LCD-TV outsourcing to EMS/ODM falls short of expectations

EL SEGUNDO, USA: Although sales of LCD-TVs are continuing to grow during the current downturn, the recession is resulting in somewhat weakened demand, causing contract manufacturing of such sets to fall short of expectations, according to iSuppli Corp.

iSuppli previously projected that 35.2 percent of LCD-TVs would be outsourced to contract manufacturers in 2008. However, the results in 2008 show that only 28.7 percent of LCD-TVs were outsourced.

This trend is expected to continue in 2009, with outsourcing lagging previous expectations by 5.6 percentage points. In 2010, 2011 and 2012, outsourcing will fall short of the previous forecast by 4.8, 3.2 and 2.6 points.

The figure presents iSuppli’s previous and current forecasts for the percentage of total LCD-TV manufacturing outsourced by OEMs to contract manufacturers.

iSuppli: Forecast of Percentage of Total Unit Production of LCD-TVs Outsourced to Contract ManufacturersSource: iSuppli, July 2009

“The primary reason for this shortfall compared to expectations is weakened demand due to the recession,” said Jeffrey Wu, senior analyst for Electronic Manufacturing Services (EMS) and Original Design Manufacturing (ODM) at iSuppli.

“Japanese and Korean OEMs needed to retain enough production in-house in order to rationalize their cost structures and to optimize their internal capacity utilization rates.”

While the LCD-TV market will continue to grow robustly during the downturn in 2009, the operational and financial challenges caused by the recession are forcing many OEMs to reconsider their internal expansion plans and outsourcing strategies, as well as to initiate changes that are having an immediate impact on the supply chain.

Major OEMs and ODMs suffer
A number of leading LCD-TV OEMs and Original Design Manufacturers (ODMs) reported operational losses in 2008. Samsung’s Digital Multimedia Division, where its flat-panel TV operations belong, incurred an operational loss of $311 million in 2008, despite the company’s market share gains.

In its fiscal year 2008, ending in March 2009, Sony incurred its largest operational loss in its history of $2.4 billion. Sharp incurred a net loss of $1.3 billion in fiscal 2008, ending March 2008, citing stagnant consumption, fierce competition and a surging Japanese yen.

“The struggle for growth during the economic downturn forced these OEMs to reduce their prices in order to increase sales and to maintain their market share,” Wu said. “Consequently, contract manufacturers’ growth potential and profitability were squeezed by their OEM customers.”

TPV Technology Ltd., which long has been the largest LCD-TV ODM, also suffered losses in 2008. At the beginning of 2008, the company projected that it would ship 7.5 million LCD-TVs.

But as the turmoil hit the consumer market, the company revised down its outlook for 2008 throughout the third and fourth quarters, and ended up shipping 6 million LCD-TVs. TPV incurred a net loss of $31 million in the fourth quarter of 2008, compared to a net profit of $56.3 million in the fourth quarter of 2007. The company’s full-year net profit for 2008 was $97.2 million, down 46 percent from 2007.

Tug of war between outsourcing and internal expansion
During the last two years, leading Japanese and Korean OEMs invested heavily in new manufacturing facilities in China and Eastern Europe to establish LCD-TV manufacturing clusters.

In the past, only final assembly was done close to the end market. However, in an effort to streamline the supply chain and production process, OEMs began to localize the production of LCD modules and even of LCD panels.

It was exactly this aggressive expansion, however, that resulted in decelerated outsourcing in 2008.

Who benefits?
Unlike OEMs in certain other consumer electronics segments that are shifting more production internally, many LCD-TV OEMs now are looking to contract manufacturers for cost-reduction opportunities.

For example, Hitachi Ltd. last week announced a major shift in its production strategy and will turn to contract manufacturers to produce its televisions in order to cut costs.

In another example, Sony at the beginning of 2009 announced a restructuring plan to close 14 percent of its 57 manufacturing sites, aiming to reduce operational costs by $3.2 billion this year. The announced closure inevitably will force Sony to further strategize its outsourcing approaches to LCD-TV manufacturing and to rely more on contract manufacturers.

Besides established ODMs, such as TPV and Proview, a handful of Tier-2 ODMs and EMS providers have made inroads into LCD-TV manufacturing, leveraging their existing technology and relationships with their clientele. To name a few, Hon Hai, Innolux, Wistron are such contract manufacturers that are capitalizing on this growing outsourcing trend.