Samsung and Sony unite on flat screens

Nobuyuki Idei, chairman of Sony, and Yun Jong-yong, chief executive of Samsung Electronics, were marking the launch of S-LCD, the two companies' display-making joint venture, at a sprawling new technology park in Asan, South Korea, on Thursday. But the opening was overshadowed by fears that the young market could already be heading for saturation and oversupply.

The alliance, agreed last year, is designed to help Sony catch up with Sharp, its Japanese rival, in the flat screen TV market, while providing Samsung with a co-financier and reliable customer for its fast-expanding LCD business.

By joining forces, Sony and Samsung have pitted themselves against LG Electronics of South Korea and Philips of the Netherlands, which are to list their five year-old LCD joint-venture on the Seoul and New York stock exchanges next week.

Together with Sharp and a handful of Taiwanese manufacturers, S-LCD and LG Philips are investing billions of dollars in plants to make flat panel displays. The companies are anticipating years of rapid growth in the sector as households and offices replace bulky cathode ray tube TVs and computer monitors with slimmer LCD models.

The surge in output and a fierce battle for market share is raising fears that the fledgling industry could already be heading towards oversupply.

Cho Yong-duk, vice-president of Samsung's LCD division, on Thursday said LCD prices could fall by 10-20 per cent in the third quarter before stabilising later in the year. This will erode the profit margins of LCD makers at a moment when they are facing heavy capital expenditure costs.

However, Chang Won-kie, the Samsung-appointed chief executive of S-LCD, said lower prices would lead to increased demand as LCD TVs and monitors became more affordable. A 32-inch LCD TV currently retails at about $4,000, making it too expensive for most consumers.

Samsung believes the price has to fall by more than a third before the product reaches the mass market.

In addition to producing flat panel displays, Samsung, Sony, Sharp, LG and Philips are also among the world's biggest makers of TVs and monitors. That means they must seek a balance between keeping LCD prices high enough to make profits but low enough to attract consumers.

Samsung and Sony are each investing Won1,050bn ($902m) in S-LCD to build a so-called seventh-generation plant that will churn out 60,000 panels a month, starting in the first half of next year.

The facility will produce bigger glass panels than the sixth-generation plants recently opened by Sharp and planned by LG Philips. This will allow S-LCD to make larger-sized TVs and cut more screens from each panel, reducing costs.

By focusing on large-sized TVs, up to 46-inches in width, Samsung and Sony are aiming for potentially the most profitable part of the LCD market, in contrast to lower-margin small TVs and monitors.

Each company will be entitled to half the plant's output to feed their rival TV businesses and Samsung is building a second seventh-generation plant by itself. Keiji Nakazawa, the Sony- appointed chief finance officer of S-LCD, said the two companies would decide in future whether to build more facilities together.

The forging of an alliance between Sony and Samsung - based in Japan and South Korea, respectively - took many observers by surprise because they are fierce rivals in the consumer electronics market.

Samsung has overtaken Sony in terms of market capitalisation and profitability and is challenging the Japanese company's leadership in quality and brand strength.

The Korean company is expected to underline its growing stature on Thursday by announcing a near tripling in second-quarter net profits, compared to the same period last year, driven by surging exports of LCDs, semiconductors and mobile phones.

Mr Chang stressed that S-LCD was solely a manufacturing joint-venture and that technology sharing would be limited.

The joint-venture with Samsung marks a first foray into LCD manufacturing for Sony. The Japanese company has fallen behind Sharp in the flat screen TV market and needed a reliable source of LCDs to catch up.

In the first quarter of this year, Sharp made 26.5 per cent of global LCD TV sales, while Samsung and Sony each commanded 11.9 per cent, followed by Philips, LG and Toshiba.

For Samsung, its partnership with Sony allows it to share the cost - and the risks - of its development of seventh-generation LCD technology, while also guaranteeing stable demand for the output.

"It is a win-win situation for both companies," says Lee Sang-wan, president of Samsung's LCD division.