|December 22, 2003
New York Times
For a Few Dollars Less, TV
Making Moves Abroad
The future of television production, like that of many other consumer goods, lies largely in low-cost areas of Asia, especially China. Last month, Thomson, the French electronics company that sells televisions under the RCA brand in the United States, entered into a joint venture with TCL International Holdings of China to form the world's largest maker of TV's, with an expected annual production of 18 million sets.
The number of televisions with screens 20 inches or larger exported from China to the United States has soared to an estimated 2 million sets this year from less than 16,000 sets in 2000. According to industry experts, only about 1.5 million of the 32 million sets sold in the United States annually are made here; the rest come mainly from Mexico and Asia.
Labor accounts for about 15 percent of the cost of making televisions, but China's lower wages can still save a few dollars per set for manufacturers facing ever more intense price competition.
"This is the start of a big consolidation phase in the industry," said Chris Chinnock, senior analyst at Insight Media, a television research firm based in Connecticut. "We're seeing a change in the market because the cost of manufacturing standard TV's must come down."
For Thomson -which has a bigger share of its business than some rivals in standard TV's, rather than large-screen digital models - times are tough. The company sells 7.2 million sets a year, but high sales volume does not make the business profitable, according to company executives. "Continuing price cuts and research and development costs are some of the reasons why we can't make a profit operating alone," said Mike O'Hara, Thomson's executive vice president for worldwide consumer product marketing and sales.
While other television makers, like Philips, the electronics giant based in the Netherlands, have generally outsourced production of high-volume products to overseas contractors, Thomson chose instead to create a separate, jointly owned company with TCL. Its belief was that having an ownership stake in a Chinese production company would allow it to cut costs, increase its market share around the world and put it in a better position to enforce its intellectual property rights in China.
"With this venture with TCL, we are showing that Thomson wants to actually be in the TV manufacturing business," Mr. O'Hara said. "This is a much more beneficial arrangement for us than just finding a subcontractor." TCL, which makes televisions for companies like Philips, is also working to extend its own brand to Asian markets outside of China.
Under the terms of the arrangement, Thomson will be the minority partner, owning 33 percent of the new venture, TCL-Thomson Electronics. The two companies intend to take the new company public eventually, at which time TCL's ownership will be reduced to 40 percent and Thomson's to 30 percent.
Ownership of Thomson and TCL's television and DVD manufacturing plants in Asia, Europe and Mexico will pass to the new venture, but Thomson will retain ownership of its television brands and intellectual property. The new company will use the RCA brand in North America, the Thomson brand in Europe and the TCL brand in Asia. But the TCL name may eventually appear in the United States on a lower-end line of TV's, a Thomson spokesman said, possibly replacing the GE brand name, which Thomson currently licenses.
The deal is another step in Thomson's efforts to remake its television business. In February and June, the company laid off more than 1,200 people, close to half the work force at its plants in Circleville, Ohio, and Marion, Ind., which make picture tubes and glass components. The move was in response to slackening demand for smaller television sets. Sales of consumer electronics make up 23 percent of the company's revenues, compared with 69 percent in 1997. Thompson expects that share to fall further in the next few years, as it concentrates on higher-profit broadcast equipment and services.
Whether the joint venture in China will allow Thomson to stay in TV manufacturing is by no means certain, said Danielle Levitas, a senior analyst at IDC, a research firm. "It is true that Thomson can make some additional profit by joining with TCL, through economies of scale and other means," she said. "But I think in three to five years, they will want to wash their hands of this business."
Making products in Asia does not guarantee profits, even with high sales volumes. Apex Digital made its mark in the United States by offering low-priced Chinese-made DVD players; it now sells a wide range of standard TV's plus a few digital models. But the company has never been in the black, the president, Steve Brothers, said.
"I can't honestly say we're making any money," Mr. Brothers said. "Consumer electronics is a very difficult business in which to make a profit, due to the price pressure from retailers." He said he hoped to increase profit margins by offering more expensive digital televisions with added features. Other makers, like Sony and Philips, are also focusing on large-screen digital models. Most high-end sets destined for the American market are made in Mexico or in the United States, where the savings in transportation costs for large models outweighs the cost advantages of producing the sets overseas.
"We've seen this price competitiveness coming for years," said Frans van Houten, chief executive of Philips Consumer Electronics. Earlier this month, that company closed picture-tube manufacturing plants in Germany and Britain, citing continued price erosion and the need to remain competitive. Next year, it will move manufacturing of its tube-based high-definition TV's for the American market to Juarez, Mexico, from Bruges, Belgium.
Philips outsources much of its TV production to China, not just because of low labor costs but also because of the country's strong supply chain, Mr. van Houten noted. Even so, he said, "If you're just at the low end of the market, you are in much more trouble."
Sony, which makes 75 percent of the picture-tube sets it sells in the United States in its plants in Mexico, announced in October that it would lay off 13 percent of its employees throughout the company over three years, end picture-tube manufacturing in Japan and create a joint venture with Samsung of Korea to make LCD screens.
Sony does not make televisions in China, but "it may be necessary to use China in the future," president of Sony Electronics. Hideki Komiyama, said. "We need a lot of manufacturing flexibility to meet our requirements."
In the long run, every segment of the television business will be affected by continuing price competition. "Making a transition from standard picture-tube sets to rear-projection and flat panels lets you run for cover. But it is only a matter of time before that business feels similar pricing pressures," said Ms. Levitas of IDC.
Indeed, over the next few years the TV manufacturing business is likely to fragment further, with large companies concentrating on the high-end market while ceding the lower end of the business to obscure Asian companies that license better-known brand names. Just recently, a Taiwan-based company announced that it would sell LCD televisions under the Westinghouse name.
The domestic industry received some relief late last month when the Commerce Department imposed tariffs ranging from 28 to 46 percent of the wholesale price on Chinese-made televisions with screens 20 inches or larger. The department found that Chinese manufacturers were dumping sets below cost on the American market. The dumping charges were brought by the International Brotherhood of Electrical Workers, the Industrial Division of the Communications Workers of America and Five Rivers Electronic Innovations, the last American-owned television manufacturing plant, operating in Greeneville, Tenn.
To survive, Five Rivers, which makes sets for companies like Zenith and Sharp, has switched the bulk of its output from lower-priced sets to expensive high-definition televisions and rear-projection models using microdisplay technology. But even at the high end of the market, pricing pressure is strong.
"One customer said that we would lose our contract if we couldn't lower our price by $100," the president of Five Rivers, Tom Hopson, said. "We couldn't, and we lost the contract.
"An executive from China told me that our country's future role is only as a distribution service center, not a manufacturer," Mr. Hopson said. "I hope he's not right."