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LAS VEGAS - Business for consumer electronics makers hasn't looked this good in two decades, with revenue rising well over 10 per cent in major world markets, yet gadget makers are still turning in meagre profits.
Consumer electronics producers, gathered at the sector's top trade show this week,
the Consumer Electronics Show, rarely talk about their bottom line -- a sore point in the industry that is often blamed on ferocious competition.
Sales of US consumer electronics rose 13 per cent in 2006 to US$145 billion ($210 billion), the Consumer Electronics Association said, while Western Europeans spent 18 per cent more on consumer electronics in the first half of 2006 according to GfK, a market research group.
But operating profit margins at many major vendors remain below savings interest rates, despite soaring demand for flat TVs, mobile phones, music players, navigation systems and other gadgets.
Profit margins as a percentage of full-year revenue at Sony, Samsung, Panasonic, Sharp, Philips and LG Electronics have not been above 6 per cent for the last few years, according to data compiled from company earnings releases by Reuters.
The average profit margins those six companies derive from consumer electronics products hovered around 2 per cent over the three to 10 years for which data is available.
"There's a tremendous amount of supply and competition," said Jon Erensen, a sector analyst at market research group Gartner.
Sharp, which pioneered the LCD TV market, was one the best performers with a margin of 5.4 per cent in its 2004 fiscal year, 5.9 per cent in 2005 and 5.8 per cent in fiscal 2006.
Panasonic's parent company Matsushita, which is leading in flat plasma TVs, hit 6.3 per cent in the July-to-September quarter, but only achieved a 5.3 per cent operating margin in its TV and video division over the first six months of its fiscal year to end-March 2007.
Virtuous cycle
Analysts said the industry has landed in a virtuous cycle where higher volumes are needed for better economies of scale and lower costs, which lead to more competitive prices. That drives consumer demand, but also causes oversupply, which leads to low margins.
"The only way to get those units to sell is by cutting prices. A lot of companies are very aggressive in their pricing," Erensen said.
How aggressive was evident this last holiday season, with retail prices of flat TVs falling some 30 per cent to 40 per cent from the previous year's levels.
Market researcher DisplaySearch found that the price per square-meter of a flat TV panel has declined 25 per cent per year since 2003. Top flat-panel makers, such as LG.Philips LCD and Samsung, are struggling to make a profit.
To look at it from yet another angle: shipments of LCD TVs are forecast to rise 57 per cent to 62.5 million units in 2007, according to iSuppli, but revenue from these televisions will only rise 20 per cent.
"Prices have fallen by more than 40 per cent. There's oversupply of panels," Michael Ahn, president and CEO of LG Electronics USA, said. The silver lining is that it cannot continue, he said in an interview on the sidelines of CES.
"For the time being, nobody makes a reasonable margin. However, when only a few players survive, they can have a reasonable profit. I believe several players will disappear," he said, adding he hopes the shake-out will happen within the next three to five years.
Phone makers also hurting
The pain has also started to seep into the mobile phone segment, which has become the biggest consumer electronics category with close to 1 billion units of annual sales and more than $130 billion of wholesale turnover.
Third-quarter margins for the top four handset makers were between 11.6 per cent and 14.7 per cent, according to company data compiled by Reuters. Nokia, with 13-per cent operating profit margin, has seen its margin fall slowly but surely from well over 20 per cent just a few years ago.
Motorola warned last week that its profits had fallen dramatically in the fourth quarter, which analysts quickly connected to a global price war.
Consultant Ben Wood at CCS Insight in Britain said low margins come with the territory of large global players. Unlike specialised producers such as Bang & Olufsen from Denmark the big producers cannot restrict themselves to attractive niches to achieve economies of scale.
Vendors agree.
"It's a huge problem for the high-volume technology companies. You can be Rolex, but then you can't be an $80 billion dollar company," said Chris Deering, the former president of Sony Europe.
- REUTERS
