Sharp and Sony Link up in Joint Venture to Make LCD Panels for Burgeoning Flat Panel TV Market

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Consumer-electronics giant Sony Corp. (SNE) announced it will take a one-third stake in a $3.5 billion LCD plant that Sharp Corp. (OTC: SHCAY) is building to meet the soaring worldwide demand for flat-screen television sets.

Sharp markets the Aquos line of LCD TVs. It plans to take the LCD plant - which would be the world's largest - into a joint venture: The Osaka-based Sharp will take a 66% stake, while Sony will take the remaining 34%.

While the companies would not say how much Sony would invest for its stake, Japan's Nikkei newspaper said that Sony agreed to pony up $926 million, Bloomberg News reported.
Sony and Sharp rank second and third, respectively, on the list of the world's largest makers of LCD televisions behind South Korea's Samsung Electronics Co. Ltd. (PINK: SSNLF).
Matsushita Electric Industrial Co. Ltd. - maker of the Panasonic brand - controls one-third of the plasma TV market.

The two Japanese companies were planning to hold a press conference at which both Sony President Ryoji Chubachi and Sharp President Mikio Katayama were to speak and provide details of the joint initiative.

The Sony-Sharp alliance is just the latest in a series of linkups taking place among Japan's flat-panel TV producers, who are trying to balance two competing challenges: The need to secure enough liquid-crystal display (LCD) panels to meet the accelerating demand against the desire to keep their capital investments low at a time when flat panel displays are becoming a commodity, inducing steep price declines for the components.

In the face of burgeoning demand and tight supplies for LCD panels, companies are choosing different routes to fill their needs. Late last year, Toshiba Corp. (OTC:TOSBF) decided to buy LCD panels from Sharp. But earlier this month, Panasonic-maker Matsushita said it would spend $2.8 billion to build an LCD plant of its own.

"Sony needed an extra source of panels because the large-size LCD TV market is growing faster than it had expected. As Sony expands TV production, it is natural to seek to diversify panel sources," Park Hyun, an analyst at Prudential Investment & Securities, said in an interview. "Sony is likely to continue the partnership with Samsung ... therefore Sony's diversification strategy won't have a negative implication for the alliance with Samsung."

For Sharp, the linkup with Sony serves as a hedge at a time when aggressive industry investments in panel-production capacity is boosting worries about a supply glut down the road.

"The problem will be 2010 and 2011," said Shinko Securities Co. Ltd. (PINK: SKSTF) analyst Hideki Watanabe. "Just when TV demand is likely peaking, Sharp's 10th-generation plant will come onstream, and so will Matsushita's new factory [causing the potential glut. But this] deal gives Sharp good risk hedging."

The new Sharp-Sony factory would utilize the so-called "10th-generation" glass substrates, which can yield more panels than earlier-generation, smaller glass substrates, improving production efficiency and helping both Sharp and Sony offer flat-panel TVs at competitive market prices.

The new factory will produce LCD screens that have a diagonal reach of as much as 60 inches. Sony will receive a third of the factory's output, with the rest going to Sharp. Initially, the monthly output will be 36,000 glass substrates, although the ultimate monthly output will reach 72,000 glass substrates.

The substrates are the output from which the flat panels can be cut.

Besides the flat-TV panels, the factory will also make so-called "LCD Modules," which are flat-panel displays equipped with such components as a backlight unit and LCD driver chips.

"For Sharp, this is a positive step since it means a major buyer that would keep the 10th-generation factory busy," Kazuharu Miura, a Daiwa Institute of Research analyst, told Reuters.

The venture reduces Sony's reliance on Samsung - currently its main supplier - at a time when LCD TV sales are projected to rise 29% this year, easily outpacing demand growth for rivaling plasma-based TV sets. Both UBS AG (UBS) and Lehman Brothers Holdings Inc. (LEH) predict that the LCD shortage will persist throughout the year.

Worldwide sales of LCD TV are expected to reach 155 million units by 2012, double the 74.8 million sold in 2007, predicts the Japan Electronics and Information Technology Association. Demand for plasma TVs will likely reach 25 million units in 2012, 119% more than the 11.4 million sold last year, the JEITA said.

Sony is expecting to sell 10 million of its Bravia LCD TVs in the current fiscal year, which ends March 31. The suggested list price of the TVs range from a low of $800 to a high of about $4,200, according to the Sony Web site.

It has a second LCD joint venture - this one with Samsung - known as S-LCD.

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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