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The Economics of Projection Tube Production in the America The Economics of Projection Tube Production in the America

Matsushita Electronics Company: A Case Study Matsushita Electronics Company: A Case Study

Hirofumi Tanaka Wright State University - Main Campus

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THE ECONOMICS OF PROJECTION TUBE PRODUCTION IN THE AMERICA MATSUSHITA ELECTRONICS COMPANY:

A CASE STUDY

An internship report submitted in partial fulfillment of the requirements for the degree of

Master of Science

By

Hirofumi Tanaka B.A. Law, Gakushuin University, 1994

WRIGHT STATE UNIVERSITY

DEPARTMENT OF ECONOMICS

March 20. 1998

I HEREBY RECOMMEND THAT THE INTERNSHIP REPORT PREPARED UNDER

MY SURPER VISION BY Hirofbmi Tanaka ENTITLED The Economics o f Projection

Tube Production in The American Matsushita Electronics Company: A Case Study BE

ACCPEPTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE

DEGREE OF MASTER OF SPENCE.

Tran H. Dung, Ph.D. Faculty Supervisor

V ' V , . , .....

Robert Premus, Ph.D. Faculty Reader

i s s r 1—Director, M.S. in Social and Applied Economics Program

AbstractThe sales of big screen projection television (PTV) have been increasing rapidly and will

continue to increase since there is no economically feasible substitute for PTV. In 2002,

annual sales are forecasted to be 70 percent more than in 1997. Therefore, the demand for

projection tubes (major components of PTVs) is also expected to increase as much as the

sales of PTV.

Matsushita Electronics Company (MEC), the second largest projection tube

producer, relocated their projection tube plant from Japan to the U.S.(AMEC) in order to

increase its sales by conforming to NAFTA regulation. This plant relocation will also

enable MEC to reduce its production cost significantly.

Basically, the more projection tubes produced, the lower cost will become.

However, the cost does not proportionally decrease with quantity produced because the

direct labor cost is a quasi-variable. In order to produce projection tubes at the lowest cost,

AMEC should carefully implement its work shift schedule.

There will be competition only between Hitachi and AMEC. Other projection tube

producers will not be able to compete with Hitachi and AMEC. For the next five years,

AMEC will constantly increase sales. However, Hitachi, the largest projection tube

producer, will continue to dominate the market by being able to sell more projection tubes

at lower production costs. Hitachi’s dominance will be a problem for AMEC in the long

run. To prevent the further dominance of Hitachi, AMEC should increase their sales more

than projected by implementing the following strategies; 1) supply more to minor

customers, 2) have excess inventories, 3) supply flexible amounts and many types of

projection tubes, 4) reduce the price of projection tube 5) improve yield rates, and 6)

implement the most efficient work-shift.

TABLE OF CONTENTS

I. INTRODUCTION .......... .1

II. PROJECTION TUBE MARKET ...... ..21. D isc u ssio n o f P r o je c t io n T e l e v is io n M a r k e t ........................ 22. F u tu r e D em a n d f o r P r o je c t io n T u b e s ...................................................... 63. M a r k e t I m p a c t o f t h e N o r t h A m e r ic a n F r e e T r a d e A g r e e m e n t 64. P r e s e n t C o n d it io n o f M a r k e t fo r P r o je c t io n T u b e .............................. 75. B e n e f it o f R e l o c a t in g P l a n t ..... 11

III. AMEC’S PROJECTION TUBE PRODUCTION................. ........... A3L C o st o f P r o d u c t io n ..................... 132. C o st An a l y s is .............. 16S. Y ie l d R a t e and P r o d u c t io n C o st p e r U n it .................. 20

IV. CONCLUSIONS ......................... ...211. Bu sin ess C l im a t e o f P r o je c t io n T ubes M a r k e t ............... 212. St r a t e g ie s f o r A M E C ...................................................... 26

APPENDIX A ................ 29

APPENDIX B............... 30

APPENDIX C ....... .— 31

APPENDIX D ...............................................................................................32

BIBLIOGRAPHY 34

LIST OF TABLES

Table 1. Annual Sales of PTV (Factory sales to dealer) ............... ..3

Table 2. Future Sales of PTV.............. 4

Table 3. Future Demand for Projection tubes ................ 6

Table 4. Cost of Production Factor in the U.S. and Japan. ..................... 12

Table 5. Monthly Fixed C ost ............. 13

Table 6. Variable Cost .................. 15

Table 7. Monthly Production Capacity and Cost under Each Work Shift ......... 15

Table 8. Efficient Manufacturing Quantity of Each Work Shift ............ 16

Table 9. Annual Supply Capacity of Projection Tube Industry in 1997.......... .21

Table 10. Production Capacity Utilization Rate.............................................. 25

I. Introduction

The purpose of this paper is to analyze the projection tube (a major component of

projection television) industry in order to evaluate the business climate of America

Matsushita Electronics Company (AMEC), the world's second largest projection tube

producer.

AMEC (America Matsushita Electronics Company) was established in 1988 as the

American branch of Matsushita Electronics Corporation (MEC) in Osaka, Japan. MEC is

a subsidiary of Panasonic (Matsushita Electric Industry), and produces electronic parts,

such as computer chips and picture display devices. AMEC produces and supplies cathode

ray tubes to color TV manufacturers throughout the world including not only Panasonic,

but also Sony, Mitsubishi, Thompson, Zenith, etc (American Matsushita Electronics

Company, 1995, p. 1).

