The $1.6bn acquisition of a 50% interest in South Korea’s LG LCD, the active matrix liquid crystal display business of the LG conglomerate, by Royal Philips Electronics of the Netherlands is important for a number of reasons.
On one level it represents the first significant foray by a non- Asian company into the thin film transistor liquid crystal display (TFT LCD) business, which until now has been dominated by Japanese and Korean companies, with Taiwan also gearing up to be a major international player.
At present, Japanese companies have a global market share of 70% with Korean companies owning the remaining 30%. But several new plants are under construction in Taiwan, and the island’s official Institute of Information Industry (III) predicts the number of production lines will increase from the current five to about 15 by 2005. It said this year when new facilities come on line, Taiwan is expected to account for 4% of total world production but by 2005 its global market share is expected to be 32% compared to an estimated 35% for Japanese makers.
Many Asian companies see TFT LCDs as the next semiconductor, a technology which will soon become ubiquitous, spreading from its current main use for notebook computer displays to desktop displays, smart handheld devices, automotive displays and wall mounted television. It is the most rapidly growing area of display technologies, worth an estimated $8bn last year and expected to be worth in the region of $25bn by 2005 according to III projections.
And many of the leaders in the new display technology are also top semiconductor makers. LG LCD was formed at the beginning of this year from the LCD divisions of LG Electronics and LG Semiconductor. It was stripped out of LG Semicon before the merger with Hyundai Electronics Industries took place. LG LCD had sales of approximately $500m in 1998 but expects that to rise to about $1.8bn this year and continue increasing rapidly.
Hyundai, in turn, has its own TFT LCD operation which is rapidly expanding and recently ordered $200m worth of production equipment from Japan. Like LG, it has separated out its display business from its semiconductor operations and is also looking for a foreign partner.
Samsung is also at the leading edge and is currently upgrading its own facilities to increase production of 13.3-inch monitors from 320,000 per month to 460,000. For now, the application is confined to notebooks but we anticipate that wall-mounted display devices will be mass-produced and new production lines will have to open up, a Samsung official said.
Most of Japan’s top electronics firms with substantial semiconductor operations have also got into the active matrix LCD business.
For a European company to break into this Asian monopoly is a major achievement. The deal not only puts Philips into an immediately profitable leading position in the active matrix LCD industry, but equally important guarantees itself a supply of the displays at a time when there is a worldwide shortage, despite the new production facilities which are rapidly coming online.
Philips itself has a long history in display technology, in particular through its Cathode Ray Tube (CRT) capabilities for television. It has also been involved in the research and development of other types of display such as light emitting polymer (LEP) which may one day be a rival to TFT technology. While the new joint-venture company, which is expected to be launched in August, will start off as a manufacturing and technology enterprise it may in time develop into a full joint venture incorporating all the display activities of both parents.
At the signing of the agreement with LG, Gerard Kleisterlee, chief executive of Philips Components, said: The partnership with LG considerably strengthens Philips Components’ position as a leading global supplier in the overall display components market. It represents a significant step for Philips Flat Display Systems and the digital strategy of our product division. Through the deal we will build on our leadership in CRTs, creating the foundations for continued leadership in the future of displays.
The venture will certainly be a world leader in TFT-LCD technology and one of LG’s three existing plants in Kumi, South Korea, will be converted and upgraded to manufacture 680mm x 880mm mother glass, the largest on the international market, with each of the glass substrates yielding six 15-inch TFT-LCD panels.
For LG Group the deal represents the latest plank in a successful restructuring strategy which has allowed it to sell off several businesses, most notably LG Semicon to rival conglomerate Hyundai. This allows it to concentrate on a few profitable core businesses with excellent growth potential, such as telecommunications and electronics, while at the same time reducing its massive debt. While it is giving up 50% of the business, it is getting a large payment which is badly needed right now as well as a partner which can help the business grow far more quickly than it could have managed by itself.
From the point of view of the opening up of the Korean economy to the outside world the deal is also important. It represents the single largest foreign investment in a South Korean company and could be just the first of a series of mega deals.
Major investments by foreign firms in key sectors of the Korean economy are being encouraged by the government as part of a package of measures aimed at revitalizing the economy as a whole and in particular as part of the restructuring of the major chaebol or conglomerates.
The government has announced it will, jointly with local governments, offer tax breaks and other incentives to foreign companies involved in mergers with and acquisitions of Korean firms, even to the extent of supporting hostile takeover bids.
It is also working to eradicate lingering public hostility toward foreign advances into the local market while fostering a better business environment through the simplification of the bureaucracy and customs procedures and enhancing the flexibility of the labor market.
