January 21, 2007 / 11:07 AM / 13 years ago

Boom time for gadget giants, but where is profit?

LAS VEGAS (Reuters) - Business for consumer electronics makers hasn’t looked this good in two decades, with revenue rising well over 10 percent in major world markets, yet gadget makers are still turning in meager profits.

LG technicians prepare a display for their new Super Multi Blue Blu-ray disc rewriter and HD DVD rom drive at 2007 International Consumer Electronics Show (CES) in Las Vegas, Nevada January 7, 2007. REUTERS/Steve Marcus

Consumer electronics producers, gathered at the sector’s top trade show this week, the Consumer Electronics Show, rarely talk about their bottom line — a sore point in the industry that is often blamed on ferocious competition.

Sales of U.S. consumer electronics rose 13 percent in 2006 to $145 billion, the Consumer Electronics Association said, while Western Europeans spent 18 percent more on consumer electronics in the first half of 2006 according to GfK, a market research group.

But operating profit margins at many major vendors remain below savings interest rates, despite soaring demand for flat TVs, mobile phones, music players, navigation systems and other gadgets.

Profit margins as a percentage of full-year revenue at Sony (6758.T), Samsung (005930.KS), Panasonic, Sharp (6753.T), Philips (PHG.AS) and LG Electronics (066570.KS) have not been above 6 percent for the last few years, according to data compiled from company earnings releases by Reuters.

The average profit margins those six companies derive from consumer electronics products hovered around 2 percent over the three to 10 years for which data is available.

“There’s a tremendous amount of supply and competition,” said Jon Erensen, a sector analyst at market research group Gartner.

Sharp, which pioneered the LCD TV market, was one the best performers with a margin of 5.4 percent in its 2004 fiscal year, 5.9 percent in 2005 and 5.8 percent in fiscal 2006.

Panasonic’s parent company Matsushita (6752.T), which is leading in flat plasma TVs, hit 6.3 percent in the July-to-September quarter, but only achieved a 5.3 percent operating margin in its TV and video division over the first six months of its fiscal year to end-March 2007.

VIRTUOUS CYCLE

Analysts said the industry has landed in a virtuous cycle where higher volumes are needed for better economies of scale and lower costs, which lead to more competitive prices. That drives consumer demand, but also causes oversupply, which leads to low margins.

“The only way to get those units to sell is by cutting prices. A lot of companies are very aggressive in their pricing,” Erensen said.

How aggressive was evident this last holiday season, with retail prices of flat TVs falling some 30 percent to 40 percent from the previous year’s levels.

Market researcher DisplaySearch found that the price per square-meter of a flat TV panel has declined 25 percent per year since 2003. Top flat-panel makers, such as LG.Philips LCD (034220.KS) (LPL.N) and Samsung, are struggling to make a profit.

To look at it from yet another angle: shipments of LCD TVs are forecast to rise 57 percent to 62.5 million units in 2007, according to iSuppli, but revenue from these televisions will only rise 20 percent.

“Prices have fallen by more than 40 percent. There’s oversupply of panels,” Michael Ahn, president and CEO of LG Electronics USA, said. The silver lining is that it cannot continue, he said in an interview on the sidelines of CES.

“For the time being, nobody makes a reasonable margin. However, when only a few players survive, they can have a reasonable profit. I believe several players will disappear,” he said, adding he hopes the shake-out will happen within the next three to five years.

PHONE MAKERS ALSO HURTING

The pain has also started to seep into the mobile phone segment, which has become the biggest consumer electronics category with close to 1 billion units of annual sales and more than $130 billion of wholesale turnover.

Third-quarter margins for the top four handset makers were between 11.6 percent and 14.7 percent, according to company data compiled by Reuters. Nokia NOK1V.HE (NOK.N), with 13-percent operating profit margin, has seen its margin fall slowly but surely from well over 20 percent just a few years ago.

Motorola MOT.N warned last week that its profits had fallen dramatically in the fourth quarter, which analysts quickly connected to a global price war.

Consultant Ben Wood at CCS Insight in Britain said low margins come with the territory of large global players. Unlike specialized producers such as Bang & Olufsen BOb.CO from Denmark the big producers cannot restrict themselves to attractive niches to achieve economies of scale.

Vendors agree.

“It’s a huge problem for the high-volume technology companies. You can be Rolex, but then you can’t be an $80 billion dollar company,” said Chris Deering, the former president of Sony Europe.

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