MEC decided to relocate their projection tube plant to AMEC (in the U.S.) in order

to increase their sales because, after the NAFTA agreement, it became very difficult for

MEC to supply projection tubes at competitive prices in North America. Today, most PTV

manufactures are located in North America. To increase their sales, MEC has to

competitively produce projection tubes in North America and sell them to PTV

manufactures in North America.

Section II examines the projection television (PTV) market and forecasts the future

sales; then, the present condition of the projection tube market are discussed. Section III

examines the cost of AMEC’s projection tubes manufacturing operation in order to

identify the most efficient production method. In the concluding section, I evaluate the

future business climate of the projection tube market, and suggest the internal and external

strategies for AMEC.

IL Projection Tube Market

1. Discussion of Projection Television Market

Prior to 1980, there was not a very high demand for PTV, which was satisfied by seven

manufacturers. They were Sony, General Electric, Matsushita1, Mitsubishi, Philips, Kloss,

and Toshiba. Compared to the sales o f conventional TV, the sales of PTV were very low

because of their high costs and poor performances2.

After 1980, the sales of PTV increased rapidly and became one of the most

important products in the TV industry (United States Precision Lens, 1992, p.2).

Manufacturers overcame the early technical difficulties of PTVs during the late 1970’s

(United States Precision Lens, 1984, p.3). By 1981, six other manufacturers, Hitachi,

Zenith, Sylvania, Magnavox, Pioneer, and RCA introduced PTVs as a response o f the

increasing demand for PTVs (United States Precision Lens, 1984, p.4). Table 1 shows the

annual sales of PTV and its growth rate after 1980. During the first half o f 1980’s, the

sales of PTV increased by double digits. Although the sales slowed down during the last

half of the 1980’s, again increased rapidly in the early 1990’s.

The sales of PTV are expected to increase even more rapidly in the future. The

average screen size of TV sold in the U.S is becoming larger, and is approaching a size that

can only be satisfied by PTVs. In fact, according to AMEC’s executive, Todd Tsuchiyama

(personal communication, June 21, 1997) the Consumer Electronics Industry Association

(CEIA) found that PTVs ranked as the second most wanted-to-buy electric product after

the personal computer among American families.

1 Matsushita had two brand names, Panasonic and Quasar.‘ For example, the picture o f PTV appeared to be too dark. Also, the cabinets o f PTVs were too large.

Table 1. Annual Sales of PTV (Factory sales to dealer)

Year Sales Sales increase(Previous year =100%)

1980 57,000* -

1981 87,000* 52%1982 117,000* 35%1983 144,000* 23%1984 195,000* 35%1985 266,000* 36%1986 304,272 14%1987 293,084 -4%1988 301,784 3%1989 265,300 -12%1990 351,402 32%1991 379,837 8%1992 404,303 6%1993 465,359 15%1994 636,177 37%1995 820,411 29%1996 887,097 8%1997 945,172* 7%

* EstimatedSource: Consumer Electronics Industrial Association (CEIA). 1997

Although the big screen televisions are becoming popular, there are currently no

viable substitutes for PTVs (United States Precision Lens, 1995, p.6). There are many

kinds of TVs, but none of them can demonstrate the PTV quality. The largest conventional

picture tube TV is 40 inches3, but has only one fourth of the 40-inch PTV’s picture

resolution (Weinberg, 1993). Also, the suggested retail price of $4,999 is more than two

times higher than PTVs.

TVs with digital technologies, liquid crystal displays and plasma displays are

supposedly able to demonstrate better pictures than PTVs, but TVs with these new

technologies do not have the screen sizes or, the low prices of PTVs. Currently, liquid

crystal displays can be used for only small TVs and portable computers. They are very

3 Mitsubishi has been manufacturing this product since 1993 (Weinberg. 1993).

3

expensive to produce due to their low yield and the cost of new technology used in their

production (United States Precision Lens, 1995, p. 19). Liquid crystal displays are used

only where their compact sizes, lightweight, and low-power consumption make them

worthwhile (United States International Trade Commission, 1996, p. 18 )4 The 42-inch

plasma screen TVs were introduced to the U.S. consumer market by several companies in

1998, but these TVs are too bulky and too expensive for practical home-use. An issue of

Time Magazine reported that these TVs look like refrigerators (Ruiz, 1998). The

minimum price for plasma screen TVs is $11,000, which is about five times higher than

the comparable PTV.

Based on the sales of PTV from 1984 to 1997, the sales for the next five years are

projected in Table 2. The sales are estimated to increase every year. In 2002, the sales

will be 70 percent more than that in 1996. Figure 1 shows the projected monthly sales of

PTV.

Table 2. Future Sales of PTV*

Year Sales Growth Previous year = 100%

1998 1,112,947 17%1999 1,233,736 11%2000 1,354,526 10%2001 1,475,315 9%2002 1,596,104 8%

^Calculated by Microsoft Excel

4 Prototype 21-inch liquid crystal TV has been produced, but these TVs were several times more expensive than the comparable TV (United States Precision Lens, 1995, p. 19).

