Why LCD panels are being sold at a loss

In response to part of my post about upcoming price swings for flat panel televisions, a few readers asked this question: "Why would LCD manufacturers sell their equipment at a loss?"

There are two major business factors at work here, so let me try to outline them in brief:

First is the age-old issue of "economies of scale." In many businesses, especially the electronics industry, the more you produce of something, the cheaper it (often) becomes to produce in the future. This is why LCD TV prices have fallen by hundreds, if not thousands, of dollars in the last few years. Manufacturing plants get more efficient by the month, so it makes sense for them to produce as much as possible in order to keep "getting better" at it and refining the process. In that regard, it may make sense to take a small loss on today's panels in the hopes of cutting production costs next quarter. Of course then you have to deal with prices falling again, so it's kind of an endless, vicious circle that feeds on itself, but that's why computers today cost about 10 percent of what they cost 20 years ago.

The second, and more important, issue is actually far simpler: LCD panel companies want to build or maintain a business relationship with the TV manufacturers, and so they are willing to price them below cost temporarily. This is one reason why retail stores have sales that price some products below cost. Once you start shopping at one store, you're more likely to continue shopping there in the future, even if prices creep up a bit down the line. Once a glass manufacturer is "in the door" at a big TV company, the force of momentum is likely to keep them there, so they undercut the competition to get the account. Similarly, if your glass company is already doing business with Sony and you know that some hungry, second-tier glass company is offering panels on deep discount, you will likely be willing to take a temporary loss in order to keep Sony from switching to the other guys. (I spoke to DisplaySearch, which originated the research, about this issue and the company indicated that this was indeed the biggest reason for the current pricing issues.)

It's important to note that in all cases, LCD panel makers are not trying to lose money on panels but rather look at this as a temporary issue that will hopefully rectify itself quickly. (Ideally the hope is that some of your competitors will be driven out of business along the way, too, giving you more breathing room on prices.) As DisplaySearch notes, this is all actually "a typical part of the downturn in the crystal cycle."

Hope that helps.