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Electronics Production | August 23, 2007

$25b LCD-TV industry up for grabs for EMS-firms

Ask consumers which companies make LCD-TVs and they might respond with names like Vizio, Syntax-Brillian and Westinghouse. But in reality, LCD-TVs sold by these and many other brands are actually made by companies whose names few consumers have ever heard of—contract manufacturers like Amtran Technology Co Ltd., Hon Hai Precision Industry Co. Ltd. and TPV Technology Ltd.
Indeed, contract manufacturers are getting into the LCD-TV market in a big way, with their global
production of such sets expected to rise by more than a factor of five by 2011, iSuppli Corp. predicts.

The two types of companies in the contract manufacturing business, the Original Design Manufacturers (ODMs) and the Electronics Manufacturing Services (EMS) providers, together areexpected to produce 61.8 million LCD-TVs in 2011, up from 12 million in 2006. By 2011,thesecontract manufacturers will produce more than one out of every three LCD-TVs madeworldwide.

The attached figure presents iSuppli's forecast of LCD-TV unit production broken down by in-house and outsourced LCD-TV manufacturing for the period of 2006 through 2011.

The ODMs and EMS providers have been lured to the LCD-TV market by its triple-digit increases
in shipments during the last few years. LCD-TV unit shipments expanded by 103.9 percent in 2006 and will rise at a Compound Annual Growth Rate (CAGR) of 31.7 percent for the five-year period of 2006 through 2011.

“The contract-manufacturing industry is playing an essential role in the development of the LCD-TV market," said Jeffrey Wu, analyst, EMS and ODM services for iSuppli. “ODM and EMS companies are enabling brand names to enter the market and compete, conducting the essential behind-the-scenes tasks like manufacturing and supply chain management."

LCD-TV brands also gain other advantages from outsourcing production, including improving
resource allocation, alleviating their inventory burden, avoiding regional tariffs and increasing asset flexibility.

Business opportunities for contract manufacturers:

LCD-TV outsourcing generated $8.9 billion in revenue in 2006 and is projected to grow to $25.2 billion in 2011, rising at a CAGR of 23.2 percent.

This huge revenue growth outlook has attracted the attention of a large number of Asian ODMs. There are more than 20 such ODMs serving LCD-TV OEMs, including global brands, regional brands and retail brands, making for a decentralized competitive landscape.

EMS providers, on the other hand, are just beginning to penetrate the market. iSuppli estimates that from a final-assembly shipment perspective, of all LCD TVs outsourced in 2006, only 6.8 percent were produced by EMS providers, with the remainder made by ODMs.

EMS providers' deployments and challenges:

During the last few years, leading EMS providers including Celestica, Elcoteq, Flextronics, Hon Hai and Jabil have invested significant resources in improving their competitive positions in the LCD-TV manufacturing industry to undertake tasks including:

- Providing board-level assembly services.
- Utilizing facilities in emerging markets such as Mexico and Eastern Europe to serve OEMs.
- Investing in the LCD panel business.
- Developing reference-design capabilities.
- Forming joint ventures with OEMs to build LCD TVs.

While these investments are paying off gradually, EMS providers still lag far behind their ODM peers in terms of LCD-TV shipments. Furthermore, a number of critical challenges are facing EMS providers, adding uncertainty to their endeavors in the LCD-TV manufacturing business. These challenges include:

- Pricing pressure from OEMs and eroding margins (gross margins are in the 8 percent range) at the ODM imply limited margin lift for EMS providers.

- Pricing fluctuations for LCD panels. Panels account for more than 60 percent of the total bill-of-materials costs of LCD TVs.

- Limited potential to leverage the vertically integrated supply chain due to tight control of material supply chains by a number of Japanese OEMs.

- Barriers to entry built by ODMs in the form of footprint expansions and product design and production knowledge accumulated through the learning curve.

iSuppli predicts that while EMS providers increasingly will catch up to ODMs in the LCD-TV market, ODMs will remain dominant in this space for the next few years.
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