1993 1993

1993 1994

1994 1995

1995 1995

1996 1996

1997 1997

1998 1998

1998 1999

1999 2000

2000 2000

2001 2001

2002 2002

Figure 1

PTV M

onthly Sales

History and

Forecast

2. Future Demand for Projection Tubes

As the sales of PTV increase, the demand for projection tubes will increase since

projection tubes are major components of PTVs. Projection tubes are also used for

overhead projectors, medical equipment, and arcade games, but these were less than five

percent of the total demand. Therefore, the demand for projection tubes is totally depend

on the demand for PTV. Also the demand for projection tubes will be simply three times

more than demand for PTV because one PTV requires three projection tubes. From 1984

to 1996, the demand for projection tubes increased by 445 percent (from 584,000 to

2,661,291 units). According to the forecasting result in the previous section, the demand

for projection tubes is estimated (Table3).

Table 3. Future Demand for Projection Tubes*

Year Demand Growth** Previous year = 100%

1998 3,338,841 17%1999 3,701,208 11%2 0 0 0 4,063,578 10%2 0 0 1 4,425,945 9%2 0 0 2 4,788,312 8%

* Based on calculations of Table 2.

3. Market Impact of the North American Free Trade Agreement

In recent years, the TV industry has been affected by the NAFTA agreement3. The

NAFTA agreement stipulates that color TVs larger than 13 inches assembled in North

America must have North American made picture tubes to avoid duties. The TVs that do

not meet this requirement could be assessed a 15 percent on picture tubes and an additional

5 Effective in January 1, 1994,

5 percent duty on the value of the completed TV (United States International Trade

Commission, 1996, p.5).

Because of the NAFTA agreement, Hitachi, the only projection tube producer to

have a plant in North America before 1994, increased it's market share while other

producers that imported projection tubes to North America, lost market shares. As a result

of the NAFTA, agreement, small producers, such as Sanyo and Samsong, quit their

projection tube productions, and other relatively large producers, Matsushita (MEC), Sony,

and Philips decided to relocate their plants to North America.

4. Present Condition of Market for Projection Tube

In general, projection tubes are categorized as cathode ray tubes because they are

technically the same products6. Cathode ray tubes are used for manufacturing of all kinds

of picture display devices, but the principal factor affecting demand for cathode ray tubes

is consumer demand for TVs (United States International Trade Commission, 1996, p.5).

In the U.S. there are twelve small and seven large cathode ray tube producers

(United States International Commission, 1996, p.5). Small producers produce cathode ray

tubes for military and industrial use (United States International Commission, 1996, p.5).

All these seven producers are subsidiaries of TV manufacturers, and produces cathode ray

tubes for TVs. However, there are TV manufacturers that do not have a subsidiary cathode

ray producer (CEIA, 1997). In other words, there are more TV manufacturers than cathode

ray tube producers. TV manufacturers that have subsidiary cathode ray producers will

have more stable supply of cathode ray tubes than other TV manufacturers.

6 The only differences between projection tubes and cathode ray tube are that projection tubes are much smaller than cathode ray tubes, and projection tubes have only one color, blue, green, or red, instead o f all three colors.

There are some very unusual relationships that exist between cathode ray tube

producers and TV manufacturers. Unlike other industries, this industries’ parent and

subsidiary relationships do not describe exclusive customer-supplier relationships. Some

TV manufacturers that have subsidiary cathode ray producers may purchase products from

their competitors’ subsidiaries. In other words, all TV manufacturers may purchase

products from all other producers. The United States International Trade Commission in

it’s report, Industry and Trade Summery: TV Picture Tubes and Other Cathode Ray Tube

(1995), explain this unusual relationship: “Given the tremendous capital investment in

picture tube production, it is not economically feasible for every tube manufacturer to

make every size and kind of tube”(p.6). Since a large amount of capital investment is

needed to produces every type o f cathode ray tubes, it is better to concentrate on producing

a few types of cathode ray tubes and take advantage of the economies of scales.

Figure 2 shows the market shares of projection tube producers and PTV

manufactures, and their customer-supplier relationships for 1996. All projection tube

producers (Sony, Hitachi, MEC, and Zenith) are subsidiaries of PTV manufacturers. Each

projection tube producer has only one plant which are all located in the U.S., (Sony in

California, Hitachi in North Carolina, Zenith in Indiana, and Panasonic in Ohio). Sony is

only producer that produces solely for internal consumption (United States International

Trade Commission, 1995, p.6). The other three producers supply projection tubes to not

only their parent PTV manufacturers, but also other PTV manufacturers.

Figure 2. Projection tube producers and PTV Manufacturers’ Market Shares and Relationships

Source: CEIA, 1997. AMEC, 1995, p. 1

In 1996, 2,661,291 units of projection tubes were sold to PTV manufacturers in

North America. Hitachi sold 49 percent of entire demand (about 1,304,000 units). MEC

sold 26 percent (692,000 units). Other producers including Sony and Zenith supplied 25

percent.

Hitachi had a plant in Japan, but built a new subsidiary plant in North Carolina in

1990. Their projection tube production has been totally switched to the North Carolina

plant since 1994 to conform to the NAFTA’s content requirement. Among these four

projection tube producers, Hitachi has the biggest demand from their parental PTV

manufacturer.

