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TV Marriage

Behind Sony-Samsung Rivalry, An Unlikely Alliance Develops Electronics Giants Join Forces On Flat-Panel Technology; Move Prompts Complaints

Uniforms vs. Jackets and Ties

By PHRED DVORAK and EVAN RAMSTAD Staff Reporters of THE WALL STREET JOURNAL

January 3, 2006; Page A1

For years, Samsung Electronics Co.'s key mission was to unseat rival Sony Corp. as the world's top electronics maker. Long seen as a South Korean underdog, Samsung has in the past few years surpassed its Japanese rival in market capitalization, revenue and profits. In television sets, Sony's traditional stronghold, Samsung now jockeys with Sony and a handful of top players for the No. 1 share of sales globally.

But the relationship between Sony's Hiroshi Murayama and Samsung's Jang Insik tells a different story. The two engineers symbolize how the two companies have increasingly come to depend on each other since 2003. That's when Sony, looking for a source of panels for its new flat-panel TV line, asked to become a partner in a $2 billion factory Samsung was building to produce liquid-crystal displays.

Messrs. Jang and Murayama phone each other from their bases in South Korea and Japan respectively several times a day and visit in person every month to discuss how to make better panels. Mr. Murayama persuaded Mr. Jang and his bosses to speed their development of key technologies, and Samsung let Mr. Murayama use some of those technologies in Sony's TV panels even before its own products. Sony's TVs that use those new panels ended up outselling Samsung's LCD sets by more than three to one this fall in major U.S. retailers.

But Samsung is still keen to work with Sony because it's getting a crash course in how to improve LCD panels, which it had mostly used in computer monitors and cellphones, in the important TV segment. "If we learn from Sony, it will help us in advancing our technology," says Mr. Jang, 46 years old.

The unlikely alliance shows just how tangled the connections have become between consumer-electronics companies as competition in the industry intensifies. Later this week, the two companies will have some of the largest displays and biggest numbers of new products at the International Consumer Electronics Show, in Las Vegas. Despite their growing rivalry, the two companies are also realizing that they increasingly need each other as well, at a time when the cost of making key parts soars and the pace of development gets faster. Samsung has developed a huge lead in technologies like LCDs that Sony lags in. Meanwhile, Sony understands better than Samsung how to turn that technology into best-in-class consumer products.

The same trend is happening across Asian electronics makers, which have traditionally prided themselves on doing as much as they could in-house, from the design of their gadgets to the technology that goes into them. Sony and NEC Corp., another big Japanese electronics maker, for instance, recently said they'll merge their optical-disc divisions, even including teams responsible for rival next-generation DVD projects. Japan's Toshiba Corp. and Hitachi Ltd. recently said they may pool resources by building a cutting-edge semiconductor plant together with another Japanese chipmaker called Renesas Technology Corp.

The new alliances don't come without conflict. Inside Sony, some engineers worried that Samsung will eventually use Sony's TV expertise to beat the Japanese company. At Samsung, some executives wondered whether it's smart to help such a big rival.

What's more, Sony and Samsung represent two countries -- Japan and South Korea -- that have traditionally considered keeping the lead in technological innovation a matter of national pride. Both companies say nationalistic concerns play no part in their choices of who to partner with, but the alliance nonetheless shocked the public in both countries. It prompted complaints on Sony-related message boards and forced Sony to drop out of a key Japanese industry technology alliance.

Sony first considered a joint venture with Samsung around 2003, when its prized TV business was in serious trouble. The company's move into new businesses like movies, music and videogames starting in the 1980s had left the core electronics business rudderless and weakening. While flat-panel TV sets were spreading rapidly in the market, Sony had neglected to invest in them. With TVs accounting for around 20% of Sony's electronics revenue, executives decided the company had to get into flat panels fast.

The task fell to Ken Kutaragi, the outspoken creator of Sony's hit PlayStation videogame business, who had just been asked to help get electronics back on track. He says he thought of joining up with Samsung, which was already one of the world's biggest manufacturers of LCD panels and was planning its largest new factory.

