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Sony's joint venture with Samsung underlines Korean giant's prowess
By Yuri Kageyama, The Associated Press, Tuesday, December 06, 2005

TANGJEONG, South Korea -- One look at Samsung's new joint venture with Sony to make liquid crystal displays is enough to see how the tables have turned for these two Asian electronics giants.

The production part of the plant -- totally run by Samsung Electronics Co. Ltd. -- towers like a futuristic city over vineyards and farms, a sprawling complex of glass and steel that includes high-rise dormitories, tennis courts, a cafeteria, exercise gym and clinic for the facility's 4,000 workers.

Sony has but a tiny presence in the 50-50 joint venture, called S-LCD Corp. -- just 20 people tucked away in offices in a corner of the complex. They mainly oversee coordination with Sony's Tokyo headquarters.

Sony's reliance on Samsung to produce the display panels shows how far behind the Japanese company, once the industry's king, has fallen in the booming flat-panel TV market -- and why it has been bleeding red ink while the South Korean company's profits soar.

The two companies are normally rivals, but Sony invested $1 billion in the joint venture because it did not produce its own liquid-crystal display panels, and desperately needed to meet the surging demand for flat-panel TVs, a product that Sony officials concede they never expected to become popular so quickly.

Thanks to this factory in southern South Korea, though, Sony can obtain 30,000 sheets a month of "mother glass" for liquid crystal displays -- half of the plant's capacity and enough for 360,000 32-inch TVs a month. The other half goes to Samsung.

Sheets of "mother glass" are cut into various sized liquid-crystal display panels. In LCDs, a backlight shines through panels and liquid crystal to produce colors and images, instead of the massive cathode-ray tubes in old-style TV sets.

For decades, Sony, founded in 1946, was synonymous with quality electronics, building its reputation with its Walkman portable players and PlayStation video-game machines.

But in recent years, Sony has lost its footing. It's taken an embarrassing beating in portable music players to the iPod from Apple Computer Inc., besides falling behind on flat-panel TVs. Earlier this month, Apple announced that iPod's market share in Japan climbed to 60 percent.

Samsung, set up in 1969, has emerged as a global leader, thanks partly to a more focused strategy.

It now dominates key electronics sectors, ranking No. 1 in global market share in memory chips, and vies with South Korean rival LG Philips LCD Co. for the top spot among manufacturers of liquid crystal displays.

Sony Corp.'s sales have slipped while Samsung's have grown to the point where now they are about the same: In the July-September quarter, they each reported $14 billion in sales.

Although Sony and Samsung are both tiny players in portable digital music players compared to iPod's domination, Samsung has an edge at least in providing memory chips to Apple.

Samsung's 13 percent share in the global cell phone market trails only Nokia and Motorola, while Sony Ericsson, Sony's joint venture with the Swedish company, controls just 7 percent and ranks fifth after LG Electronics, according to IDC, which tracks such data.

"Samsung is scary," says Toshiaki Kitaoka, a management expert who has recently written a book about Samsung's threat to Japan.

Kitaoka believes that Sony and other Japanese electronics makers must show more decisive leadership to focus on key products, take a global strategy and become more nimble. If not, he said they could decline in the same way their U.S. counterparts like General Electric and RCA lost to the challenge of the Japanese, including Sony, three decades ago.

"Japanese management is too content and tends to be arrogant about technological superiority," Mr. Kitaoka said, adding that Samsung has already matched or surpassed much of Japan's technology.

Other ambitious Korean companies are challenging the Japanese. Hyundai Motor Co. is going neck-and-neck in global vehicle sales against No. 8 Honda Motor Co., and steelmaker Posco recently became the first Korean company listed on the Tokyo Stock Exchange.

But analysts say Samsung has been smart because it focused on specific hit products in shaping a global strategy, whereas Sony has sprawled into all kinds of businesses, including movies, music, video games and even banking.

Also, Samsung has a more authoritative management style, allowing it to move more quickly, while at Sony, once famous for charismatic chief executives like Akio Morita, the decision-making process has become slower and more consensus-driven.

Even Sony officials are dazzled by Samsung's quickness.

"Samsung has speedy decision-making and it acts very quickly. This applies to all Japanese companies, not only to Sony, but everything is fully considered to create a detailed business plan first," said Keiji Nakazawa, a Sony executive that serves as S-LCD chief financial officer.

John Yang, equity analyst with Standard & Poor's in Tokyo, says Sony was smart to swallow its pride and pursue the LCD joint venture with Samsung. LCD production requires a lot of money and Sony needed to quickly try to catch up, he said.

"Unless you can make your own panels, unless you can procure the panels in-house, you're dead meat," Mr. Yang said.

Sony is forecasting an $84 million loss for the fiscal year through March 31, 2006, as sales remain flat and product prices drop. Competition from lesser-name Chinese brands are eroding prices, hitting Samsung as well as Sony.

In contrast, Samsung racked up $1.8 billion in net profit in the July-September quarter. That was down 30 percent from the same period a year earlier, as prices came down for Samsung's mainstay businesses -- chips, mobile phones and liquid crystal displays. But it was still dramatically better than the $246 million profit Sony recorded over the same period.

Samsung has also just been stung with a $300 million fine in the United States, where it pleaded guilty Wednesday to conspiring to fix prices of memory chips.

But that's not slowing it down.

Earlier this month, Samsung and Sony announced an additional $84 million in investment together to boost production by 15,000 at S-LCD Corp. to 75,000 panels a month from July 2006.

Although Sony faces an uphill battle, Mr. Yang says the company could bounce back.

"The whole race has just begun for Sony. There are many, many risk factors," he says. "It's way too early to count the chickens."