MEC’s market share in 1996 was only 26 percent, and has been decreasing since

1994 because of NAFTA. Their American plant (AMEC) started to operate in the end of

1997 and should regain market share.

Zenith’s subsidiary plant was established in 1994, but has not been productive

enough to meet even their parent company’s demand. In fact, Zenith’s PTVs has been

purchasing projection tubes from MEC (personal communication with Mr. Tsuchiyama.

AMEC production manager, August 1997).

There are seven major PTV manufacturers in North American market7. Hitachi

purchases projection tubes only from their subsidiary plant. Mitsubishi, Philips, and

Toshiba purchased most of their tubes from Hitachi, but also purchased some from MEC.

Thomson and Zenith purchased mainly from MEC, but also purchased some from Hitachi.

Zenith and Sony purchases from their subsidiary plant and MEC.

Before the NAFTA agreement reinforced Hitachi’s dominance, Hitachi has had the

largest market share because their parent PTV manufacturer had a larger market share than

any other projection tube producers’ parent PTV manufacturers. And also Mitsubishi, the

largest PTV manufacturer, purchased most of their projection tubes from Hitachi. These

two large PTV manufacturers guaranteed a certain amount of sales for Hitachi. Hitachi

could invest large amount of capital in the projection tubes production with less

uncertainty. In fact, Hitachi was the first foreign company to establish a projection tubes

plant in the North America.

There is no strong exclusive relationship between projection tube producers and

PTV manufacturers. Basically, everyone is buying from everyone, and supplying to

everyone. This non-exclusivity is due to the fact that PTV manufacturers with no

subsidiaries need to have more than one projection tubes suppliers to be assured of a stable

supply.

5. Benefit of Relocating Plant

By relocating projection tube plant to the U.S., MEC will regain it's competitiveness

against Hitachi and other North American producers. MEC had 21 percent less sales in

1996 than 1995 although the total sales of PTV in North A_merica increased by 8 percent.

The United States International Trade Commission (1995) pointed out two disadvantages

for Japanese cathode ray tube manufacturers to increase their sales in North America. The

first is the effect of NAFTA regulation (explained the previous section). The second is the

Japanese currency appreciation. Japanese Yen was appreciated by approximately 80

percent against U.S dollar during the first half of the 1990’s. One U.S dollar was ¥ 153.00

in 1990, ¥138.35 in 1991, ¥126.88 m 1992, ¥107.00 in 1993,¥104.65 in 1994, and

¥ 85.00 in 19958. The strong Japanese Yen made Japanese imported cathode ray tubes too

expensive for PTV manufactures in North America.

Additionally, this plant relocation will lower the production cost. The production

cost of projection tubes in the U.S is estimated to be 36 percent less than that in Japan

(AMEC, 1995, p.5). Table 4 shows the production cost differences between Japan and the

U.S. Most of production related costs are significantly lower in the U.S. Only the

production machinery will cost more in the U.S because they are imported from Japan.

7 Some o f PTV manufactures have more than one brand name.K Exchange rates on June 1 (Nikkei, 1996).

Table 4. Cost of Production Factor in the U.S. and Japan

(Japan=T00)Japan u .s

Labor 100 44Power Utilities 100 25Land and Building 100 41Production Machinery* 100 130Parts and Materials* 100 82Corporate Tax 100 91Total 100 64

Source: Minister of International Trade and Industry, 1995, p. 13.*AMEC, 1995, p.2

HI. AMEC’s Projection Tube Production

1. Cost of Production

The costs of projection tubes production can be classified into the fixed, variable, and

quasi-variable costs9.

(A) Fixed Cost

Table 5 shows the fixed cost of AMEC’s projection tubes production. The fixed cost can

be further divided into five categories. The annual fixed cost will be $9,621,000, and the

monthly cost will be $798,000.

Table 5. Monthly Fixed Cost

Monthly costMachine and facility $650,000Maintenance $60,000Indirect labor* $68,417Other costs $20,000Total Fixed Cost $798,417

Source: AMEC, 1995. p.4-7. *See Appendix A for details.

The cost o f machine and facility was approximately $0.65 million per month $30

million ($25 million for machine and $5 million for facility) was initially invested to

construct this plant (AMEC, 1995, p.3 ). The costs of machinery and facility are to be paid

off by the end of 2002. The present value (opportunity cost) of this $30 million investment

9 In this paper, only costs, which can be seen at this manufacturing site, are included. In other words, some costs, which are actually expensed for this manufacturing operation, are not included. These costs are such as the cost o f R & D, the patent purchase fee, and the loyalty to Panasonic. Therefore, especially the total fixed costs calculated in this section will be less than the actual fixed cost.

for the next 5 years is estimated $39.2 million10. The cost o f maintenance equipment, and

expendable machines is estimated about average $60,000 per month (AMEC, 1995, p.4).

The cost of indirect labors is estimated to be $68,417 monthly (Appendix A). These costs

include wages and benefits for department managers, engineer, leadmg-supervisor,

maintenance-supervisor and other staff. Other costs incurred by the manufacturing

operation production include the telephone, fax, office equipment, office maintenance, and

the safety equipment costs. These costs are estimated to be $20,000 per month (AMEC,

1995, p.6).

