Economic Analysis Of Flat Panel Tv Market In Indiaeconomic Analysis Of Flat Panel Tv Market In India

APPENDIX – 1 Title:

Case Study: Flat Panel TV market analysis

Subject

:

Economic Framework for Business Decisions

Level / Semester

:

Level1 / Trimester II

Programme

:

MBA (Part Time)

Subject Tutor

:

Xavier D’Souza

Name of Student

:

Rajaseelan Manavalan

Student’s Registration Number

:

WBPT/ F09 /07

Date of Submission

:

12th April 2009

Word Count

:

1902 words

Word Limit

:

2000 words.

APPENDIX – 2 Student Name

Rajaseelan Manavalan

Registration Number

WBPT/F09/07

Date for submission of the Assignment. The cover page is in the correct format as indicated in the Guidelines of writing Assignments Have done a complete spell – check of the assignment Have done a complete word count for the assignment Does the table of contents include numbers? Are the pages numbered correctly? Are the figures numbered correctly? Are the tables / charts numbered correctly? Are the captions for the tables and charts proper? Are the references / bibliography listed in the assignment? Are the references cited adequately in the text? Are the references in the text in the proper format as indicated in the “Guidelines to writing Assignments” A soft copy of the assignment has been enclosed with the assignment All material written in this assignment is my own and I have not used any material, content or information of others claiming them to be mine. Wherever materials have been used, proper citation has been done in the text. I am fully aware of the rules and regulations governing the Plagiarism applicable to the dissertation and should at any point of time my work is suspected / investigated and established to have plagiarized some other work. Am aware of the consequences if such cases are detected and have read the Student Handbook in detail. Signature of the student

Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No Yes / No

Yes / No

Date

(________________)

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Case Study: Flat Panel TV market analysis 12th April 2009

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Table of Contents 1 Problem Statement............................................................................................................6 2 Introduction.......................................................................................................................6 3 Market for different FPTV technologies...........................................................................7 3.1 Worldwide Revenue Forecasts for all TV products...................................................7 3.2 Sales forecast of various FPTVs in US Market (Isuppli)..........................................7 3.3 Market Share across major FPTV firms....................................................................8 4 Impact of Government Regulation....................................................................................9 4.1 Probable intention of government policies................................................................9 4.2 Business of flat panel TV production......................................................................10 4.3 Example calculation for an individual firm production decision.............................10 4.4 Likely results of government policy........................................................................11 5 Nature of Flat Panel TV market......................................................................................12 5.1 Typical characteristics of FPTV market...................................................................12 6 Impact of current economic developments on FPTV market.........................................13 7 Conclusion......................................................................................................................14 Appendix I – References / Bibliography...........................................................................15

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LIST OF FIGURES Figure 1: Revised TV Revenues Estimates..........................................................................7 Figure 2: Sales of various FPTV in US Market...................................................................7

LIST OF TABLES Table 1: LCD TV market share of firms in 2008.................................................................8 Table 2: Comparison of Flat Panel TVs between India and USA.......................................9

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1 Problem Statement An analysis of the Flat Panel Television market based on • recent economic developments • role of government • Market structures

2 Introduction Flat panel TV (FPTV) products are classified as consumer lifestyle products. The market for FPTV has evolved from the older CRT1 TV market. The FPTVs have been steadily gaining market share over the last decade with advancement in various flat panel display technologies resulting in lower cost of production, lower total cost of ownership 2, better space utilization and larger display sizes. The FPTV producers3 are mostly based out of east Asia because majority of its components4 are mass produced there resulting in economies of scale5. Initially, most of the consumers of FPTV were in the United States, Europe and other rich nations as the cost of the product was a significant barrier and the high price could create demand only in affluent countries where more households were willing and able to buy them. With the recent decrease in pricing of these products and increase in purchasing power in other nations, the demand for FPTVs has been increasing in the rest of the world especially China.

