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Chinese Flat-screen TV Earnings Lag
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China's fledging flat-screen television market is expected to continue its robust growth next year with twice the number expected to be shipped out of factories compared to this year.

However, squeezed profit margins resulting from constant price wars are likely to further challenge domestic makers, making it harder to compete with foreign rivals.

Urban consumers are increasingly embracing liquid crystal displays (LCDs) or plasma display panels (PDPs), according to the latest report by the State Information Centre (SIC).

The number of flat-screen TVs leaving plants in China will reach 4.2 million units next year, more than double the figure this year, estimated at 1.9 million units, said the report.

Among the total, 3 million will be LCDs and the remaining 1.2 million will be PDPs.

"Consumers' purchasing power for flat-screen TVs will be further released next year, with urban residents in big cities still leading the trend," said Cai Ying, head of SIC's marketing information division yesterday.

The flat-screen TV market officially began in 2004 but took off in the past 12 months. It saw a 375 percent growth rate year-on-year, according to SIC's report.

However, results from an earlier SIC report indicate that LCDs and PDPs jointly command only 16.7 percent of the TV market in the country's big cities, well below the global average of more than half of the TV market, said Cai. He pointed out that compared with the nearly-quadruple growth last year, the expected double shipments in 2006 "mean somewhat slower growth, suggesting domestic makers' difficulty in making a profit."

Although domestic brands contributed 75.3 percent and 45.3 percent of the total shipment of LCDs and PDPs respectively, their corresponding shares in terms of revenue were 65.1 percent and 34.7 percent respectively, said the report.

The soaring demand of China's flat-screen TV market in 2005 was largely stimulated by domestic makers' constant price-cutting, as well as the market's organic growth, noted Cai.

"They wanted to grab a share of the market, and offering more competitive prices was the only thing they could do," he said. "As a result, profit margins dropped dramatically."

Domestic players saw profit margins of more than 50 percent a year ago but only 3 percent in August, and a trivial 1 percent in October, said the report.

"Price wars will remain the most important weapon for domestic makers next year," said Cai. "But I am highly sceptical as to whether they can afford to do so."

Prices of domestic-made flat-screen TVs have significantly reduced in the past six months, and "to make things worse, consumers prefer holding onto their money, anticipating a big promotion soon; that often results in a sharp shipment decline."

In contrast, foreign brands from Europe, South Korea and Japan are able to maintain a considerable profit margin in part thanks to their control of panel products.

The panel is the most critical and valuable part of a flat-screen TV. Costing around 18 billion yuan (US$2.2 billion) for each production line, it is beyond the financial reach of domestic players. Now, panel products mainly come from Japan.

"Chinese makers will probably join hands to find a way out, and government support in funding is important," noted Cai.

While the average price of domestic LCD TVs is 8,750 yuan (US$1,080) per unit, the figure for imported foreign brands in China is 13,709 (US$1,692) per unit. Globally the average price is 9,920 yuan (US$1,125) per unit.

"That means profit margins of the foreign brands in China is even higher than what they have in the global market," noted Cai.

Foreign brands, in particular Japanese makers, began joining in price wars this year.

"We foresee domestic players will experience greater pressure," said Cai.

Nine major domestic TV makers announced a few months ago that they would jointly develop core technologies in flat-screen TVs including panels. No substantial moves have been taken so far.

The report also said distribution channels, especially major retailers in household electric appliances such as Gome and Dazhong, will have a much bigger say in the industry next year.

(China Daily December 27, 2005)

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