. plasma TVs and 32-in., 37-in., 40-in., and 42-in. LCDs. Why should a company that specializes in scanners get into televisions? "We are good at color processing," explains George Sun, director of Microtek's R&D center in Hsinchu. "In TV, there is no other differentiation that you can make, only function and color. We are newcomers to the TV business, but we can use our color skill. We can transport our techniques into TV."



PRICE GAP.

Further down on the Taiwanese food chain, smaller companies see niches they can develop. Gold Rain Enterprises, a small company with sales of just $30 million, last year won an important customer for its Alona brand of LCD TVs and monitors: the government of Iran. "They're a very good customer," says Albra Yu, a Gold Rain vice-president.



That said, Yu admits that the LCD TV market is extremely crowded and competitive. "But there are still some gaps," he says. "We can survive; we can compete with the big brands very well." Yu estimates that Alona TVs sell for one third to one half of the price of well-known brands. These Taiwanese companies have been struggling. Kolin's stock price is off 12% this year. Microtek is down 23%. Gold Rain has dropped 46%.



The drop in TFT-LCD prices might be just the thing these companies need in order to stick around. One thing seems certain: Consumers later this year will be finding much lower prices for snazzy TVs, just in time for the holidays.