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CRT stands for Cathode Ray Tubes technology (the predecessor technology for televisions) Total cost of ownership includes maintenance costs and power consumption costs besides other product costs. 3 Firms that produce the flat panel television sets 4 Primary components of FPTV are molded plastic, Flat Panel Display Screens & various other electronic components. 5 Economies of scale is where cheaper component costs because of mass scale production (supply) and reduced transportation cost for assembling results in lower cost of product. 2

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3 Market for different FPTV technologies Some of the popular types of flat panel TV products are: 1. LCD6 2. PDP7 3. MD RP8 4. OLED9

3.1 Worldwide Revenue Forecasts for all TV products The Figure 1 data shows that between years 2006 and 2008, the total TV market grew by about 10%, the sales of CRT and CRT RP10 fell whereas the sales of FPTV increased. This data shows that constituents of flat-panel TVs are substituting the older CRT based panels. Figure 1: Revised TV Revenues Estimates11

3.2 Sales forecast of various FPTVs in US Market (Isuppli) Figure 2: Sales of various FPTV in US Market12 6

LCD: Liquid Crystal Display Panel PDP: Plasma Display Panel 8 MD RP: Micro Display Rear Projection Panel 9 OLED: Optical Light Emitting Diode Panel 10 CRT RP: CRT Rear Projection TV 11 Source: http://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/LCD_TV_Revenue_Expected_to_Fall_Y Y_for_the_1st_Time.asp 12 Source for Figure 2 is from isuppli.com paper titled “Despite Economic Concerns, US Flat Panel TV market shows strength” by Riddhi Patel, Isuppli 2009. 7

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3.3 Market Share across major FPTV firms The Table 1 data shows about 61% of market share of the LCT market is held by the five largest firms. Besides these there are other firms that compete on Plasma market also. This indicates that there are many firms that produce for this market. The spread of market share also indicates that no single firm has more than 20% of market share and there is a fairly well distributed market share across the leading firms. We can infer that there is lot of competition and pricing pressures. Table 1: LCD TV market share13 of firms in 200814

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For the market share, multiple Flat Panel technologies like OLED, LCD, Plasma & MD-RP have been assumed to be summed up. 14 Source of data: http://www.eetasia.com/ART_8800554624_480700_NT_c7c606b8.HTM

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4 Impact of Government Regulation15 Since most of the components and product assemblies for the flat-panel TVs are East Asia based, they are treated as import goods in India. The Indian government imposes steep import tariffs on these goods and the duties are higher if the entire product is imported and relatively lower if components are imported and then assembled in India. Table 2: Comparison of Flat Panel TVs between India and USA

S.No.

Company & Model

1. 2. 3. 4. 5. 6. 7. 8.

Sony LCD 46” Z series 17 Sony LCD 40” Z series Panasonic Plasma 42” PX/V8018 Panasonic Plasma 50” PX/V80 Samsung LCD 40” 6 series19 Samsung LCD 46” 6 series LG LCD 47”LG6020 LG LCD 42” LG60

Listed price in USA $1999 $1900 $1000 $1400 $1700 $2100 $2239 $1499

Listed price in India16 $4878 $3678 $1160 $2000 $2100 $3100 $2960 $1840

4.1 Probable intention of government policies This government policy of tariffs is intended to generate more demand in domestic input market consumption (labor supply). Thereby increase the household income leading to increase in output market consumption (goods supply). The ostensible intention of the policy was to generate market for labor and goods in the input and output markets of India respectively.