Aggressive Style

Many Japanese makers viewed Samsung with trepidation. Founded in 1969, it was a second-tier manufacturer of electronics until the late 1990s, when a crisis sparked by overspending on too many businesses and a countrywide financial meltdown forced managers to slash tens of thousands of jobs and exit dozens of product categories. It poured huge sums into making memory chips and LCD panels -- out-investing the Japanese companies that had dominated those businesses and driving some out of those markets. In the process, it became South Korea's biggest company and one of the world's most successful electronics firms with a net profit margin -- or net income divided by sales -- of 13%, on revenue of $78.5 billion, in 2004. Sony's net profit margin was a mere 2.3%, on revenue of $67 billion, in the fiscal year ended March 2005.

Mr. Kutaragi, though, says he liked Samsung's aggressive management style. He knew many executives -- including Chang Won Kie, 50, now the head of the joint venture -- from a decade ago, when he decided to buy memory chips from Samsung for the first PlayStation. Since then, Samsung had become the world's biggest memory-chip maker.

And Mr. Kutaragi thought it could repeat that success in LCDs, since the panels are made in a very similar way to semiconductors -- in a process that requires super-clean rooms, high-precision equipment and huge investments. LCDs work by filtering light through a thin film of liquid crystal that's sandwiched between two glass plates. Though the panels are still more expensive to produce than picture tubes for traditional TVs, makers can charge more for the svelte, flat-panel sets, meaning they can make a lot of money if they can keep costs down.

Executives at both companies had concerns about working so closely with a direct rival. "Would this joint venture help us, as a company that is competing in the TV sector?" Mr. Chang recalls wondering.

Public reaction to the possibility of a Sony-Samsung LCD deal was even more visceral, tapping into old enmities that stretched back to Japan's colonization of Korea in the early 1900s. Anti-Korean slurs and accusations that Sony was a traitor appeared on Sony-related chat boards in Japan. And in January 2004, Sony said it had pulled out of a secretive, government-backed, LCD-panel development group, in order to quiet concerns that confidential technology would fall into Samsung's hands. Government officials had urged Sony to ally with a Japanese LCD-panel maker instead, people familiar with the situation say.

Still, Mr. Kutaragi says he convinced Sony executives that the company had to tie up with Samsung if it wanted to get enough panels at a low-enough cost.

Samsung executives, meanwhile, realized that while the company was good at making panels with relatively static images for products like computers, it faced challenges in making them look as good with moving pictures for TVs. Samsung figured a joint venture with Sony would let it apply Sony's TV-making expertise to LCD panels, as well as lock in a big, important customer for one of its most important products.

In March 2004, the two inked a final contract for the venture, called S-LCD. The 50-50 venture, into which each company sank $1 billion, supplies half of the 60,000 panels it makes per month to Sony and the other half to Samsung.

To underscore Sony's commitment, Mr. Kutaragi threw a party in southern Japan for a select group of Sony and Samsung engineers. The Sony engineers sang a comic ditty about cooperation between Sony and Samsung through S-LCD. Mr. Chang, who flew in from hierarchical Samsung's base in Korea, was surprised to see Sony engineers using their camera phones to snap photos of themselves standing next to Mr. Kutaragi. "That's very unusual in Samsung -- taking pictures with your boss," Mr. Chang says with a laugh.

Pressing Samsung's Team

In the meantime, a team of Sony TV engineers, including Mr. Murayama, had flown to Korea to hammer out panel-development plans with Samsung's LCD staff. Among them was Mr. Jang, one of Samsung's lead LCD engineers.

Mr. Murayama, a 46-year-old career Sony TV engineer, knew the panels would be key to a major new LCD TV line Sony was planning for 2005. He was determined to make them as high-performance as possible.

Mr. Murayama pressed Samsung's team for panels that could show a greater array of colors, from a wider viewing angle, at a higher resolution than the industry standard. He asked Samsung to speed up its development schedule by as much as a year.

Initially, Samsung's research and development team balked. They were used to planning for computer monitors rather than TV screens, where keeping costs under control is more important than pushing the envelope on picture quality.

"We told them, that's Sony TV policy: We're picky about picture quality," Mr. Murayama recalls saying. Samsung eventually agreed to speed up its timetable.

