Small Screen, Smaller World

Let's say a belated Happy Birthday to a dear, valuable friend: Sept. 7 marked the 75th anniversary of the invention of television by American scientist Philo Farnsworth. In the three-quarters of a century that it has been among us, the TV set has been one of the key drivers of globalization, making the world a smaller place, with ever more transparent boundaries. It has become the single most important product shaping global public opinion on a daily basis.

But television set has also been one of globalization's greatest beneficiaries. Its sheer ubiquity is the product of a global manufacturing process that helps make the TV set increasingly more affordable for consumers, rich and poor, all over the world.

Can you think of another consumer product where, year after year, average prices have fallen, even as its features have become richer? How does the TV-manufacturing industry, with its famously thin profit margins, continue to deliver better price/performance on a global basis? And what's behind the ever-increasing penetration of TV sets, ahead of the telephone, the Internet and the personal computer in overall adoption and usage?

Before we find answers to those questions, let's look at the demographics. With a global penetration of 1.7 billion TV sets, there is roughly one set for every four human beings. In the lowest income countries (comprising 2.5 billion people), there's a TV set for every 12 people, or less than one per household. Indeed, for the poorest 50 countries (comprising 1 billion people), the $300 average price of a TV set exceeds the $295 annual GDP per capita. While most of us take it for granted, television is clearly still a luxury for millions of people around the world.

Despite these wide differences, more than 150 million TV sets are sold every year--with double-digit growth rates in less developed countries. This is not because of rising income levels, but because of the continuing fall in the prices of TV sets. In 1956, an RCA color TV set was sold for $500, or $1,300 in today's dollars. That same year, the average car sold for $2,100 and average annual salary was $5,300. In 2002, it is possible to purchase a standard, no-name 20-inch TV set for $130. That's a ten-fold decrease in price in 46 years!

THE SUPPLY-CHAIN FACTOR

The dramatic drop in prices was made possible by a global supply chain. In the electronics industry, the supply chain is the central nervous system that governs how companies manufacture products. It includes choosing the source of components, managing supplier relationships, making the product, deciding on inventory levels, supporting the logistics of transportation and pushing the final delivery of the manufactured product through distribution channels into the retail stores. Although the inner details of its operations are secretive (to preserve competitive differentiation), the TV supply chain is quite open and modular. It relies on standard components from known suppliers and can be easily copied, contributing to its large footprint around the world.

Several factors contribute to the overall dynamism and peculiarity of the television supply chain:

Modularity and standardization in product design: Prior to 1970, TV manufacturing (like most manufacturing 30 years ago) was vertically integrated. This meant that a single manufacturer designed, produced and assembled each part that went inside a TV set. TV production was concentrated in the US, Japan and Germany--the three top industrialized nations. Today's favored supply-chain model is one of "virtual integration", where companies, rather than manufacturing every component, depend on a virtual and dynamic co-ordination of external suppliers. This innovation has led to a large degree of standardization and modularity in product design, hence manufacturing simplicity. By making TV sets modular with standard components, companies are able to easily duplicate and replicate the manufacturing process around the world. Arguably, this is the single most important innovation that has set the wheels in motion for the globalization of television manufacturing.

Economies of scale: TV manufacturers compete on volume, and volume drives prices down. Many TV factories run 24-7 around-the-clock operations so that fixed capital costs are spread over a larger number of TV sets. Thanks to manufacturing automation and robotics, companies can operate factories with even higher output capacities, yielding lower unit prices. TV sets are no longer manufactured: they are assembled. More 40 countries from the poorest (Ethiopia) to the richest (the US) have TV assembly lines. More than a dozen new factories open yearly in less developed countries. A handful of them close or shift to better locations. New factories being set up in India will reach annual capacities of 5 million sets per year within 4 years of opening. This is almost double the capacity of previous generations of manufacturing capabilities.

New sources of materials: As the demand for TV manufacturing increases, so does the demand for components. Large-scale specialized factories can build one specialized component cheaper than before. For example, a new joint-venture factory in China will manufacture 1 million yokes per month. Manufacturers keep finding these new and cheaper sources of materials from various parts of the world so they can shave material costs or integrate additional features into the next product. Many of these sources are in Asia. Many TV makers have strategic procurement offices in Asia, the better to continuously source the best components at the best prices and manage the vendor relationships.

LOCAL OR REMOTE SUPPLIERS?

When the television industry first arrived in Mexico in the early 80's, only 5% of components were locally sourced. Gradually, a peripheral components industry prospered, allowing companies to source now over 80% of components in Mexico within trucking distance of the manufacturing plants. Ideally, companies prefer suppliers close to the assembly locations. This saves on transportation costs, eliminates potential duty rates and allows for better management of vendor relationships. In reality, companies end up making trade-offs due to the attractiveness of supply sources from Asia. On average, they rely on global sources for roughly 25% of components.

This phenomenon is not exclusive to TV manufacturers. Multinational companies such as American Express, General Electric, Procter & Gamble and British Airways have already switched part of their business operations to low-cost countries (LCCs). A desirable low cost location has plenty of skilled workers, affordable labor rates, a large market at proximity and choice of component sourcing either in the same country or within a local free trade zone. TV makers will keep moving to (or opening factories in) low-cost, high-skill labor locations that become available as less-developed countries engage on the road to development.

As prices keep falling, televisions become more affordable in lower-income countries.

Labor costs:  Let's take a typical manufacturing facility employing 2,000 workers with a capacity of 2 million televisions annually. If they move from a country where annual wages per factory worker are $20,000 (USA) to a country where wages are $2,000 per year (Mexico), the annual savings could be up to $27 million, assuming a 75% blue-collar ratio. This could translate into a cost reduction of $13.50 per TV set at the wholesale level, or approximately $20 at the retail level. Alternatively, part of the savings might provide the company a better profit margin which in turn allows it to stay in business and build more competitively priced televisions.

Free-trade agreements: By operating factories and supplier networks inside free-trade regions, companies avoid duty and long distance transportation costs for both the finished product and its components. For example, within the North American Free Trade region (US, Canada, Mexico), Mexican factories can purchase CRTs from US plants with 0% duty and when they ship the finished product to the USA, there is no duty. Contrast this with duty rates of 5-30% if the same components were sourced internationally.

Occasionally, governments impose high duty rates (e.g. 30%) on finished goods but not on components, to encourage the development of assembly plants within these countries. Brazil was a pioneer in resorting to these tactics to jump-start their local production economy. Ethiopia is a recent example. More developing countries could impose similar policies to encourage multi-national companies to invest in their economies and contribute to local wealth creation.

Transportation costs and logistics: A TV set does not travel a long way from its assembly point to the store where it is sold, but its internal components probably travel a long way to get to the assembly point. It's cheaper to ship millions of small parts bought at competitive prices than to build millions of TVs at a single location and ship them around the world. Whereas previously suppliers had to be located nearby assembly plants, today they don't have to. Advances in logistics allow the precise co-ordination of shipments according to a complex optimization of just-in-time or just-in-case delivery schedules. Typically, freight costs average close to 4% of imported value for developed countries and 8% for developing countries. Lower freight costs can make for cheaper TV sets.

Such factors demonstrate the impressive scale and global footprint of the TV production industry. With a standardized product, well-known channels, identifiable marketing, the only differentiation left is in how companies operate their global supply-chain processes: It boils down to a clever choice of suppliers, components, assembly locations and market targets on a global basis. Success in TV manufacturing is a matter of making the most of globalization.