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By | Faultline 16th July 2009 11:17

Anti-trust bomb falls on LCD market

More EU probes could follow

Analysis In all probability the anti-trust bomb that landed on Philips and LG Displays desk this week, courtesy of the European Union, is unlikely to be the only one dropped by the European Commission in this recession.

In order to engage in price fixing, LG, the global market leader in small LCD displays, must have entered into price floor agreements with other companies, not just its shareholder Philips. These other companies are likely to have been in receipt of a statement of objections from the Commission, too, back in May when it sent them. Philips and LG have revealed the proceedings against them, and we would expect other companies to have to do the same over the coming weeks.

But Flash memory, also the subject of recent price hikes (we wonder how that can have happened in the current market) and LCD TV screens - which were never the subject of previous investigations, such as the one in the US - have both been in a savage glut, but have somehow avoided the price crashes of other semiconductors. LCD TVs panels have fallen 7% in revenue terms while other technology economies have fallen a further 8% to 12% beyond that. However some plants claim to have put workers on short time and have slowed outputs.

Don't be hugely surprised if the two major Korean electronics companies - LG and Samsung - and all their partners, come under increasing scrutiny either throughout this recession, or after it, over these supposedly commodity areas.

The new objection from the European Commission may, or may not, be similar to the one in the US which resolved itself last year with $580m of fines. This was for price fixing on screens for devices made for, among others, Apple, Dell, and Motorola. The implication in that case was that iPods and handsets, and perhaps a few of the smaller laptops, suffered in having their LCD panels artificially price managed for a period of something like 5 years, dating back to 2001. The fines were agreed in November last and the great bulk - $400m - was paid by LG.

Price fixing is something of an infection. Once you see how easy it is, you get addicted to it. Say, for instance, there are three majors operating in a market. All it takes is for one middle manager, someone who prepares all the bids for his company, to arrange to see his two counterparts in the other companies, over a beer. “We won‟t bid any less than $X for panels, he says, you can bid $X and keep your existing big customers, and we can bid $X for our existing customers – for new customers we can only bid $X as our last final bid. Agreed?”

No money needs to change hands, all the three players need to do is try the new pricing. If the floor holds and no-one breaks cover and undercuts it, they all simply make more money and the individuals make more commission and their bosses just have to not look too hard. Eventually they meet when the market is fixed and say, “We no longer have a need to fix the price any more, but…” and they are either tempted or not - based on how greedy they are and how frightened they are of getting caught - to continue or go back to the bad old days of flat out competition.

Price fixing happens at times in the market when it is really competitive, when there are fewer margin points possible to shave off a commodity line and when the stakes are really, really high.

It's tough to prove. Most of the prices that LCD panels are bought for are secret, and to reveal them to anyone means that customers can lose their most favoured nation deal. The only people that might smell a rat are the buyers that have heard that prices should be falling, or anyone smart enough to count up the outputs the current factories can produce and work out if there is a glut or not, such as an analyst. Even that's tough in a world where the prices of LCD panels are naturally volatile. Prices are generally falling as outputs go up, but demand is rising rapidly, and a big 80 inch TV set takes up more panel capacity in fewer orders.

Just take the shift to touch screens. Obviously the layers that need to go on top of the screens to make them touch sensitive are additional, but the actual screen sizes go up from maybe 2 inches diagonally, to over 4 inches, doubling physical screen space on anything up to 1 billion devices. It's not just touch screen devices, but screens on all phone classes which are going up in size. That is probably about to happen again, if Apple revolutionizes the touch screen platform with an oversized iPod Touch, as is largely expected, and if the world then copies it.

When you start to build a factory you have no idea of when high yields will come on stream or how much payback you will get for that yield. You gamble. And if three or four players in a market all gamble at once, they can quadruple capacity in a rush, all released at the same time as those factories are completed within months of each other. The outcome is a glut.

Samsung has been very cagey and has not said whether it is in receipt of a Commission statement of objections. But if this time the price fixing is more recent – for instance relating to the current recession – rather than buried in the rubble of 2001 onwards, then there may be some interesting issues surrounding TV sets. And you could not fix the prices on TV set LCD displays without involving the market leader, which is the S-LCD joint venture that Samsung has with Sony.

These two are the global market leaders with 22% and 15% each, so a total of 37% between them. You might argue that they supply their own LCDs so they could get around any price fixing that went on in the market, ignore it or bypass it, but of course if that were the case, their end products would be so much cheaper than everyone else's, because other brands would be suffering from the price fix, which would invariably hold pricing high. In which case their market shares would have rocketed. Sony's market share DID rocket, but Samsung's remained the same – inconclusive.

While we have no privileged information and we are not pointing a finger at anyone, the market conditions for suddenly commodity items are not good, and in order to prevent disaster, people are capable of doing desperate things. We saw in the dotcom era, and the temptation that Enron and others were under to “fix” performances which market conditions created, using scams. So even if it is not these companies which are caught up in it, there will at least be more investigations and someone's head will be in a noose at some stage: that much can be guaranteed. Then $580 million will be the least of anybody's worries.

Another complication of the LCD market is Sony's desire to be its own boss in LCD manufacture or at least not to be partnered with its biggest TV rival. In February it said it would pick up part of the $3.5bn cost of building out Sharp's new 10th generation LCD TV panel plant. Sony would be happier to be in partnership with a smaller Japanese rival, rather than a larger Korean one.

Sharp is probably now fourth in LCD TV manufacture after Sony and the two Koreans, but continued investment in more LCD plants by all of these players has to drive prices down further and further.

The Sharp-Sony plant will make panels which are 2.8 metres by 3 metres, and support TV sets up to 60 inch formats at least, and be up and running in 2010. Similarly Panasonic, so long the global leader in plasma panel TV sets, which are becoming more and more unfashionable by the minute, is going to make a similar investment in a factory, in partnership with Toshiba and Hitachi.

Sharp was one of the other companies to be fined in the US case, but says that this time it has not received a statement of objection from the EU. The other company fined in the previous US action was Chunghwa Picture Tubes, from Taiwan.

All of this is without the investment that will soon begin to chase OLED screens, whether these be AMOLEDs where Samsung leads or one of the other variants of flat TV screens which can go to fractions of a millimetre thick, offer far better contrasts, use other LEDs which also don't require backlit screens and which use a fraction of the power of an LCD screen.

So far there are few details of the case. The Commission has confirmed it sent Statement of Objections to a number of players in May 2009. While it goes a long way to making it clear in its announcement that this is early days, and nothing is yet proven, this is really not the case. A statement of objections is sent after the area has been fully investigated - which implies that perhaps it does relate to events prior to the current recession.

It usually takes around 18 months for a Statement of Objections to be raised after a complaint is received, if one ever is raised. The next step is to listen to what the target companies have to say about it, usually followed by a fine and then an appeal to the European Court of First Instance.

The announcement did talk about thin, flat monitors used for example in mobile phones, televisions, computers, digital watches and pocket calculators – clearly mentioning TV sets, something that was not part of the US case.

The Philips involvement may well be as a shareholder, not as an active player in the price fixing, in that it will have benefited because until recently it was a shareholder of LG Display. In fact Philips may even be one of the complainants, since it buys in screens from LG Display. “It is important to note that the statement of objections does not allege that Philips was directly involved in the infringement and that we received the statement of objections as a former shareholder of LG Display,” said a Philips spokesman in one European newspaper.

Copyright © 2009, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

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