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The scope of study of Government regulation impact on Flat Panel TVs is restricted to India. Price in India is converted to US$ assuming a conversion rate of Rs50/$. 17 Sony Prices sourced from http://www.sony.co.in/productcategory/tvp-lcd-tv & http://www.sonystyle.com/webapp/wcs/stores/servlet/CategoryDisplay?catalogId=10551&storeId=10151& langId=-1&categoryId=563 18 Panasonic prices sourced from http://www2.panasonic.com/consumer-electronics/shop/Televisions/AllVIERA-Flat-Panel-HDTVs.list.103502_11002_7000000000000005702 & http://www.samsung.com/us/consumer/detail/detail.do?group=televisions&type=televisions&subtype=lcdt v&model_cd=LN46A650A1FXZA 19 Samsung prices sourced from http://www.samsung.com/in/consumer/subtype/subtype.do?group=television&type=television&subtype=lc dtv & http://www.priceindia.in/tv/panasonic-plasma-tv/ 20 LG prices are sourced from vendors where price might have some distortion because of discounts. Sources: http://www.priceindia.in/tv/lg-lcd-tv-price/ & http://www.amazon.com/gp/offerlisting/B0016P3W8K/ref=asc_df_B0016P3W8K759473?ie=UTF8&condition=new&tag=cnet-ce-mp20&creative=380345&creativeASIN=B0016P3W8K&linkCode=asm 16

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4.2 Business of flat panel TV production Since there are very limited capabilities of firms producing all components for the FPTV locally, most of the components end up being imported even if firms decide to assemble FPTVs in India. The demand for FPTVs in India is constrained by the purchasing power of the households. In the comparisons shown in Table 2 between India & USA, the prices of FPTV are higher in the range of 30% to 140%. Considering that the per-capita income21 of households in USA is about 70 times that of India. This lowered the pricepoint in the demand curve for the FPTV market in India to a much lower level than what would have been desirable for firms producing in India to price lower. This lower price would in turn reduce number of firms and total supply quantity.

4.3 Example calculation for an individual firm production decision To find out whether government policy induces firms to produce in India, we work out an example. Taking an example for calculating a firms cost of production in India and another East Asian country (let’s say China). ATC22(IN) = AVC23(IN) + AFC24(IN). AFC(IN) = labour_cost(IN) + infrastructure_cost(IN) + sales cost(IN) AVC(IN) = component_import_tariffs + freight charges + cost_of_inventories + opportunity_cost_of_lost_time_in_shipment + other_variable_costs(IN) Assuming China to be the reference East Asian country doing the same production, the input components availability being geographically co-located has negligible cost in freight charges. Also the supply-chain could lead to very lean inventory. ATC(CN) = AVC(CN) + AFC(CN). AFC(CN) = labour_cost(CN) + infrastructure_cost(CN) + sales cost(CN). AVC(CN) = other_variable_costs(CN).

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Per-Capita Income source: http://www.success-and-culture.net/articles/percapitaincome.shtml ATC: Average Total Cost 23 AVC: Average Variable Cost 24 AFC: Average Fixed Cost 22

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In current scenario given the infrastructure bottlenecks, it would be safe to assume: infrastructure_cost(IN) >> infrastructure_cost(CN). Also assuming: sales cost(IN) = sales cost(CN) other_variable_costs(IN) = other_variable_costs(CN). For the Indian government policy to be sustainable, the following equation should be important for firm’s decision to produce in India. Equation 1: competitive cost of firm to produce in two nations

ATC(IN) <= ATC(CN). Extrapolating equations, Labour_cost(IN) = labour_cost(CN) – num_of_labours*(1100-530)25 = labour_cost(CN) – num_of_labours*$570

Equation 2: cost analysis between two countries

Infrastructure_cost(IN) + cost_of_inventories + num_of_labour*$570

component_import_tariffs + freight charges + opportunity_cost_of_lost_time_in_shipment <=

This Equation 2 indicates that for a firm to be economically profitable by producing in India, it needs to match the costs in the “left hand side” to be less than the comparative labor costs26

4.4 Likely results of government policy The above extrapolation is based on some assumptions lead to the belief that it is very unlikely that the firms in India would be able to match the prices from firms in China. Hence it is very likely that despite import tariffs, firms would rather import flat-panel TVs than produce it locally in India. Then the import tariffs essentially pull up the prices of the flat-panel TVs bringing down its demand in India also bringing down the output markets supply.

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Assuming the per-capita income for reference calculations. Perceived advantage of lower cost of labor in India.