Over the year and a half that the factory was being built and the first panels tested, Messrs. Murayama and Jang worked together more and more closely. But they remained an odd couple of sorts. Mr. Jang, like other Samsung engineers, wears a zip-up uniform jacket. Mr. Murayama favors jackets and ties.

A Japanese speaker who spent six years in Japan in a sales-related job, Mr. Jang put up with Sony's constant requests to fix flaws or improve quality in the panels.

In return, Mr. Jang frequented Sony's TV headquarters in Tokyo, learning what features Sony TV engineers focused on. Once, Mr. Murayama showed Mr. Jang a new light Sony had developed to go behind the LCD panel, which would let the TV display a wider range of colors.

Because Sony jealously guards know-how about its TVs, Samsung was able to see so much only because it was a partner, says Mr. Murayama. He concedes that Samsung could eventually use Sony's technology to compete against him. But he adds that in consumer electronics, it's hard to keep secrets long anyway, and being open with Samsung is key to making the joint venture work. "If we put up barriers, they'll close up too," he says.

By mid-2005, S-LCD's panel line was ready to roll out the panels Sony wanted. To a large extent, Sony's fortunes were riding on them. Sony's TV business had fallen even more deeply into the red as the company bought expensive flat panels from other vendors even as prices for TVs fell. Sony Executive Deputy President Katsumi Ihara, who in April had replaced Mr. Kutaragi as head of TVs after a broad management overhaul, announced soon afterward that the TV division would post a $1 billion loss in the fiscal year ending in March 2006. That would erode almost all of Sony's profits.

Mr. Ihara, known for turning around the Sony Ericsson cellphone joint venture, promised to have TVs making money again by the second half of the next fiscal year ending in March 2007. At the heart of his strategy was the new LCD TV line -- dubbed Bravia -- which would use panels from S-LCD.

The Bravia TVs went on sale in the U.S. in late August, coupled with a hefty $140 million advertising campaign focused on the high-quality features of its S-LCD-made panels. Sony also lowered its prices: a 32-inch non-Bravia model cost $2,499 in July; its Bravia equivalent was $1,999 in October. Other manufacturers, including Samsung, cut prices even further.

Bravia was an instant hit, unseating Sharp Corp. and Samsung from their top market positions in LCD TV sales in the U.S. The new product snagged about 30% of the sales of LCD TVs at a dozen national retail chains, not including Wal-Mart Stores Inc., according to market research firm NPD Group. Samsung's share of LCD TVs has been about 10% since Bravia's launch. World-wide, LCD TVs brought in $6.5 billion during the July-September quarter -- 34% of the global TV market by sales and 13% by volume, according to data tracker DisplaySearch, a unit of NPD Group. In North America, around 30% of the TVs sold during the quarter were LCD sets.

Fighting Back

Samsung's sales team in the U.S. fought back, boosting advertising to stress that it sells many more kinds of TVs than just LCDs. Jim Sanduski, senior vice president for digital video and audio for Samsung Electronics America, says he doesn't believe Bravia can stay successful for long. He says he thinks Sony is unprofitable on TVs because of high costs and aggressive pricing. "At some point, they have to make money again," he says.

Sony, while it won't say whether Bravia is turning a profit, says the product's success was not due to aggressive pricing. Helped by the Bravia rollout, the TV division is on track to become profitable next year, the company says.

Back in Korea, Mr. Chang says Bravia has been good for his panel business because Sony's difficult demands helped push Samsung's panel technology ahead of others. And competition with Sony is helping Samsung hone its own TV designs. Samsung will soon roll out sets in the U.S. that use the same wide-viewing-angle technology that many of Sony's Bravia sets have.

S-LCD became profitable in September, and the two companies are planning a 25% expansion of capacity next year. Executives from both companies say there are discussions about possible joint investment in an even bigger LCD line in the future. Samsung isn't waiting for Sony to expand: It is building a second -- even bigger -- LCD panel line on its own next to the S-LCD factory.

Write to Phred Dvorak at phred.dvorak@ and Evan Ramstad at evan.ramstad@

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