Samsung, LG To Buy LCD Panels From Each Other

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Trading Markets: Samsung Electronics and LG Electronics, two of the largest chaebols in South Korea, agreed to purchase LCD panels from each other according to the Ministry of Knowledge Economy officials. Under the deal, Samsung will purchase at least 40,000 17-inch wide LCD monitor panels every month from LG Display. LG Electronics will purchase the same number of 22-inch wide LCD monitor panels from Samsung’s LCD division. The government has been strongly encouraging the two companies to work together to establish South Korea’s leadership in LCD manufacturing.

Will this arrangement really help South Korea to solidify its leadership in LCD manufacturing? Currently Samsung and LG Display are two of the world’s largest LCD manufacturer. According to DisplaySearch’s latest Monthly TFT LCD Shipment Database, LG Display captured 24.7-percent unit shipment market share in July followed by Samsung with 23.4-percent. Taiwan’s largest supplier, AU Optronics (AUO), took the third spot with a 16.8-percent share. In terms of area shipments Samsung took the top spot with a 26.8-percent share followed by LG Display with 25.1-percent. Taiwan’s Chi Mei Optoelectronics (CMO) edged out AUO with 15.7-percent versus 15.6-percent. If you combine LG Display and Samsung on a unit base the two captures 48.1-percent and based on area shipments that increases to 51.9-percent. South Korea is dominant. But will this 40,000 unit exchange between the two top suppliers help further solidify South Korea’s leadership? Read on for analysis regarding Rationale, Social Democracy, Korea Not Taiwan, Short End, Government Stay Out.

There is a certain reasoning that underpins the logic that South Korea’s Ministry of Knowledge Economy is using. Both LG Display and Samsung have been procuring LCD panels from Taiwan suppliers such as AUO and CMO when they could have supplied each other. LG Display and Samsung’s LCD fabrication plant designs are different enough that between the two of them they there are no holes in terms of LCD size. Instead of purchasing from Taiwan, Samsung could easily have purchased from LG Display. But in reality it isn’t that easy. Samsung and LG have been bitter rivals for a very long time. These two chaebols compete in everything from air conditioners, restaurants to LCDs. Many graduates from top universities end up working for one of the chaebols, but once you start your career in one you’ll most likely spend the rest of your life working there, if you’re lucky. Lifetime employment is not what it once used to be but for the few who have the diligence, the connections, the smarts, etc. it is still a possibility: once a Samsung, always a Samsung. So it is not unreasonable to assume that both Samsung and LG loathed the idea of working together. In fact it was this bitter rivalry that helped propel them to the top.

South Korea is a social democracy. The government wields immense power and can influence businesses, even chaebols, to do its will. At the top of the power pyramid is the president. No wonder there is so much corruption. The tried and true quote from John Emerich Dalberg Acton (a.k.a. Lord Acton) comes to light at the end of every presidential term: “Power tends to corrupt, and absolute power corrupts absolutely.” South Korea wants to be an economic power but the nation has significant challenges. There is Japan a fully-industrialized country with enormous wealth, technology and human capital just across the East Sea; North Korea borders the country and is a source of instability; and China is a dragon that has woken up from a long hibernation and is increasingly becoming powerful–politically and economically–and is challenging the world for hegemony. South Korea has established itself has leader in many areas thanks to a close relationship between the government and the chaebols that has led the country to capture top positions in ship building, semiconductors and LCDs.

From South Korea’s point of view the bitter rivalry between Samsung and LG has had a side effect of bolstering Taiwan’s LCD suppliers. When Samsung needs additional panels it has never gone to LG Display and vice versa. Instead Samsung would go to Taiwan and purchase LCD panels from AUO, CMO or others. The South Korean government wants to stop this.

It seems LG Display has gotten the short end of the bargain. The math is simple: 17-inch versus 22-inch. Samsung is selling to LG a significantly larger LCD panels that are worth more than the smaller 17-inch ones. Based on DisplaySearch’s latest PriceWise update a 5:4 17-inch LCD monitor panel costs an average of US$79. Compare that to a 22-inch wide LCD monitor panel that’s has an average price of US$105 in mid-August. The total dollar amount that LG Display will be purchasing from Samsung is US$4,200,000. And Samsung will be purchasing just US$3,160,000 worth. This isn’t exact science since a 17-inch wide LCD panel might have a slightly higher price compared to the squared one but it should show there will some difference in total sales generated by Samsung and LG Display with this deal. The more the two companies do business together the better off Samsung will be relative to LG Display. But maybe there is something else going on. Samsung might have manufactured too many 22-inch LCD panels while LG Display might have done the same thing with 17-inch wide LCD panels. And maybe Samsung will be giving LG Display a significant discount for taking 400,000 out of inventory.

LG Display has a single 17-inch LCD monitor panel: LM171WX3 with a 1440 x 900 resolution, 250 cd/m2 of brightness, 60-percent NTSC, 800:1 contrast ratio, 8ms response time and 160/160 viewing angles.

Personally, I am not in favor of government-induced business deals like this. If Samsung absolutely needs panels from LG Display the two companies will find a way to do business. If not, well, no business. That’s how it should be done. The government should stay out of brokering deals and instead concentrate on funding universities and research institutes so more engineers can develop the next-generation of displays and stay ahead of the game.

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