(B) Variable cost

Table 7 shows the variable cost of projection tubes manufacturing11. Currently, these costs

are estimated to be $28 per projection tube 12(AMEC, 1995, p.8). These costs

proportionally increase with the number of projection tubes manufactured. The variable

cost consists of two costs, the cost of part and material, and the cost of utility. These costs

are estimated at $27 and $1.

l0Calculated by the Japanese interest rate o f 5.5 percent. $30 million *(100 + 5.5%)5=$30 million * 130.6%= $39.2 million11 In this paper, I suppose that the supply o f parts and materials are unlimited because these supplies are not only for projection tubes. The increased demand from projection tube producers will unlikely increase the prices o f these parts and materials (personal communication with Mr. Nishiguchi, AMEC executive, August1997).12 This cost will be fluctuated with exchange rates because some o f parts and materials are imported from Japan. Japanese yen is converted to U S dollar by the ratio o f $1 = Y 125.

Price per unit^ Glass bulb $17.25

Electron gun $7.25Part and Material -< Phosphor $0.75

Other chemical $0.50^ Other part $1.25

Utility $1.00Total $28.00

Source: AMEC, 1995, p.8.

(C) Quasi - Variable Cost

Direct labor (assembly workers) cost is quasi-variable because it is fixed within certain

quantity ranges, but increases as the quantity manufactured exceeds the ranges, or as the

additional work shift is added. The cost of direct labor and the production capacity of each

work shift are calculated in Table 7 according to AMEC profile (1995), American

Matsushita Electronics Company’s internal document.

Table 7. Monthly Production Capacity and Cost under Each Work Shift*

Shift # of worker- 40 hours 40 hours and overtimeCapacity Cost Capacity Cost

1 44 40,000 $102,400 (Fixed) 68,000 $102,400- 186,8202 88 80,000 $204,800 (Fixed) 136,000 $204,800 - 373,6403 132 120,000 $307,200 (Fixed) 168,000 $307,200 - 524,2804 176 168,000 $409,600 (Fixed) 168,000 $409,600 (Fixed)

*See Appendix A, B, and C for details.

There are four work shifts (Appendix A, B, and C). The additional work shift increases the

production capacity, but also the direct labor cost. As long as each shift manufactures

projection tubes within their 40 hours production capacity, the direct labor cost will be

constant. However, workers are able to work more than 40 hours per week, and produce

more projection tubes13. In such a case, the production capacity of each work shift

increases, but the direct labor costs increase with quantity manufactured14.

2. Cost Analysis

To maximize the profit, AMEC has to produce at a quantity that reflects lowest

cost. However, because of labor cost’s quasi-variability, the total cost unproportionally

increases with quantity manufactured. Figure 3 shows the cost of each work shift

according to the quantity manufactured. Table 8 shows the most efficient manufacturing

quantity for each work shift. The most efficient manufacturing quantity is the quantity

range that each work shift can produce at lower cost than any other shift.

Table 8. Efficient Manufacturing Quantity of Each Work Shift

Work shift Efficient Manufacturing Quantity1 0-68,0002 68,001-112,000oJ 112,001-148,0004 8,001-168,000

*See Appendix C for details.

The one-shift can produce 0 to 68,000 units of projection tubes at the lowest cost

per unit. The two-shift can produce 68,001 to 112,000 units at the lowest cost per unit.

The three-shift can produce 112,001 to 148,000 units at the lowest cost per unit. The four-

13 A] I calculation assumes that one worker can work up to 72 hours (1.7 times o f a normal working hours).14 If a worker worked more than 45 hours a week, AMEC has to pay 50 percent more than regular wage on weekdays and 100 percent more on weekends. For example, if one with $20 regular wage works 45 hours in weekdays and 10 hours on Sunday, his payroll is $1,350 ($20 X 40 hours = $800, $20 X 150% X 5hours = $150, and $20 X 200% x 10 hours = $400).

shift can produce 148,001 to 168,000 units at the lowest cost per unit. AMEC has to

produce demanded quantity of projection tubes by the lowest cost work shift in order to

minimize the production cost. For example, if the demand is 100,000 units, it is the most

profitable to implement two work shift, and produce 80,000 units by a normal 40 hour

work shift and additional 20,000 units by an overtime operation.

Figure 4 shows the average total, marginal, average fixed, average variable costs

according to the quantity manufactured. These curves indicate the following

characteristics of this manufacturing operation. (1) As more projection tubes are produced,

the production cost per unit becomes lower. Although the marginal cost fluctuates

inconstantly, the average cost decreases with quantity manufactured. (2) The marginal cost

does not constantly changes with quantity manufactured because it reflects not only the

variable cost, but also quasi-variable direct labor cost. (3) Despite of the fluctuation of the

marginal cost, the average variable cost does not considerably change. Therefore, the shut

down cost of this manufacturing operation is almost constant. (4) The cost of parts and

materials, $28, is the most significant component of entire production cost. Compared to

this cost, the fixed cost and the quasi-variable cost are not very influential to the average

cost.

Quantity

(Tho

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Figure 3

Direct Labor Cost

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Cost Curves

The yield rates affect the manufacturing activity in terms of the yield quantity and the

production cost. However, the yield rate is always less than 100 percent16. In order to

reduce the production cost per unit, the yield rate should be improved as much as possible.

