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By William Patalon III
Money Morning/The Money Map Report
Investigators from Japan's Fair Trade Commission raided the offices of Sharp Corp. (OTC: SHCAY) and Hitachi Displays Ltd. yesterday (Thursday), due to suspicions the two were fixing prices of display panels for Nintendo's popular DS portable game machines, .
In related news, a source said that South Korea's Samsung Electronics Co. Ltd. (PINK: SSNLF) is in the final stages of contract talks with Japan's Sony Corp. (SNE) about jointly developing a new production line for liquid crystal displays (LCD) for television sets.
The revelation soothed concerns that the Samsung/Sony alliance had hit a rough patch: Early this week, Sony said it was taking a one-third stake in a $3.5 billion LCD plant that Sharp is building to meet the soaring worldwide demand for flat-screen television sets.
Investigators for the FTC – Japan's watchdog for domestic trade matters – searched several offices and factories of both Sharp and Hitachi Displays, commission officials told The Journal. Since sometime in 2005, Hitachi and Sharp were allegedly fixed prices on LCD panels before supplying them to Nintendo Co. Ltd. (OTC: NTDOY) for use in its consoles, according to media reports.
Sharp and Hitachi Displays are the sole suppliers for the small LCD panels that Nintendo uses in its DS and DS Lite gaming consoles. Sharp started supplying the panels since the DS devices debuted in November 2004, and Hitachi Displays became a secondary supplier a year later. The price-fixing began when Hitachi became a supplier, investigators allege.
According to reports from newspapers in the Asian region, the price-fixing allegations surfaced as part of December 2006 cross-border probes when trade agencies in Japan, Europe and the United States investigated the world's top panel-display makers for possibly agreeing to limit production as a way of offsetting price declines in the marketplace.
Violators of anti-monopoly laws can be socked with fines equal to 10% of their sales. That sales figure is not known.
None of the three companies involved in yesterday's raid would comment. Sharp and Hitachi Displays confirmed that the raid took place. A spokeswoman for Sharp told The Journal she couldn't provide details of the trade allegations, while a spokesman for Hitachi Displays said the raid involved its LCD product line, but couldn't identify the client involved. A spokesman for Nintendo said it was too early to comment on whether the company would be looking to change suppliers.
The company said it expects to sell 29.5 million DS machines for the fiscal year through March 31.
The Samsung/Sony Alliance
When Sony confirmed it was going to invest a reported $926 million for a 34% stake in a new LCD factory planned by Sharp, analysts immediately concluded that Sony might not cooperate with Samsung in future projects.
However, Sony Presidentpledged to continue running S-LCD, its joint venture with Samsung.
That may not be the final word, though.
Sony is expected to see sales of its flat-panel TV sets soar between 50% and 100% in the new business year, which starts April 1.
Needless to say, Sony is in desperate straits with regards to securing enough flat panel displays to meet demand.
But Sony and Samsung are direct rivals in the LCD TV market, with Samsung ranked the world's biggest LCD TV maker last year. Sony and Sharp rank second and third, respectively.
Matsushita Electric Industrial Co. Ltd. – maker of the Panasonic brand – controls one-third of the plasma TV market.
That's why Sony is taking the one-third stake in the $3.5 billion LCD plant that Sharp is building. 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%.
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 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.
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 TVs are expected to reach 155 million units by 2012, double the 74.8 million sold in 2007, according to 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. Projections call for the company to sell between 15 million and 20 million LCD TVs in the fiscal year that starts April 1.
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 – the one with Samsung that's known as S-LCD.
Samsung and Sony spent a combined $1.9 billion on the initial production line in that venture, and Samsung is currently ramping up the line on its own, spending another $2.1 billion.
Samsung believes it is still possible to work with Sony on the next-generation production line, and Sony's Chubachi on Tuesday said his company is willing to consider such a plant with Samsung if Samsung proposes the venture. Apparently some negotiations already are under way.
Experts say that Samsung has benefited from Sony's brand power and from Sony's steady demand for the Samsung LCD screens, while the venture provided Sony with a partner to shoulder heavy investment needs at a time when a "go-it-alone" investment strategy is highly risky.
But as Sony diversifies its sources for LCD panels, analysts believe the firm might be able to position itself so it has pricing power over Samsung – even though Samsung was the world's No. 1 maker of large-size LCD screens last year.
"Sony had difficulty in securing enough panels, but now it can have bigger power in pricing negotiation" because it has multiple suppliers, said Park Sang-Hyun, an analyst at the Seoul, South Korea-based CJ Investment & Securities Co. Ltd.
LCD makers such as Samsung that already have manufacturing capacity in place will reap big benefits from a booming flat-panel TV market this year, since demand is soaring even though inventories of panels and related components remain low. But there are huge concerns about a production glut in 2009 and 2010 when new factories – such as the Sony/Sharp – begin production.
"The picture could be grim for 2010," CJ Investment's Park said.
News and Related Story Notes:
- Money Morning:
Sharp and Sony Link up in Joint Venture to Make LCD Panels for Burgeoning Flat Panel TV Market.
- The Wall Street Journal:
- Sharp USA:
Widescreen Aquos televisions.
- Bloomberg News:
Sony Will Invest in Sharp Factory to Meet LCD Demand.
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. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.