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Foxconn Sets Its Sights on LCD Market

It looks as if Foxconn is adding another feather to its vertical-integration cap.

Chinese media last week reported the $17 billion EMS provider is paving the way for its LCD affiliate, Taiwan-based Chimei Innolux, to open an LCD manufacturing plant in Chengdu, China. According to DigiTimes, Foxconn will invest $10 billion to set up a facility to provide LCD TV assembly, LCD module production, LED backlight unit (BLU) production, LED packaging, and lighting sources production.

The move is not surprising, given Foxconn's vertical integration model, which already provides everything from components to after-market services and support to its OEM customers. It also positions Foxconn in the display market, which analysts say is becoming strategically important in the booming tablet computing market. (See:The Big Picture: Is the LCD Becoming the New Motherboard?)

Foxconn is shoring up its supply of LCD panels and ensuring its higher-than-average EMS profit margins stay that way. LCD prices have been dropping steadily since July when a number of retail television makers canceled their orders for LCDs. Market researcher iSuppli reported in August that LCD prices had reached manufacturing cost levels and expected prices to decline even further in September. The only way to make money on panels is to hang in until prices rebound — which iSuppli expects they will — or make them more cheaply than anyone else.

Among all of the contract manufacturers, Foxconn has led the way in embedding the advantages of Chinese manufacturing into its cost structure, according to iSuppli. Because of its early and rapid production shift to China, Foxconn can compete on a price structure better than any other EMS company. Although its gross profit margin declined a bit earlier this year — 8.7 percent in Q1 2010 vs. 9.5 percent in Q1 2009 — it's still high for the EMS industry as whole.

Foxconn is also investing in LCD technology that is in high demand in China. Shipments of LED-backlit LCD-TVs in China are set to rise to 5.5 million units in 2010, up from just 406,000 in 2009, iSuppli reported in September. “With sales being driven by a government stimulus plan designed to promote LCD-TVs, demand in China is so robust that availability of LED-backlit sets has become constrained, causing some consumers to delay their purchases until they can get the product they want,” said Riddhi Patel, director for televisions and retail services at iSuppli.

China’s LED-backlit LCD-TV sales continue to pick up steam as the year progresses. Shipments are forecasted to climb to a whopping 1.6 million units in the third quarter of 2010. This will mean that LED backlit sets will reach a penetration rate of more than 18 percent of the entire LCD-TV market.

Earlier in the year, iSuppli reported that LED-TV prices in China were taking longer than expected to fall. Consumers have become more cautious in their buying decisions, with some going as far as postponing an LCD-TV purchase until an LED-backlit set becomes available.

Foxconn will no doubt address that problem. And there are other indications that LCD prices will continue to fall. Also last week, {complink 5638|Tokyo Electron Ltd.} announced it was moving some of its production from Japan to China. The Chinese cost structure, the company said, would decrease the cost of manufacturing its LCD fab equipment.

5 comments on “Foxconn Sets Its Sights on LCD Market

  1. bolaji ojo
    October 25, 2010

    The OEMs fled vertical integration, spinning off first semiconductor operations, other “non-core” business and manufacturing, and handing some of these over to specialists–so-called contract manufacturers, that have now dwarfed their customers in size. Foxconn is one of the more successful practitioners of reverse-vertical integration to the benefit of companies like Apple. Smaller OEMs may not be benefitting from this, however. Have you looked into the implications of this vertical integration at companies like Foxconn on small to medium OEMs?

  2. Barbara Jorgensen
    October 25, 2010

    I'll admit I've been skeptical about the trend back toward vertical integration, even as it pertians to EMS. As for the effect on small and mid-size OEMs, I think the impact depends on what market they are in. Foxconn continues to focus on high-volume consumer electronics and as long as that is the case OEMs in medical, military aerospace and other highly-specialized markets shouldn't feel the impact. These OEMs also tend to use small to midsize EMS close to their design centers that also shouldn't feel the impact.

    The wild card is whether Foxconn will keep its LCD partner “captive” to Foxconn or sell into the open market. Then the question becomes how much will OEMs and other EMS companies begin sourcing from Foxconn?

  3. AnalyzeThis
    October 28, 2010

    Foxconn is also investing in LCD technology that is in high demand in China. Shipments of LED-backlit LCD-TVs in China are set to rise to 5.5 million units in 2010, up from just 406,000 in 2009, iSuppli reported in September.

    Wow, that's an incredible statistic: once Chinese consumers start buying some of the technology and gadgets they currently mostly only just export… well, the mind boggles at how gigantic of a potential market there is. Of course, there are also gigantic obstacles to overcome; it's not as if the vast majority of Chinese citizens will suddenly be able to afford iPhones. Still, it'll be interesting to see what the Chinese consumer market will look like 25-30 years from now.

    Foxconn is a very interesting company and I suppose it is somewhat unfortunate that they only thing most Americans associate them with is deplorable working conditions and suicide.

  4. Barbara Jorgensen
    October 28, 2010

    Hi Dennis–I can add a little insight into that, courtesy of iSuppli. iSuppli reports that consumers in China have been holding off on LCD TV purchases until the realization of this latest technology. I didn't see any references to pricing, but if it follows the trend line these TV sets will be more expensive initially. But I guess it's a little like holding on to your 3G cell phone and waiting for 5G to arrive… 

  5. Ariella
    October 29, 2010

    I suppose that holds for just about any advance in technology.  When something is the latest and greatest, it comes at a premium price.  As competitors come in, or the company itself comes out with a more advanced version that is now the latest, the items formerly known as the greatest becomes just another gadget and comes down to average market price.

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