Lower yield rates reduce the yield quantities. For example, if the yield rate drops

to 90 from 100 percent, the daily production capacity of two-work shift with no overtime

will decrease to 3,600 from 4,000. Lower yield rates also make the production cost per

unit higher (Appendix D), and consequently diminishes the profitability of this

manufacturing operation. All costs of the rejected products are included in the total costs,

and reflected into the costs of the good products because the costs of the rejected products

are considered to be an opportunity cost.

15 The yield rate is a rate of good products in the total manufactured quantity.16 MEC has been producing projection tubes for more than 30 years, but the annual yield rate has never exceeded 97.5 percent. The average yield rate over this 30 years was 96.0 percent (AMEC, 1995, p.3). Since a plant with 30 years of experience can only average a 96.0 percent annual yield rate, AMEC expects a 90 percent average annual yield rate for their new plant over the next five years.

IV, Conclusions

L Business Climate of Projection Tubes M arket

New entrants as well as Sony and Zenith will not be able to compete against

Hitachi and AMEC, and ultimately there will be strong competition between Hitachi and

AMEC in the projection tube market. Table 9 shows the annual supply capacity of each

plant. The total production capacity of all producers in 1997 is estimated between

6.136.000 and 5,346,000 units. Compared to Hitachi and AMEC, Sony and Zenith’s

production capacities are very small. AMEC’s plant can yield 2,016,000 units annually

(AMEC, 1995, p.3). Hitachi’s plant expanded their production capacity about 2.7 times in

1996. Hitachi’s plant now can yield 3,420,000 tubes per year, enough to manufacture

1.140.000 units of PTVs (Japan Economic Institute of America, 1995, November 1). On

the other hand, Sony and Zenith can supply 300,000 or less projection tubes together.

Table 9. Annual Supply Capacity of Projection Tube Industry in 1997

Producer* Maximum Annual YieldAMEC 2,016,000Hitachi** 3,420,000Sony 100,000 or lessZenith 200,000 or lessOthers 400,000 or lessTotal 6,136,000-5,436,000Monthly yield by full operation time

Source: AMEC, 1995, p.3 *CEIA, 1997.

**JEIA, 1995, November 1.

Zenith and Sony will unlikely increase their capacities17. First o f all, even if they

increase their production capacity, they will not be able to increase their sales immediately

because PTV manufacturers are tied to Hitachi and MEC by a long-term relationship. PTV

manufacturers will not easily change their suppliers. Secondly, AMEC and Hitachi can

easily drive them out of the market by decreasing their prices. Even if Hitachi and AMEC

do not take this predatory action, the increased supply will reduce the price, and the

reduced price will make their production operations unprofitable because Hitachi and

18AMEC already have absolute cost advantages in terms of resource purchasing and

economies of scale.

The United States International Trade Commission (1996) explains about the

potential entrant for this industry. "Firms, which are able to make the major capital

investment to construct plant, are part of large consumer electronics industries; and, in

most cases, especially the largest companies, and affiliated with TV receiver producers, the

largest consumers of CRTs (cathode ray tubes) (p.5).” Additionally, it specifies that they

must have 1) access to technology, 3) access to the large domestic or export market (p.5).

All PTV manufactures are large consumer electronics companies and, some of them likely

have enough capital to build their own new projection plants. However, not all of them

17 Sony and Zenith will not expand their production capacities, but will exit from the projection tubes market in the near future according to Mr. Tsuchiyama, AMEC executive (personal communication, August, 1997). Sony’s projection tubes quality is not very good, and the yield of their production line is not very efficient because Sony produces projection tubes in the inferior equipment. Sony will concentrate on producing computer displays, which is another demanding product, because Sony has many patents in production of computer displays, but not at all in production of projection tubes. It will cost too much for Sony to purchase these patents. Therefore, Sony will likely invest in a computer display or, cathode ray tube production rather than projection tubes. Zenith’s plant has about half o f AMEC’s production capacity. However, they have never been productive because of technical problems. In 1996, Zenith sold about 100,000 PTVs, but only a few thousand PTVs had Zenith made projection tubes. Most o f their PTVs had MEC made cathode ray tubes. Furthermore, this plant is getting old and needs modernization. Zenith needs to not only solve their technical problem, but also modernize and expand their production equipment. Zenith will unlikely continues their projection tubes manufacturing operation. They can purchase projection tubes from other producers at a lower price than their own production cost.

have access to the projection tube production technology. And, most of these companies

do not have enough PTV sales to make investing for their own projection tube production

feasible. It is economical for the most of PTV manufactures to purchase projection tubes

from existing producers rather than produce by themselves. Therefore, no new entrant will

likely enter the production tube industry.

Hitachi and AMEC will compete to capture expanding demand. There will be not

enough demand to totally satisfy both Hitachi and AMEC’s production capacities. In

2002, the projected demand for projection tubes is only 4,788,312 units, which is less than

the Hitachi and AMEC’s combined production capacities (5,436,000 units).

The projection tube market shares for the next five years is projected in Figure 5.

Based on the previous discussions, Figure 5 assumes that 1) AMEC keeps all MEC’s

customers in 1996, 2) No new producer comes into the market, 3) Sony and Zenith slowly

decrease their outputs. 4) All PTV manufactures market shares do not change. In other

words, Hitachi continues to have twice of MEC’s market shares.

