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February 1, 2012
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TV makers cope amidst flat growth, constrained margins

A report this week that Panasonic was leaving the U.S. set-top market was a reminder that all is not well in consumer electronics (CE) land. The Light Reading article said Panasonic was closing its cable group amidst general cost-cutting moves following the company’s disappointing second-quarter loss, year-over-year sales declines and doubts that it could turn around its TV business.

These challenges are common knowledge. “Panasonic expects its television unit to be unprofitable for the fourth year running and is drastically shrinking operations,” wrote the Economist’s Schumpeter columnist K.N.C, in a mid-January post. The author also pointed beyond Panasonic. “Sony is braced to lose money on its television business in 2011 for the eighth year in a row.”

Both companies, all the same, generated attention at CES 2012. Panasonic for its Viera TVs, including a social-media launch with MySpace TV; Sony for its Bravia line, now divided into RX entry-level, EX mid-range and HX at the top, with HX850 featuring screens made of Corning’s thin, light, and scratch-resistant Gorilla Glass.

The economics of the underlying liquid crystal display (LCD) panels is one problem for some TV makers. According to “Schumpeter,” no company that makes LCD panels earns money from it. Companies such as Samsung and Sharp that make both LCD panels and TVs have been subsidizing the panel side of the house. That can work as long as enough TVs are selling at the right price. As global market leader with more than 21 percent of flat-panel revenues as of a year ago, according to DisplaySearch, Samsung may be able to make the numbers work.

But LCD panels are a concern. In a case of bad timing, capacity for LCD manufacturing expanded in 2006, just as overall growth in demand for flat-panel TVs was beginning a precipitous decline—a decline that occurred despite downward-trending consumer prices. From 2005 to 2011, year-over-year growth in flat-panel sales dropped from more than 125 percent to 2-4 percent today, which are the rates that DisplaySearch projects forward for several years. (See figure.)

Not all TV makers face the same challenges of integration. One master at outsourcing is Vizio. The upstart manufacturer, which for a time claimed the top spot in North American LCD TV market last year, generates $3 billion in revenue with only 300 in-house employees, as reported by Bloomberg Businessweek last summer. Of course, it relies on an army (about 50,000 mostly Taiwanese workers) to manufacture the devices.

On several panels at CES 2012, speakers mentioned Vizio as that rarity: a CE company that makes money. But there was another reason to mention this brand leader—its expansion into a new market. “News that Vizio plans to enter the PC market caught quite a few CES attendees off guard, and it was a common topic of conversation at the show this week,” wrote Chris Connery, DisplaySearch VP of PC and Large Format Commercial Displays, in his analyst blog.

Connery noted a few items on the plus side of this strategic shift: Vizio’s suppliers and assemblers make both LCD TVs and PCs; the PC market (perhaps surprisingly) has higher margins than the TV market; and the all-in-one (AOI) and notebook PC markets are growing globally. On the minus side, Vizio faces downward trends in its base U.S. market. With year-to-year growth in China (178 percent) and Latin America (107 percent) surging, those markets are more promising targets.