Consumers are hot for LCDs, but are investors?

That thesis will be put to the test Thursday, when LG.Philips LCD, one of the world's largest manufacturers of flat panels for displays, will offer stock to American investors.

Although flat-panel demand is surging, the public offering is still dicey because of trends that may not be understood by casual investors. Hot technologies often suffer from severe boom-and-bust cycles, making it difficult for manufacturers to accurately time expansion and contraction plans.

Indeed, the LCD market may already be cooling off, at least for investments. "The market was stronger six months ago," said Vinita Jakhanwal, a senior analyst with research firm iSuppli. "An IPO would have done a lot better then."

Executives from South Korea-based LG.Philips LCD, which makes large LCD sheets that are cut into smaller panels for use in a wide range of products, were not available for comment and are restricted by the Securities and Exchange Commission from making statements about its business that may affect its IPO.

The company, a joint venture of LG Electronics and Royal Philips Electronics, and the overall LCD market have been bitten by the fickle buying habits of consumers, and by the exuberance of competitors who don't want to be left out of a still-young market that brings in billions of dollars. LG.Philips LCD offered shares at the low end of its price range at $15 per share and cut its funding efforts in half in less than two months, from $2 billion to $1 billion. The drastic reduction highlights the volatility of a fast-growing business that requires billions of dollars to enter but will be a valuable market for those who survive.

The LCD panel market brought in worldwide revenue of $35.7 billion in 2003, according to research firm iSuppli. Still higher revenue is expected this year--$47 billion, an increase of 32 percent from last year.

"Volume production (of LCD panels) is still in its infancy and very volatile, but it will get less so as the years go by," said Chris Connery, vice president of research firm DisplaySearch.

Price fluctuations of flat-panel displays are expected to smooth out and lead to cheaper flat-panel televisions and monitors. But for now, the battle to more accurately balance supply and demand has near-term effects on manufacturers and consumers.

For example, late last year, manufacturers dedicated more fabrication lines to the production of large LCD panels, anticipating high consumer demand for large screen televisions. This took away from the production of flat-panel desktop monitors and eventually led to a supply shortage. The result was a 16 percent increase in the cost of 15-inch monitors in the second quarter, from $300 to $349, according to DisplaySearch.

And the high demand for large screen televisions? Analysts say shipments were high but did not provide manufacturers' hoped-for cure for the market's volatility.

"LCD TVs were supposed to be the panacea, but (shipments) did not live up to expectations," Jakhanwal said.

PC makers, such as Dell, Gateway and Hewlett-Packard, were even lured into what was perceived to be a hot market.

LCD TVs tune out
Worldwide shipments of 1.76 million LCD TVs were forecast for the first three months of the year, but the actual number came in around 1.68 million, according to iSuppli. Analysts blamed high prices.

A 30-inch LCD TV from a top maker such as Sony or Sharp costs about $4,000. By comparison, a similarly thin, 42-inch plasma TV was about $500 less, according to iSuppli.

There is an oversupply of panels in the market now, which is expected to lead to lower prices for the rest of the year. That's something Cho Yong-duk, a vice president of Samsung's LCD division, told reporters last week at the launch of Samsung Electronics and Sony's $1.8 billion LCD joint venture, S-LCD. (Notably, the Samsung executive made his remarks just a week before shares of rival LG.Philips LCD were to be sold to the public.)

The oversupply is expected to continue as more manufacturers open new plants so they can spit out bigger and bigger panels at higher volumes just to stay in line with competitors.

While overestimating the popularity of large screen sizes may have played a big role in softening the market, those large panels are likely to play a still bigger role in the future.

This year, revenue from flat-panel desktop monitors will account for 41 percent of the overall market, and notebooks will account for 22 percent, according to DisplaySearch. LCD-based televisions will account for 11 percent. By 2008, revenue from desktop monitors will make up only 31 percent and notebooks, 16 percent. LCD televisions will provide 33 percent of the market, DisplaySearch forecasts.

Compound annual growth of revenue from televisions will rise 62 percent from 2003 to 2008, while desktop monitors' revenue will grow 13 percent, the research firm predicts.

The share of worldwide TV shipments that are LCD models will grow from 5 percent this year to 18 percent in 2008, according to iSuppli. The total TV market is expected to jump from about 168 million units to roughly 203 million units during that period.

Bigger plants mean bigger changes
LCD TVs have the allure of bigger margins for manufacturers, and that, coupled with the added flexibility and efficiency of next-generation fabrication plants, will lead to major changes in the business.

New fabrication plants will dramatically boost the production of panels in the market, because they take bigger and bigger sheets of mother glass--the foundation of flat panels--to produce more panels. The latest plant from S-LCD, a leading-edge, Generation 7 plant, takes a sheet of mother glass about 74 inches by 87 inches and cuts it into forty 17-inch panels or six 46-inch panels. About 60,000 sheets of mother glass will be cut per month in that plant, according to a Samsung executive.

Older facilities, such as Generation 5 plants, take a sheet of mother glass about 43 inches by 51 inches and cut it into a dozen 17-inch panels or two 46-inch panels. Up to 120,000 sheets of mother glass can be cut depending on the characteristics of the plant, according to analysts.

Many of the larger plants, such as Generation 6 and 7, are being built to more efficiently produce LCD TVs, which are bigger and have higher margins than desktop monitors.

Analysts estimate that LCD-based televisions carry margins in the mid- to high teens, depending on the size and age of the plant. Those margins will be hard to maintain, so there's been an emphasis on building large plants, which can more efficiently produce large panels.

The proceeds of LG.Philips LCD's IPO will go toward building next-generation fabrication plants. Meanwhile, Sony is looking to be able to react to demand faster than other TV makers by building an LCD TV assembly plant in South Korea.

In the short term, this is likely to exacerbate the oversupply problem--at least until demand picks up.

"It absolutely makes sense to expand capacity, but in the short term, it will be tricky for some folks," Connery said. He expects the oversupply to continue through the rest of the year and all of 2005, with a rebound in 2006.

Falling panel prices and the increasing influence of LCD-based televisions will help the industry in the long term, said Jim Sanduski, vice president of visual display product marketing for Samsung Electronics America.

"As the TV business becomes a bigger part of the LCD panel output, I think we'll be able to manage the price volatility," he said.

Sanduski added that the consumer electronics market is more stable than the IT industry, which suffered two years of contraction in 2001 and 2002. Annual sales of televisions in the United States have been consistent at about 30 million units, he said.

Samsung and its competitors will have to show staying power to reap the rewards from that consistency.