18 All projection tube producers are buying their parts and materials from the same producers. These suppliers tend to offer cheaper prices for larger quantities. Hitachi and Matsushita will get cheaper prices than any other producers will.

1998 1999

2000 2001

2002

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Figure 5. Projected

Market Share

Although the AMEC’s market share will increase, AMEC will not be able to

produce projection tubes at the lowest possible production cost during the next five years.

When AMEC implements four work shifts and processed 168,000 units of projection

tubes, the cost per unit will be minimized. However, even in 2002 when the sales will be

the highest in the next five years, AMEC’s sales is estimated to be 122,056 units, but this

quantity is only 72 percent of AMEC’s maximum manufacturing capacity. AMEC will

never have enough sales to fully utilize their production capacity, and never achieve the

lowest production cost per unit.

On the other hand, Hitachi will be able to utilize their production capacity more

than AMEC. Table 10 shows AMEC and Hitachi’s production utilization rates for next

five years. Hitachi’s rates are higher than AMEC’s in all years.

Table 10. Production Capacity Utilization Rate

Year AMEC Hitachi1998 45% 53%1999 52% 62%2000 59% 70%2001 66% 78%2002 73% 86%

Based on the projected market shares in Figure 5.

Since more production will reduce the cost per unit (Figure 4), Hitachi’s production

cost per unit will be lower than AMEC’s. In other words, since the more utilization of the

production capacity lower the production cost per unit, Hitachi can sell projection tubes at

lower production costs than AMEC, and will become more powerful in the market than

AMEC. Although it is not very' easy for Hitachi to drive out AMEC from the projection

tube market, because of PTV manufacturers’ strong needs for the secondary suppliers,

Hitachi will be able to make AMEC’s projection tube manufacturing operation

unprofitable. Before Hitachi gains enough market share, which enable them to take

predatory action against AMEC, AMEC has to increase their market share.

2. Strategies for AMEC

In order to compete against Hitachi, AMEC needs to increase their sales more than

estimated in Figure 5, and utilize more fully their production capacity to decrease the

production cost per unit. As explained in the section II and III, this market and

manufacturing operation have particular characteristics. AMEC should take advantage of

these characteristics. The first four are strategies toward customers, hence, how to increase

sales rather decrease the production cost per unit. The fifth and sixth strategies are related

to production operation, how to reduce the production coast.

A discussion of the strategies follows: (1) AMEC should concentrate more on supplying to

minor PTV manufacturers. There are minor and major PTV manufacturers. Projection

tube producers tend to discriminate against minor PTV manufacturers in terms of prices

(personal communication with Mr. Nishiguchi, AMEC executive, August 1997). They

charge lower prices for larger quantity. Minor PTV manufacturers pay higher prices for

projection tubes than major producers do because they purchase fewer quantities.

However, since PTV demand is forecasted to expand, minor PTV manufactures’ sales are

likely to increase. Under such a market condition, sales by minor PTV manufacturers

could became quite significant amount. While Hitachi discriminates against minor PTV

manufacturers by charging higher prices, AMEC should sell projection tubes at lower

prices. When minor PTV manufacturers have many sales, the today’s lower prices will be

paid off by large quantities that they will purchase later. Additionally, the lower prices

will help to increase these manufacturers’ sales because lower projection tubes prices will

be reflected in lower PTV prices19. The price is one of the important factors for sales of

PTV.

(2) AMEC should produce projection tubes more than demanded. In other words, AMEC

should have an excess inventory. As seen in Figure 1, PTV sales have large seasonal

fluctuation. During the times of highest demand, the supply is not quite secured, especially

for PTV manufacturers that have no subsidiary projection tube producers (United States

International Trade Commission, 1995, p.7). By having excess inventory for these cases,

AMEC should capture demand from these PTV manufacturers.

(3) AMEC should have more product selections. During the last five years, the product

selections increase rapidly (United States Precision Lens, 1990, p. 15). Each type of PTV

uses a slightly different kind of projection tube. AMEC can produce any quantity of any

types of products with more flexibly than Hitachi because AMEC production capacity is

smaller than Hitachi’s. Stopping the production line for changing products will not cost

AMEC as much as Hitachi. By responding demands for small quantities of many types of

projection tubes, AMEC should gain more sales.

(4) AMEC should cut their price to increase sales. Specifically, AMEC should charge the

price as close as their average variable cost until enough market share is reached, which

makes it difficult for Hitachi to take predatory actions against AMEC. AMEC will not be

able to pay off their fixed cost until the sales increases to the certain amount. However, as

iv The lower price is one o f the important factors to increase the sales o f PTVs (United States Precision Lens. 1991, p. I 5)

long as the price covers the operation cost (the sum of the variable and quasi-variable

costs), AMEC will be able to continue the manufacturing operation without considerable

losses.

