Market Insight

Samsung ramp up for the year

January 23, 2012

Tom Morrod Tom Morrod Research Director | Consumer, Displays, Media, Security & Telecoms

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Korean consumer electronics vendor Samsung has been in the press a lot these past few weeks. Starting with a surprise counter-launch to LG's 55-inch OLED TV at CES, and with releases expected from both brands before year-end, Samsung has since announced a major investment round of $41bn this year, and has separately planned to integrate the open-source Linux platform Tizen into its in-house Bada operating system. Finally, Sony's recent retraction from and buyout of its displays manufacturing JV has further confirmed the rise of Korean giants - LG and Samsung - in the crucial panel manufacturing industry; however, even if this exit notionally reduces direct competition to Sharp in Japan, and CMI and AUO in Taiwan, Samsung's and LG's preponderance in the displays market will continue to be driven by their internal, consumer-TV brands.

Samsung's string of announcements has kicked off a year where consolidation and restructuring in the consumer electronics industry (both in vendors and supply chain) is likely to be of paramount importance. Falling margins in the TV industry have already forced several brands out of the market (often into licensing agreements, as per JVC and Thomson), into joint-ventures (as per Philips) or to further outsource to OEMs to control costs (as per Sony). The introduction and success of tablets, still dominated by Apple's iPad, has been a key multiscreen and multidevice content-consumption catalyst. In the handset market, the astronomic growth of the smartphone segment has not only catapulted Google, via its Android OS, firmly into a lead player, but highlighted the value of OS control as a means for manufacturers to retain costs and increase margins.

From this point of view, some of Samsung's announcements take on a new strategic insight. In particular, the release of an OLED 55-inch consumer TV later this year, in conjunction with voice and gesture control and an advanced cross-platform search, look very much like spoilers for other launches or expected launches. Coming just weeks after LG's 55-inch OLED announcement, the Korean conglomerates show how tightly their R&D facilities may actually be interlinked. Similarly, voice control pre-empts an industry expected Apple TV set - expected at the end of 2012 or early 2013 - which would probably be sold heavily on Siri integration, and gesture control via a rumoured Microsoft set-top box product utilising Kinect technology. Finally, with notably fewer mentions of Google TV at CES, in stark contrast to virtually every other brand, an update of integrated search functions and the announced integration of its proprietary Bada OS (currently used on all internet-enabled TVs) with open-source Tizen - supported by Intel - suggests that the fourth, large, industry-wide cross-device OS might be in the works this year following Apple iOS, Google's Android and Microsoft Windows 8.

These initiatives will all have their cost though, and a $41bn pot for acquisitions, hiring 26,000 new staff and splurging $26bn on capital expenditure for new production facilities is already allocated. Of the $26bn in CAPEX, $21bn will be spent in the consumer electronics industry: $6.5bn on chipsets; $5.6bn on memory; $6bn on OLED displays; and the remaining $3bn on batteries, LCD displays and LED lighting. With this kind of cash no wonder rumours abound for a substantial takeover, such as the strongly denied opportunity to buy the beleaguered RIM. While industry conjecture can inflate share prices, there is sound reasoning why such a move is unlikely - the integration of a further OS (Blackberry) alongside currently supported Android (Google), Bada (in-house), Windows 8 (Microsoft) and now Tizen (open-source) seems to be a bridge too far. Certainly the potential to buy in WebOS within a larger deal to acquire Hewlett-Packard's personal computing business last year was rejected, although it is not clear how much of this was directly due to considerations regarding WebOS.

Finally, Sony's pulling out of a long-standing joint-venture with Samsung's display business reveals some of the economics in the deeply troubled panel manufacturing market. Low-prices for TV sets have suppressed the Japanese firm's sales volumes, making it increasingly difficult for it to make up the promised volumes within the joint-venture. As panel supply expanded during the last five year bubble for global TV set shipments, up 26 per cent from 2006, there was widespread oversupply and price competition, making panel manufacturing a commodity industry with intense competition. This is likely to necessitate consolidation over the next few years, favouring vendors with scale efficiencies and those happy to make very low margins. But vendors internalising their supply chain do have one key benefit - being able to tightly integrate strategic product planning with manufacturing technology. This has been most visible in Sharp's large format 60-, 70- and 80-inch TVs, provided by their in-house 10th generation fabrication facilities (large format glass), creating a new market currently only available to Sharp. LG and Samsung look likely to take a similar lead in OLED production, while 4K resolution screens, another technology being pushed initially by Sharp and Toshiba using a CMI panel, may also provide a route to high-end differentiation. When compared to the competition who are buying in panels from the open market, in-house supply chains may offer the kind of technical product differentiation required to retain any kind of margin in this increasingly cutthroat world.


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