The two major segments of the outsourced electronics business—electronics manufacturing services (EMS) providers and original design manufacturer (ODM) companies—together will produce 127.9 million LCD TVs in 2015, up from 65.1 million in 2010. The EMS and ODM companies will account for 43.0 percent of LCD TV unit production in 2015, up from 36.2 percent in 2010, as presented in Fig. 1.
Source: IHS iSuppli, USA.“The continued growth of the LCD TV industry during the last couple of years, in spite of the economic downturn, has further intensified the competition among television brands and contract manufacturers,” said Jeffrey Wu, senior analyst for EMS and ODM at IHS. “However, even amid this growth, prices have fallen, causing profit margins to dwindle and prompting brands to increase outsourcing to achieve greater cost efficiency.”
LCD TVs clearly have become the dominant segment in the flat-panel TV market and will continue to drive growth of the flat-panel TV industry. From the 2010 to 2015 period, LCD TV shipments are projected to rise at a compound annual growth rate (CAGR) of 10.6 percent, expanding from 179.8 million units to 297.6 million units. In comparison, plasma television shipments will decrease from 19.6 million units to 8.6 million units, equivalent to negative 16.5 percent CAGR during the same period.
In order to capitalize on the growth momentum in the LCD TV industry, brands need to maintain attractive product lineups while containing their costs, Wu said.
Benefits from outsourcing LCD TVs
Beyond cost reductions, a host of other benefits can be obtained by manufacturers in outsourcing LCD TV brands, IHS iSuppli research shows.
One advantage is greater asset flexibility. A number of Japanese and South Korean brands operate LCD panel and module production plants in addition to LCD TV manufacturing facilities, which require significant capital expenditures and high overhead. These original equipment manufacturers (OEM) increasingly utilize contract manufacturers in order to improve asset flexibility, reduce headcount and contain operating expenses.
The use of contract manufacturing also mitigates the impact of exchange rate fluctuations. In particular, the Japanese yen’s appreciation by approximately 25 percent in the last three years has hurt the export business of Japanese brands, forcing many to resort to ODMs for lower-cost LCD TV manufacturing.
A third advantage is that EMS and ODM companies deliver an enhanced manufacturing footprint to help OEMs establish presence in the end market, allowing them to enjoy economies of scale and operate LCD TV activities across multiple locations cost effectively. Hon Hai and TPV, two of the largest LCD TV contract manufacturers, now conduct LCD TV manufacturing activities across Asia (mainly China), Eastern Europe and Latin America.
Finally, an increasing number of contract manufacturers offer vertically integrated production, delivering benefits such as cost savings and a leaner supply chain.
Among the leading Japanese brands, Toshiba has been the most aggressive in outsourcing. Sony also has been active on this front, initiating rounds of restructuring efforts in 2009 and divesting its LCD manufacturing facilities in Mexico and Slovakia, contributing to the increased use of contract manufacturers in the LCD TV industry.
IHS iSuppli previously estimated that the share of production of outsourced LCD TVs would surge to 35.1 percent in 2010, up from 27.5 percent in 2009. Further research suggests that the percentage of outsourced LCD TVs hit an all-time high in 2010 and reached 36.2 percent—a significant increase driven by Sony’s divestiture of its manufacturing facilities to Hon Hai, aka Foxconn.
Many troubled Japanese OEMs, including Sony, Sharp and Panasonic, may further increase their reliance on contract manufacturers in order to remain competitive in the LCD TV market.
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