(5) AMEC should improve their yield rates to reduce the production cost per unit. If yield

rates are high, the production cost becomes lower. One percent improvement in yield rate

reduces the production cost per unit significantly (Appendix D). If the yield rates are

improved, AMEC can make more profits even if their sales remain constant

(6) AMEC carefully should choose their work shift. Although the direct labor cost is much

smaller amount than the other costs, it is only the cost that AMEC can arrange. Taking

into account not only the market demand, but also the strategies 1), 2) and 3), the most

efficient work shift should be implemented. If there is enough demand, AMEC should add

four work shifts because it is the most profitable. However, before the demand reaches the

quantity, AMEC should carefully implement their work-shift.

♦Source: AM

EC, 1995, p.5

All calculations suppose

1) one

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Tube Production

Labor C

ost Indirect

Labor C

ost_________

Appendix BProduction Capacity o f Each 'Work Shifts

1 shift 2 shift 3 shift 4 shiftOperating day per week* 5 5 5 7Operation time per day* 8 16 24

Operation time per week* 40 80 120Operation time per month 160 320 480 672

Non-operation time per month 512 352 192 0\dditional operation time available per montl 112 352 192 0

Hourly production* 250 250 250 250Daily production* 2000 4000 6000 6000

Weekly production without overtime 10000 20000 30000 42000Week with full overtime TTdays) 17000 34000 42000 42000

Month (4weeks) 40000 80000 120000 rT68000*Month with full overtime (28days) 68000 I 136000 168000 168000

_____ _ Year (48 weeks) 480000 960000 1440000 2016000Year with full overtime(48 weeks) 816000 1632000 "20160001 2016000

Calculated Based on AMEC profile (1995, p.9).

APPENDIX C Total Cost and Manufacturing Quantity

Quantity 2shift 3shift114000 4297727 14297617“ 44000i?116000 4359757 4353617 ; 0 1 /118000 4421787 4409617 i vo : /120000 4483817 *4465617 45680 * 7122000 4545847 4527647 46240!7124000 4607877 4589677 4680017126000 4669907 4651707 4736017128000 4731937 4713737 4792017130000 4793967 4775767 4848017132000 4855997 4837797 4904017134000 4918027 4899827 4960017136000 4980057 4961857 5016017138000 5023887 5072017140000 5085917 5128017142000 5147947 5184017144000 5209977 5240017146000 5278037 5296017148000 5346097 53520171500001 5414157 5408017152000 5482217 5464017154000 5550277 5520017156000 5618337 5576017158000 5686397 5632017160000 5754457 5688017162000 5822517 5744017164000 5890577 5800017166000 5958637 5856017168000 6026697 5912017

Quantity 1 shift 2 shift 3shift36000 1908817 2011217 2113617 VVI601?38000 1964817 2067217 2169617 22720 i 140000 2020817 2123217 2225617 2328■'"?42000 2082847 2179217 2281617 23840'/44000 2144877 2235217 2337617 244001746000 2206907 2291217 2393617 249601748000 2268937 2347217 2449617 255201750000 2330967 2403217 2505617 260801752000 2392997 2459217 2561617 2664017!54000 2455027 2515217 2617617 2720017156000 2 5 i7057 2571217 2673617 277601758000 2579087 2627217 2729617 283201760000 2641117 2683217 2785617 288801762000 2703147 2739217 2841617 294401764000 2765177 2795217 2897617 300001766000 2827207 2851217 2953617] 305601768000 2889237 2907217 3009617 311201770000 2963217 3065617 316801772000 3019217 3121617 322401774000 3075217 3177617 328001776000 3131217 3233617 333601778000 3187217 3289617 339201780000 3243217 3345617 344801782000 3305247 3401617 350401784000 3367277 3457617 356001786000 3429307 3513617 361601788000 3491337 3569617 367201790000 3553367 3625617 372801792000 3615397 3681617 378401794000 3677427 3737617 384001796000 3739457 3793617 389601798000 3801487 3849617 3952017100000 3863517 3905617 4008017102000 3925547 3961617 4064017104000 3987577 4017617 4120017106000 4049607 4073617 4176017108000 4111637 4129617 4232017110000 4173667 4185617 428801?112000 4235697 4241617 <i 3440-17

*The highlighted area is the lowest total cost.*The total cost is calculated by the following formula.TC = TFC + Q*VC + DLCTC =Total CostTFC = Total fixed CostQ = Quantity ManufacturedVC = Variable cost per unit = $28DLC = Direct Labor Cost

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Appendix D

Yield Rate

and Production

Cost per Unit

Glass bulbs are recyclable. Rejected projection tubes are decomposed into parts and, and glass

bulbs are kept for reuse (Figure A).

Figure A. Good and Rejected Product

Glass bulbGunOthers

Source: AMEC. 1995

Therefore, not all costs o f rejected products are included into the costs of good products. The

following formula is employed to calculate the cost per unit.

ATC = TC -{Q * (l-Y)-C G ) / Q - (Y*Q)

ATC = Average total cost per unit

TC = Total cost

Q = Quantity Manufactured

CG= Cost o f Glass Bulb, currently $17

Y = Yield Rate QR = Quantity o f Rejected Product

For example, if 140,000 projection tubes are processed with the yield rate o f 90 percent, the

average cost per unit is $38.31.

$5085917 (Total cost) -

{ 17(Cost of Glass bulb) *( 1 - 0.90( Yield rate) )* 140,000(Quantity manufactured)}

/ 140,000(Quantity manufactured) - 140,000 * 0.90 (Yield rate) = $38.31

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