Sony and Sharp’s LCD Linkup

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The Japanese rivals are working together in liquid-crystal-display TV panels to cut costs and hedge against the risk of an economic slowdown

Consolidation it wasn’t. But on Feb. 26, when Sony (SNE) said it would pick up part of the $3.5 billion tab for Sharp’s (6753.T) planned TV-panel plant, it seemed that two of the world’s biggest TV makers were finally admitting there are limits to the industry’s frenzied expansion.

Of course, this being Japan, both consumer-electronics makers would argue that the “c” word doesn’t apply. Indeed, Sharp President Mikio Katayama and Sony President Ryoji Chubachi stressed that their agreement was over joint ownership of a plant in Osaka and joint production of TV panels and other components, not any type of merger.

The deal leaves Sharp with two-thirds of what will be the world’s most advanced liquid-crystal-display factory, while Sony will own the remaining one-third. They plan to produce both LCD panels and LCD modules that come with components such as a backlight and chips. Though their giant-screen TVs will share key technologies inside, Sharp’s Aquos and Sony’s Bravia will remain separate brands.
Tieup’s Big Benefit: Lower Costs
Why is Sharp sharing precious tech know-how with a rival? After all, Sharp, the world’s third-largest LCD TV maker, wants nothing more than to close the gap with the reigning champ, Korea’s Samsung Electronics, and runner-up Sony. Every TV exec knows that the best way to get ahead in the fiercely competitive business is to be the first to invest in more efficient LCD plants. Only a few manufacturers have the resources and the brain trusts to stay ahead in cutting-edge TV manufacturing technologies.
But a tieup offers benefits to both companies. Chief among them: lower costs. That’s a big consideration in the $68 billion LCD TV industry, where fierce competition has led to annual price declines of 20% to 30%. Goldman Sachs (GS) analyst Yuji Fujimori raised his earnings forecast for Sharp for the next fiscal year, through March, 2009. “Of course, the investment burden will be lighter,” Sharp’s Katayama told reporters.

Sharp approached Sony with the idea of an alliance last fall. The aim was to ensure that its LCD panel-making factory would stay busy, something it might not be able to do alone. It’s also a relief for Sony, which will have a stable supply of panels as it ramps up from 10 million flat-panel TVs this fiscal year to larger volumes in the coming years. “Sony will be able to cover a wider variety of TV sizes,” said Chubachi.

Analog’s End Is a Boon
And sharing the multibillion-dollar investment helps both companies hedge against the risk of a looming economic slowdown in the U.S., Europe, and Japan. A recession could put a damper on TV buying. DisplaySearch predicts that TV unit sales this year will grow around 24% to 98 million, from 79 million last year. For now, few are predicting gloom ahead of the Summer Olympics in Beijing and the end to analog TV broadcasts in the U.S. next year. “The cutoff of analog broadcasts in 2009 in the U.S. is not a small deal” for TV makers, says CLSA technology analyst Ming-Kai Cheng. And by 2011, the figure could top 148 million.

The plant, whose plans Sharp revealed last July, will be what’s known in the industry as a 10th-generation plant. It will be the first of its kind anywhere, able to make the world’s largest sheets of specialized glass, measuring 2.8 meters by 3 meters in size.

Each sheet is expected to be thinner than anything Sharp has made in the past, and could be cut into fifteen 40-inch, eight 50-in., or six 60-in. sets.

Those are the sizes that Americans, in particular, want most. They also offer TV makers the highest revenues and fattest profit margins. When the new plant in Sakai, near Osaka, opens in 2010, large-screen LCD TVs could account for more than one-third of global TV sales. “Without Sony, Sharp would likely have to make smaller-sized TVs at a plant that’s optimized for larger sets,” said DisplaySearch analyst Hisakazu Torii.

Cooperation Is the Rule of the Day
Alliances are now the norm in the TV industry. Rivals Sony and Samsung have had a joint venture to make LCD panels in Korea since 2004. Matsushita Electric Industrial (MC), known for its Panasonic brand, announced two weeks ago that it would build a new $2.8 billion LCD plant in western Japan by 2010, in partnership with Toshiba (6502.T) and Hitachi (HIT). And last December, Sharp and Toshiba said they had reached a panels-for-chips deal lasting at least through the rest of the decade.

Still, by supplying panels to Sony, Sharp will have a tough time showing that its TVs are a cut above Sony’s. The only difference between the Sharp and Sony TVs made with panels from the Sakai plant will be the outer case and the chips and circuitry that affect picture quality. And in video-imaging technology, some analysts give Sony the edge.
The trick for Sharp will be recruiting Sony’s help to keep finding ways to squeeze the most out of their factory. Sony’s engineers could, say, help with quality control or offer suggestions to Sharp researchers for improving output yields.

Sony’s Promise to Restore Profitability
Sony has a few things to consider as well. Currently it gets the bulk of its panels through the joint venture with Samsung. (Smaller-sized panels come from contract panel manufacturers in Taiwan.) Sony will want to avoid claims that intellectual property developed in the joint venture with Samsung has gone into helping Sharp.

Sony also needs to keep a lid on overall LCD spending, if Chubachi is to deliver on a promise to restore the TV business to profitability soon. That won’t be easy because the company is already spending hundreds of millions of dollars on developing next-generation flat-screen TVs called organic-electroluminescent displays, or OLEDs. Last December, the company launched the world’s first OLED TV, an 11-in. set, and this month it announced plans to spend $200 million in an effort to develop large-screen OLED TVs.

by Kenji Hall (businessweek)

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Through out my years, Sony has been a passion of mine.

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