Monday, February 23, 2004		Feature

Predicament for electronic producers as prices plummet
N. Layne & D. Wakabayashi

A promoter demonstrates a 3G video mobile phone at a Hutchison service centre in Hong Kong. Hutchison Whampoa Ltd, looking to spur interest in a third-generation mobile phone service it began recently in its home town, launched a lower-cost package aimed at Hong Kong’s mass market, which would undercut rival 2G services and may lead to another mobile price war.

THE biggest surge in demand for consumer electronics since the early days of the PC hinges on a group of products being called the "3-Ds": digital cameras, DVD recorders and display panels for flat televisions.

But now there is a fourth "D" to this growth story.

Declining, as in prices.

As manufacturers ramp up production to meet overwhelming and still growing demand, the flood of supply is already pushing down prices and threatening profits.

So consumer electronics firms from Europe’s Philips Electronics NV to Japan’s Matsushita Electric Industrial Co Ltd are scrambling to differentiate their products and make them more efficiently to withstand the slide.

Matsushita, the maker of Panasonic brand electronics, has said that price declines in the October-December quarter cut into its operating income by 73.1 billion yen ($ 692 million) — 3.6 per cent of its total sales and three times its net profit of 24.2 billion yen.

"It took seven or eight years for VCR prices to halve and we were able to reap enough profits during that period, but now with DVDs that decline has been cut to two years," Managing Director Tetsuya Kawakami told a news conference.

The slide in prices is worldwide and encouraged by the entry of new players such as computer makers into consumer electronics.

Dell Inc and Gateway Inc are winning plaudits in the United States for products including flat-screen televisions and DVD players, while Japan’s Casio Computer Co Ltd is stealing digital camera market share from bigger rivals.

In recent weeks, top electronics manufacturers Sony Corp, Fuji Photo Film and Nikon Corp all complained about a profit squeeze from falling prices for digital cameras. Analysts expect the trend to gather speed.

"Prices fell about 15 per cent both last year and in 2002, but I think the price declines will accelerate this year," says UBS analyst Ryohei Takahashi. "And we could see average selling prices drop by 20 per cent or even more this year."

The average price of a digital camera fell to 26,000 yen ($ 247) in Japan in the October-December quarter, according to UBS.

Back to drawing board

Digital camera makers are now going back to the drawing board to hammer out new strategies for mending profit margins.

Olympus Corp has watched its global market share fall one or two percentage points over the past year to around 15 per cent. It is now rethinking its product line-up.

"We intend to respond and secure volumes and profit by launching new models. In the compact segment that means products with value-added features," Olympus Director and Chief Corporate Officer Hideo Yamada said this month.

Olympus is also planning to boost its line of digital single lens reflex (SLR) cameras, high-priced models with interchangeable lenses marketed to the serious camera user, as are Nikon and Canon Inc.

"The companies best equipped to avoid heavy price falls are those with digital SLRs. That’s Canon, Olympus and Nikon," says UBS’s Takahashi. "Sony would be next in line given its brand power, but even its premium is starting to fade."

It is not just Japanese manufacturers that are searching for ways to squeeze the last bit of profit out of their products by adding pricey functions or targeting the high-end.

Philips is seeking to differentiate its liquid crystal display (LCD) TVs with software enhancements to improve pictures and features such as the ability to change the screen’s background lighting to complement a room’s decor.

Efficiency

The unrelenting fall in prices has made manufacturing efficiency even more of a must as companies jostle for market share.

For example, strong holiday sales of Sony’s new series of DVD recorders lifted its share of that market in Japan to around 30 per cent by the end of December from single digit levels only a few months earlier. The need to lower costs is putting the squeeze on suppliers throughout Asia.