If you take a look at the house appliances stores in China, it is hard to imagine the difficulties that a large group of flat-panel TV makers are going through when their TVs sell so well. “In 2006, we may see China’s color TV industry repeat the tragedy of its collapse six years ago,” predicted Yang Dongwen, president of the color TV development department of Skyworth, one of China’s color TV manufacturer giants. Recent developments in the market appear to confirm his prediction made in last year.
At the end of last year, foreign-funded flat-panel TV makers including Sony, Panasonic, Sharp, Samsung, LG and Philips staged a price cut together in three days. A price war was suddenly kicked off. During the second half of 2005, LCD, the key component of flat-panel TV, had gone through a dramatic price fluctuation. As a result, domestic flat-panel TV makers, who were once in their heyday, are now suffering from component shortages and the intensified price war.�
According to these companies’ quarterly reports, TCL has seen its domestic gross margin rate drop by 1.54% compared to the same period last year; Hisense’s margin rate went down by 0.53% and Konka by 1.66%, respectively. The statistics indicate that flat-panel TV makers cannot turn a profit despite the fact that their products sell well. Currently, domestic brands’ gross margin rate has fallen to a level lower than the net margin rate of some Japanese and South Korean brands. For example, Chinese electronics manufacturer reported a gross margin rate of 15.9% in the first quarter of 2006, while Samsung’s net margin rate of relevant business hovered over 16%. The relatively bigger profit gap gives foreign brands a lot of leverage against domestic brands.�
Looking back on the history of China’s color TV industry, the flat-panel TV has gone through the same thing that color TV did in the age of the CRT screen. It took color TV ten years to go from glory to collapse while domestic flat-panel TV makers managed it in less than two years.�
Temporary Victory
In 2004, overproduction of flat-panel LCD TVs led to a tremendous drop in price. Seeing that, Qingdao-based Hisense believed that it was time to enter the flat panel LCD market after two years of preparation. Over the past several years, only 10,000 plasma and LCD TVs - mostly Japanese and South Korean brands - were sold in China in total. Those once-popular rear-projection TVs were left out due to their poor performance and the demand to replace the expensive bulbs from time to time.
“LCD TVs will rise to prominence, while the day of rear-projection TVs will come to an end,” maintained the management of Hisense, one of China’s leading white goods manufacturers. It decided to take hold of this opportunity by quick actions.
Yang Yunduo, the general manager of Hisense Marketing Corporation under Hisense Group, revealed that Hisense decided to launch a large bunch of flat-panel LCD TVs on China’s first-tier market and moved rear-projection TVs back to the second-tier market. In October 2004, Hisense launched the 1080T flat-panel TV, dubbed as “America’s highest standard”. With the low price strategy, its flat-panel TVs were priced RMB 20,000 (US$ 2,500) lower than those of the same models from foreign brands. Meanwhile, for Hisense, the key to its victory is that it did not position rear-projection TVs as high-end products any longer.
The huge stir created by the huge price discrepancy coupled with the positive results of the key index test by the China Quality Association evoked incredible market support of domestic LCD flat-panel TVs.
The sudden price storm took all flat-screen TV makers by surprise. Still, most domestic brands responded within one month, thanks to their sharp market sense based on years of experiences. Konka, who was the first to produce the 15” LCD, quickly adjusted its price and joined the war within one week. Other TV manufacturers including Skyworth, TCL and Changhong followed suit, although they were involved in various difficulties.
But at this crucial moment, the supply of LCD panel, the key component of a LCD TV, was in shortage, since LCD makers hadn’t fully prepared for the sudden hunger for LCD panels. Some even stocked up on supplies in a bid to sell at higher prices, which made the situation even worse.
Since Hisense had stocked enough LCD panels, the upsteam panel shortage did not affect it seriously. Instead, Hisense had jumped to the top from third place in China’s color TV industry by the end of 2004, followed by Skyworth and Konka. With their sharp market sensitivity and skillful techniques to maneuver the market, domestic brands wined over foreign brands that year.
2005 saw a prosperous flat-panel TV market - the sales volume increased from 400,000 sets in 2004 to nearly 1,800,000 in 2005. Optimistic predictions placed sales of large screen plasma and LCD TVs, which accounted for 80% of the market, at 5,000,000 this year. From analog to digital, from traditional CRTs to flat-panel TVs, the changes just happened too fast. Yet, Skyworth Chainman Wang Dianfu was concerned about the hidden issues behind this extremely prosperous market. He claimed that domestic manufactures were in fact far less than ready for the take-off of the flat-panel TV industry.
Wang’s anxieties seem unnecessary. Since flat-panel TVs are more digitalized than CRTs, insiders point out that producing a flat-panel TV is as simple as piecing up a PC, as long as LCDs and modules are available from professional suppliers. Standardized components have greatly reduced the time period from the R&D stage to mass production for domestic TV makers.
However, there appear some drawbacks. Domestic makers are more reliant than before on foreign upstream suppliers who have controlled the key technology and components. Consequently, the cost remains high. At present, the main components of domestic LCD sets - screens, controller chips and key components’ processors - mainly rely on overseas imports. One 37” LCD TV priced at RMB 12,000 (US$1,500) used a panel that may cost as much as US$870 (about RMB 7,150). Thus there is not much room for domestic makers to rake in more profits. When upstream resources change accordingly to the fluctuation in the purchase demand of TV makers, the domestic market will be affected by unstable supply prices and delivery times. That is to say, domestic makers are exposed to the weaknesses of an unstable supply chain and the lack of core technologies.
Unlike domestic brands, foreign-funded brands have completed the vertical integration of the industry chain. Almost all top international brands are big screen producers themselves. Sharp, who has been the No. 1 international LCD TV vendor with a 6G LCD plant over the years, is able to produce 60,000 screens per month and feed 80% of its production demands, with the remaining 20% filled by Taiwanese companies such as AU Optronics, Chi Mei Optoelectronics and Quanta Display. Sharp has devised the low-risk relationship between supply and demand, with both overproduction and underproduction concerned
