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A leading consumer electronics industry researcher has said that mass market retailers run the risk of killing the goose that lays golden eggs by constantly driving down the price of flat panel TVs. He also says that in current market conditions “something has to give” for vendors and retailers to survive.
David Barnes, the Vice President, of Strategic Analysis at DisplaySearch said “Brand owners and retailers play a dangerous game when they drive flat panel display prices towards the cost of materials. In this analogy, flat panel makers are geese who create eggs that become key consumer products such as TV sets, upon which brands and retailers depend. For the past ten years or more, TFT LCD producers have let their operating profit margins fluctuate between -20% and +20% because they believed that building capacity would lead to sustainable market share and profit in some future world. The present world is neither sustainable nor profitable. In prior business cycles, leading panel makers survived several quarters of loss while key material suppliers continued to profit. This cycle looks different. Something has to give.
One or more of three conditions must change if we want more eggs. Panel makers can write-down their assets, of course. Depreciation charges comprise about 20% of product cost for leading panel makers. In simple terms, this implies that panel makers could increase the variable portion of their product cost from 60-70% to 80-90% by eliminating depreciation charges. As shown in the following chart, that could reduce their breakeven price from a 45-65% premium range (1.45-1.65X variable cost) to a 10-25% premium range (1.10-1.25X variable cost). The problem with this, of course, is that it may become difficult to raise money for more capacity after admitting recent investments have zero value.
The second condition that could change is material cost. Unfortunately, a significant portion of fabrication material cost comes from prices for substrate glass and liquid crystals. Glass comes from an oligopoly of three suppliers. TFT glass is a golden goose for each of these companies. While they might decide to compete more on price than they have in the past, any of them would be hurt if prices fell substantially. In addition, none of them can increase substrate share substantially without significant, sustained investment. Conditions for liquid crystals are similar. There are only two major suppliers. More than one-half of total material cost comes from post-fabrication components such as optical films and supply of some of those items are dominated by a few companies with proprietary technology, also. Historical profit margins for many suppliers of glass, liquid crystals and films have remained above 30% in the worst of times. The problem is convincing them that they should share their customers’ pain or replacing them with internal supply. Neither of these is easy or quick.
The third condition that could change is price. B2C supply chains are not as short as B2B chains, so rapid price declines whipsaw brands and retailers as much as declines whipsaw panel makers. There is shared interest in gradual price changes. Slow price increases might be reasonable if brands and retailers want a range of TV sets and an adequate number to sell. On the other hand, they may face a new consumer mentality. The era of conspicuous consumption may be over: consumers used to wear designer labels proudly on the outside of their shirts, but now they wear discount labels proudly on the inside. If brands matter less than value, it may be difficult to raise panel prices. Fortunately, panel makers keep reducing cost, so they only need prices to hold steady for a while.
If I knew what three conditions would change and by how much, I could retire. I wouldn’t write it in a blog. You’ll have to think about this yourself. All I can conclude is that we all want our MTV or our YouTube or whatever, whenever and wherever we are. That will take a lot more panels that someone has to make it worthwhile for producers to make.
