Few people realise that when they buy a television from a well-known Japanese brand, the product they take home may have been put together by an entirely different company.
South Korean companies such as Samsung and LG still make the vast majority of their products. But TVs from Japanese brands such as Sony and Toshiba are increasingly likely to be assembled by groups such as Wistron or Hon Hai, the Taiwanese contract manufacturer that is better known by its trade name Foxconn and has been in the spotlight recently after a spate of worker suicides at its flagship Shenzhen plant in southern China.
About 40 per cent of the 25m TVs Sony expects to sell in the fiscal year to March 2011 are likely to be outsourced, up from about 20 per cent in previous years.
This rise, which comes after Sony recently sold its TV production plants in Slovakia and Mexico to Hon Hai, underpins a sharp increase in TV outsourcing across the industry.
About a quarter of the 170m flat-screen TVs expected to be shipped globally this year will be made by a contract manufacturer, says Maxwell Chang, manager of the consumer electronic research centre at Topology Research in Taiwan.
The move towards outsourcing has attracted new entrants into a traditionally low-margin, stable industry dominated by little-known companies such as Hong Kong and Singapore-listed TPV technology and Amtran, which primarily manufactures for low-cost TV brand Vizio.
But other companies looking to expand their TV operations include Taiwanese notebook manufacturer Compal and Wistron, the former contract manufacturing arm of Acer.
Hon Hai – which makes PCs, handsets and MP3 players and is the world’s largest contract manufacturer – has moved most aggressively into the TV market by orchestrating a $5bn merger between flat-panel maker Chi Mei and its Innolux unit.
“Even though margins are low, [these companies] are used to the high volume, low margin business model, and the margins are at least higher than notebook manufacturing,” says Jenny Lai, analyst at CLSA.
Mr Chang says Hon Hai’s move is also driven by the company’s need to find a new product to satisfy its perennial goal of growing revenue by 30 per cent.
For Hon Hai, its growth appears to have come at a cost. Last week the company announced it would raise worker’s salaries by an average of 20 per cent as it struggles to respond to a recent spate of suicides that has tarnished Hon Hai’s image. The crisis has raised broader questions about whether Hon Hai’s model of low-cost contract manufacturing is sustainable in the long term.
“Hon Hai has wanted to move into TVs for a long time, but their technology in making LCD TVs was not good enough,” says Mr Chang of Topology. The Sony acquisitions, which would also include some of Sony’s LCD technology, was aimed at addressing that shortcoming.
For the Japanese, outsourcing more of their mass market TV production makes sense because it is hard for them to beat the Taiwanese on cost.
Outsourcing also helps Japanese brands to reduce their exposure to fluctuations in the yen, as most Taiwanese assemblers price in dollars, and means they do not lose money on idle factories when demand is low.
Analysts and executives say the bigger prize for Taiwanese contract manufacturers would be the many local Chinese brands that make up 70 per cent of domestic sales in the world’s biggest TV market.
Yet this is likely to remain out of reach for now as Chinese brands can assemble TVs at even lower costs than the Taiwanese.
“Chinese companies don’t have research and development capabilities, they don’t have strong brands, they don’t have new technologies, all they have is manufacturing,” says Lu Renbo, deputy secretary-general at the China Electronic Chamber of Commerce. “They are good at manufacturing, their manufacturing cost is low and the scale is big. If they outsource that, how are they going to survive? I don’t think that’s an option for the next 50 years.”
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