Abstract

Economy of Scale Key to Survival

2006 has been a key year for the large LCD monitor OEM and ODM makers. Starting in 2005, a number of profit-oriented contract manufacturers that could not tolerate thin profit margins abandoned the contract production business. Such companies include Philips and some Japanese brands like Sony, which announced in 2006 that it would stop selling LCD monitor products. Other examples include Korean companies such as Samsung, which left the contract production business. Samsung outsourced production of medium and small models to Taiwan contract manufacturers. As many large companies shift their outsourcing strategies, the competitive gap separating first-, second-, and third-tier manufacturers has continued to widen. This competitive gap mainly manifests itself in production capacity, cost advantages and stability in orders.

First-tier manufacturers have used the advantage of large-scale output volume to control prices, capture more orders and continue to expand production capacity. The big manufacturers continue to grow, dampening the operational performance of medium and small manufacturers. These smaller manufacturers will find it difficult to maintain operations and may be forced to exit the industry, seek acquisitions or be acquired.

Concentration in the Industry to Intensify

From the viewpoint of global LCD monitor brands, even though the industry faces shrinking profits, and medium and small contract manufacturers are already unable to keep up, major brands still want to keep their bargaining power. Five major contract manufacturers are therefore likely to remain in the industry. Given this trend, giants in the global LCD monitor contracting business are likely to emerge quickly as a result of mergers.

Korea's Samsung and LGE have already shifted toward development of their own brands and cast off their contract production business. BenQ in August 2006 announced its branded and contract production businesses would be separated, and the group's contract production business would become part of the IMS (Integrated Manufacturing Services) department. Moreover, the company's manufacturing department is planned in 2007 to become an independent manufacturing company and seek strategic partnerships.

In this battle for cost and size, gains in economies of scale from mergers will lead to the emergence of giants in the contract manufacturing segment. As the global IT hardware contract manufacturing industry reaches maturity, one characteristic of competition will be to use advantages of volume production to maintain dominance, despite thin profit margins.