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5 Nature of Flat Panel TV market 5.1 Typical characteristics of FPTV market  Number of firms: Based on Table 1, there are many firms producing flat panel TVs.  Competition: Based on Table 1, the firms are unable to form a cartel as there is significant competition for market share and no single firm has more than 20% of the total market share  Product Differentiation: Based on Table 2 and Figure 1, each firm has some differentiation in offerings based on technology substitutes (LCD, Plasma etc.)  There are price differences based on technologies among firms but variations are limited and there is a quality competition Significantly higher prices could put the firm out of business  There is no significant barrier as older leaders in this market have been upstaged by newer entrants and there have been change in market share of all firms in the last decade. New entrants from China point to no significant entry barrier.  Entry barriers for buyers: Since the target buyers are all households, the only entry barrier for increasing demand is to reduce cost Based on the above characteristics, the flat-panel TV market should belong to the monopolistic competition structure.

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6 Impact of current economic developments on FPTV market The flat panel TV market has been predominantly dominated by firms producing two technologies: LCD & Plasma. Based on Figure 1, the sales of LCD TVs have consistently increased between years 2006 to 2008. In the same period, the sales of Plasma TVs have consistently decreased though the comparative costs are lesser27. The data for period between years 2008 and 2009, both the revenues from LCD TV and Plasma TV are set to fall by more than 20%. This fall in revenues is despite the price of the product falling. The fall in price of product should is expected to increase demand but this is not the case for the current year. This anomaly could be attributed to the global downturn triggered by the financial crisis of 2008-09. The current crisis has resulted in dramatically reduced credit availability, resulting in lesser consumption. The reduction in consumption has lead to decline in the output market produce. The decline in output market produce has resulted in decline in input market for labor. This in-turn has resulted in lesser income of households leading to further reduction in Flat Panel TV consumption. This vicious cycle is responsible for the significant fall in revenues of flat panel TVs despite the reduction in prices. The plasma TV demand is shrinking28 where two out of three Japanese manufacturers are exiting from the market. There is also consolidation29 in the LCD market based on cost structures.

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Refer Table 2: Comparison of Flat Panel TVs between India and USA Source: http://www.isuppli.com/MarketWatchDetail.aspx?ID=338 29 Philips exits US LCD TV market: http://www.isuppli.com/ProductDetail.aspx?ID=28099 , Sony exiting MD-RP business: https://www.businessspectator.com.au/bs.nsf/Article/Sony-to-quit-rear-projection-TVmarket-AA94C?OpenDocument , 28

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7 Conclusion The study shows that the flat panel television market cannot be controlled by government policy to boost its input and output markets unless it takes care of cost of infrastructure and ecosystem of component supplies for the flat panel TVs. Since it is a monopolistic competitive market, every change in technology can shift demand from Plasma to LCD on some of the display sizes30. Also currently Plasma firms do not address HDTV requirements that increase sales of LCD TV currently and it needs to address those capabilities to retain demand for its products. Besides these being monopolistic competitive market, there are possibilities of new entrants31 that could change the Supply curve resulting in other flat panel TV firms exiting the business.

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Current sweet spot of 42” where Plasma has price advantages over LCD is fast eroding because of lower LCD panel prices. 31 OLED technology prices can come down below marginal costs to increase their sales & market share.

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Appendix I – References / Bibliography Principles of Economics (Sixth Edition) by Karl E.Case and Ray C. Fair http://www.businessweek.com/ap/financialnews/D9717DL00.htm http://english.peopledaily.com.cn/90001/90778/90858/90863/6608920.html http://www.businessweek.com/globalbiz/content/feb2009/gb20090212_424440.htm http://www.businessweek.com/ap/financialnews/D96S73181.htm http://www.pcmag.com/article2/0,2817,2339890,00.asp http://www.isuppli.com/Abstract/ABSTRACT%20%20US%20TV%20Market%20Tracker%202009.pdf http://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/LCD_TV_Revenue_Ex pected_to_Fall_YY_for_the_1st_Time.asp

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