Japan’s Sanyo Electric Co. Ltd. (OTC ADR: SANYY) has become the latest company to become part of the industry cadre that’s buying liquid-crystal display (LCD) panels from Sharp Corp. (OTC ADR: SHCAY) for use in flat-panel televisions.

Sanyo said it started procuring the display panels from Sharp in April, and would use them for the LCD TVs it’s producing for the North American market. And while Sanyo said it will keep buying LCD panels from other suppliers, too, the company also said that it’s in talks with Sharp about a program in which the two would jointly develop a line of kitchen appliances.

With its consumer-electronics business struggling, Sanyo has refocused itself strategically, betting its future on solar cells and rechargeable batteries, Reuters reported.

"We hope to expand our business by having a mutually complementary relationship with Sharp," Sanyo spokeswoman Yuko Hosaka told Reuters. "Sharp’s strength in LCD [panels] is part of that."

Sanyo sold about 1 million LCD TVs in North America in the business year that ended March 31.

Sharp’s Growing List of LCD Disciples

Sharp, which markets the Aquos line of LCD TVs, is the world’s third-largest maker of the flat-panel televisions, trailing South Korea’s Samsung Electronics Co. Ltd. (PINK: SSNLF) and Japanese consumer-electronics giant Sony Corp. (ADR: SNE). But Sharp has been trying to boost its market position and establish a consistent market for its LCD panels among rival flat-panel TV producers even as it invests to elevate its own productive capacity, Reuters reported.

As Money Morning reported back in February, Sony agreed to take a one-third stake in a $3.5 billion LCD plant that Sharp is building in Japan to meet the soaring worldwide demand for flat-screen television sets.

It plans to transform the LCD plant – which would be the world’s largest – into a joint venture: The Osaka-based Sharp will take a 66% stake, while Sony will take the remaining 34%.

While the companies would not say how much Sony would invest for its stake, Japan’s Nikkei newspaper said that Sony agreed to pony up $926 million, Bloomberg News reported. The factory will start production by March 2010.

While Samsung, Sony and Sharp rank one, two and three on the list of the world’s largest makers of LCD TVs, Japan’s Matsushita Electric Industrial Co. Ltd. – maker of the Panasonic brand – controls one-third of the plasma TV market.

Sanyo joins Sony, Toshiba Corp. (OTC: TOSBF) and Pioneer Corp (PINK: PNCOF) as companies that have all said that they plan to buy LCD panels from Sharp. But the Sony-Sharp alliance is an especially aggressive example of the linkups taking place among Japan’s flat-panel TV producers.

If it seems odd to have competitors buying and selling such a key component as an LCD screen, consider the challenges Sharp and its rivals face:

• They need to have a big-enough supply of the liquid-crystal display (LCD) panels to meet the accelerating demand.
• But these companies also need to keep their capital investments low at a time when flat panel displays are becoming a commodity, meaning the actual component prices can be expected to undergo the same steep declines as computer memory chips or memory drives.

In the face of burgeoning demand and tight supplies for LCD panels, companies are choosing different routes to fill their needs. Late last year, Toshiba decided to buy LCD panels from Sharp. But earlier this month, Panasonic-maker Matsushita said it would spend $2.8 billion to build an LCD plant of its own.

"Sony needed an extra source of panels because the large-size LCD TV market is growing faster than it had expected. As Sony expands TV production, it is natural to seek to diversify panel sources," Park Hyun, an analyst at Prudential Investment & Securities, said during a recent interview. "Sony is likely to continue the partnership with Samsung … therefore Sony’s diversification strategy won’t have a negative implication for
the alliance with Samsung."

For Sharp, the linkup with Sony serves as a hedge at a time when aggressive industry investments in panel-production capacity is boosting worries about a supply glut down the road.

"The problem will be 2010 and 2011," said Shinko Securities Co. Ltd. (PINK: SKSTF) analyst Hideki Watanabe. "Just when TV demand is likely peaking, Sharp’s 10th-generation plant will come on-stream, and so will Matsushita’s new factory [causing the potential glut. But this] deal gives Sharp good risk hedging."

The new Sharp-Sony factory would utilize the so-called "10th-generation" glass substrates, which can yield more panels than earlier-generation, smaller glass substrates, improving production efficiency and helping both Sharp and Sony offer flat-panel TVs at competitive market prices.

