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Display Market Outsourcing Accelerates

Display-sourcing strategies are becoming clear, and not because screen resolution technology is any better. LG Display, according to reports in The Wall Street Journal, announced today its second-quarter net profit declined by 96 percent from a year ago. So recent moves by panel manufacturers {complink 5648|Toshiba Corp.} and {complink 4907|Sharp Electronics Corp.} are making sense: The display market is bottoming out.

Last week, Toshiba sold one of its LCD manufacturing plants to Compal Electronics in an effort to revamp its LCD supply chain. Also last week, Sharp and Foxconn announced they were establishing a joint venture for the procurement of LCD TV panels and components. Although market research firm IHS iSuppli noted that LCD TV prices in the US increased in June, global prices are dropping and panel makers have had difficulty sustaining profit margins. The result, says IHS iSuppli analyst Juffrey Wu in a press release, will be the increased outsourcing of panel manufacturing:

    The continued growth of the LCD TV industry during the last couple of years, in spite of the economic downturn, has further intensified the competition among television brands and contract manufacturers. However, even amid this growth, prices have fallen, causing profit margins to dwindle and prompting brands to increase outsourcing to achieve greater cost efficiency.

Although Toshiba maintains it is not exiting the LCD manufacturing market, the sale of its Mexico plant to Compal is an outsourcing agreement. Toshiba will continue to source from the plant and said the sale is aimed at increasing efficiencies in its local panel procurement. The Mexico facility supplies panels for end-products destined for the Americas region, Toshiba told EBN.

Beyond cost reductions, there are a number of other benefits to outsourcing, says IHS iSuppli:

    One advantage is greater asset flexibility. A number of Japanese and South Korean brands operate LCD panel and module production plants in addition to LCD TV manufacturing facilities, which require significant capital expenditures and high overhead. These original equipment manufacturers (OEM) increasingly utilize contract manufacturers in order to improve asset flexibility, reduce headcount and contain operating expenses.

    The use of contract manufacturing also mitigates the impact of exchange rate fluctuations. In particular, the Japanese yen’s appreciation by approximately 25 percent in the last three years has hurt the export business of Japanese brands, forcing many to resort to ODMs for lower-cost LCD TV manufacturing.

    A third advantage is that EMS and ODM companies deliver an enhanced manufacturing footprint to help OEMs establish presence in the end market, allowing them to enjoy economies of scale and operate LCD TV activities across multiple locations cost effectively. Hon Hai and TPV, two of the largest LCD TV contract manufacturers, now conduct LCD TV manufacturing activities across Asia (mainly China), Eastern Europe and Latin America.

    Finally, an increasing number of contract manufacturers offer vertically integrated production, delivering benefits such as cost savings and a leaner supply chain.

{complink 5114|Sony Corp.} is another traditional leader in display technology that is divesting itself of manufacturing plants: In 2009 it sold facilities in Mexico and Slovakia. Since LCDs are manufactured in the same way as chips, is the display industry going the way of fabless semiconductors? I'd like to hear from readers.

9 comments on “Display Market Outsourcing Accelerates

  1. Eldredge
    July 22, 2011

    The decline in profit quoted by WSJ for LG Display is pretty significant. It sounds like there may excess manufacturng capacity for the display market.

  2. Barbara Jorgensen
    July 22, 2011

    Hi Eldridge–yes, there is. I think iSuppli noted that in their report but I didn't quote that section specifically. LG also told the WSJ they were cutting back on cap spending for the rest of the year–another indication of excess capacityThanks as always for your comments!

  3. jbond
    July 22, 2011

    I think it is only a matter of time before many of the key players have either outsourced or created joint ventures. Financially speaking, combining efforts and outsourcing can save a lot of money for a company. These third party manufacturers can make components for multiple different companies and turn a nice profit. These companies can also stay busy regardless of how one particular company is doing if they are manufacturing for multiple places.

  4. Kunmi
    July 22, 2011

    For many original manufacturing companies, the major way out to keep their doors open and keep surviving in this present economy is outsourcing to contract manufacturers. I understand the fact that before the economy went really bad, this original manufacturers did this just for greater asset and cost savings. They have tasted the other side of the coin and it paid well to decrease the headcount and maintain the CEO and the CMD, the directors salary and bonuses. Why do they not want to continue. Imagine, you could pay less per head count in China and puerto rico than paying for a head count here in the USA. It is all about the exchange rate because they get more for their money and their operating expenses are reduced considerably.

    Unfortunately, we are all paying the price and most likely the CEO, CMD, the directors and managers and other civilians kids and families. The economy speaks a lot for our market outsourcing. It was not like this before now. In addition, It will affect the crime rate and other important aspect of the country if we do not stop or reduce our outsourcing.

  5. Ms. Daisy
    July 23, 2011

    The joint ventures by key players is definitely a win- win for the big players and the third party manufacturers. I also believe this may slow down outsourcing and help give confidence to the quality of the products while helping the slow economic recovery. Even though outsourcing can save a lot of money for a company it is the worst thing for American jobs.

  6. elctrnx_lyf
    July 24, 2011

    The main reason behind the outsourcing manufacturing to actually cater the abrupt changes in the suppy chain. I do think this is similar to fabless semi conductor business since the motive is to optimium use of factories avialable with minimum idle time.

  7. Eldredge
    July 24, 2011

    I agrree that outsourcing does tend to encourage more efficient use of manufacturing resources. One problem that can occur is that ir can limit the acces that an OEM has to that manufacturing capacity if the exces capacity goes away – that's the risk the OEM assumes.

  8. stochastic excursion
    July 25, 2011

    The IHS report mentions exchange rate trends as a motivation for outsourcing.  I would think the other way around is the case.  Wouldn't a vertically integrated company be insulated from exchange rate fluctuations if assemblies are transferred from one site to another?

  9. Barbara Jorgensen
    July 25, 2011

    Great question. The answer is actually no–most electronics compnaies still report their P&Ls on a regional basis–even companies that are vertically integrated have these regional silos. So exchange rates will still be accounted for within a single organization. If all manufacturing is done at one site (the glass is made there, the materials are deposited there, the panels are cut and the electronics are made and added there) , then yes, the exchange rate would not have an impact because everything is bought and sold  in a single region. But in most cases, subassemblies are transferred from one site to another. Any labor or materials added during that transfer have to be accounted for–usually in the regional currency. And so on.

    Exchange rates have less of an impact when products are manufactured and sold in a single region, as the Toshiba/Compal agreement intends to do. But that is the sale of the end-product–the subassemblies are still likely sourced elsewhere.

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