Selling at a Loss

The last half of 2004 and the beginning of 2005 was a rough time for FPD manufacturers, with only a few (perhaps) managing to stay in the black. The problem was oversupply, combined with relentless pressure from the manufacturers' TV-making customers to keep display-module prices low.

Large TV displays were being sold at a loss. In the first quarter of this year, DisplayBank reported that the average total cost of a 42-in. PDP panel was $847, while the average selling price was $840, resulting in a loss of $7 per unit. In the same period, 42-in. LCDs lost $67 a unit, having a cost of $2167 and a selling price of $2100. This made TV manufacturers happy and put consumers in a buying mood, but it is no way to run a railroad.

Fortunately, some rationality is returning, at least to the PDP side of the market. DisplayBank reported in mid-June that PDP-module manufacturers such as Samsung SDI and LG Electronics are negotiating with TV-set makers to maintain third-quarter PDP-module prices at second-quarter levels.

If these pricing deals hold, a 42-in. SD PDP module is likely to be priced at roughly $750–800; a 42-in. HD module, $900; and a 50-in. module, $1500 – numbers that reflect the recent drastic price drops approximating 10% a quarter last year and 4–5% for the first two quarters of this year. (This is not a misprint, we are talking about a total price reduction approaching 50% over 18 months.)

On the other hand, PDP-module firms are saving 5–10% of module cost per quarter by sourcing PDP driver ICs and packaging materials closer to home, and those two items account for roughly 30% of the total cost of the PDP modules. The increasing use of single-scan technology can reduce the number of driver ICs on a PDP panel by half.

DisplayBank president Sang-sei Kwon said, "The recent decrease in PDP-TV prices is attributed not to dropping panel prices, but to the reduced distribution margins through direct trades with manufacturers and distributors. In the third quarter, prices for panels will also remain unchanged, allowing several front runners to reach the break-even point by shipping 200,000 units per supplier in September or October 2005."

The news from the LCD front is similar to the weather outside my office window: partly cloudy with a chance of rain. DisplaySearch Taiwan was predicting that quotes for 32-in. LCD-TV panels, which were $580 in June, were likely to stay flat for July, while prices of 37-in. panels were likely to fall by $10–20.

The projections for smaller panels were rosier, with prices of 15- and 17-in. LCD-monitor panels projected to increase by $2–3 and 15- and 15.4-in. notebook panel prices projected to rise by $3–5. But Chunghwa Picture Tubes, Ltd., went further, saying they would raise its prices for 15- and 15.4-in. notebook panels by $15 as a result of strong demand.

Building larger fabs, localizing the supply chain, and squeezing suppliers, customers, and the distribution channel can take panel makers only so far. But, according to Nikkei Microdevices' Naoki Tanaka, writing in the English-language version of Nikkei Microdevices' Flat Panel Display 2005 Yearbook, LCD executives expect "to cut manufacturing costs to one-third of current levels over the next 5 years. The seeds for the revolutionary production technology that will be needed to that end have appeared."

That will certainly enable the production of the low-cost large-screen flat TV sets that consumers demand, but will it bring rational pricing to the market? The flat-panel industry could become an ever-larger – but ever more emaciated – cat that chases its own tail until it drops from exhaustion. Hopefully, the PDP segment of the industry is beginning to chart the way to a more productive model, in which each segment of the industry can compete vigorously while still making a sensible profit, and both TV makers and consumers can enjoy improving technology, reliable supply, and pricing that is both competitive and reasonable.

Selling at a loss is not a sustainable business strategy.

— KIW