The new factory will produce LCD screens that have a diagonal reach of as much as 60 inches. Sony will receive a third of the factory’s output, with the rest going to Sharp. Initially, the monthly output will be 36,000 glass substrates, although the ultimate monthly output will reach 72,000 glass substrates.

The substrates are the output from which the flat panels can be cut.

Besides the flat-TV panels, the factory will also make so-called "LCD Modules," which are flat-panel displays equipped with such components as a backlight unit and LCD driver chips.

"For Sharp, this is a positive step since it means a major buyer that would keep the 10th-generation factory busy," Kazuharu Miura, a Daiwa Institute of Research analyst, told Reuters.

The venture reduces Sony’s reliance on Samsung – currently its main supplier – at a time when LCD TV sales are projected to rise 29% this year, easily outpacing demand growth for rivaling plasma-based TV sets. Both UBS AG (UBS) and Lehman Brothers Holdings Inc. (LEH) predict that the LCD shortage will persist throughout the year.

Worldwide sales of LCD TV are expected to reach 155 million units by 2012, double the 74.8 million sold in 2007, predicts the Japan Electronics and Information Technology Association. Demand for plasma TVs will likely reach 25 million units in 2012, 119% more than the 11.4 million sold last year, the JEITA said.

Sony is expecting to sell 10 million of its Bravia LCD TVs in the current fiscal year, which ends March 31. The suggested list price of the TVs range from about $500 to $1,600, according to the Sony Web site.

The company also has a second LCD joint venture – this one with Samsung – known as S-LCD.

Sanyo Back in the Black

Years ago, Sanyo was one of the premium names in consumer electronics. Its car stereos, for instance, were known for their terrific sound qualities, as well as their reliability. Lately, however, all the company has done is lose money.

In late December, Japanese regulators accused the company of faking earnings reports, and Sanyo ended up amending its financial statements going all the way back to 2000 to show larger losses than it had previously reported. Ultimately, in fact, Sanyo would book nearly $40 million more in losses than it had already reported for the period April 2000 to Sept. 2007. Sanyo officials denied any intentional subterfuge, claiming the error was due to weak internal controls and a poor corporate understanding of relevant accounting rules.

That was a hard sell, especially since it had only been a few months before – also in 2007 – when Sanyo admitted that it had falsified its fiscal 2003 earnings by reporting a profit instead of the loss it actually incurred.

Needless to say, these financial misadventures left Sanyo in a much-weakened state. For that reason, Sanyo ended up raising capital to bulk up its balance sheet before 2007 came to a close. U.S. investment-banking giant Goldman Sachs Group Inc. (GS) headlined a group of investors that ponied up $2.8 billion in cash so that Sanyo could stay solvent, BetaNews.com reported.

Even that wasn’t enough, though, and Sanyo ultimately was forced to sell some assets. It first divested its wireless-telephone retail unit, and followed that up by selling its stake in Sanyo Electric Credit Co.

Finally, in January, Sanyo announced plans to sell its mobile phone business to Japan’s Kyocera Corp. (ADR: KYO) for roughly $375 million.

On Thursday, Sanyo announced that it had returned to profitability for the first time in four years, aided greatly by strong sales of its rechargeable batteries and digital cameras. The company also said that its profit would escalate substantially this year, essentially because of the sale of its cellular phone business unit.

Long-term, analysts believe its foray into solar technology and rechargeable batteries – both still-nascent growth businesses with a lot of promise – will prove profitable. It’s investing heavily in both those ventures.

But its traditional home-electronics business – which includes such product lines as cooking appliances and refrigerators – remains mired in the red. A linkup with Sharp could well provide some answers – or at least some respite from the river of red ink flowing from those ventures.

News and Related Story Links:

• Reuters:
  Sanyo buys LCDs from Sharp.

• Money Morning News Analysis:
  Sharp and Sony Link up in Joint Venture to Make LCD Panels for Burgeoning Flat Panel TV Market.

• Reuters:
  Sony to own one-third of Sharp’s $3.5 billion LCD plant.

• Sharp USA:
  Widescreen Aquos televisions.

• Reuters:
  Global flat TV demand to double by 2012: Japan Group.

• Bloomberg News:
  Sony Will Invest in Sharp Factory to Meet LCD Demand.