If this were the United States, this piece of Pacific Ocean-view land would probably hold luxury houses or a fancy hotel.
But this prime piece of Mexican real estate is home to a far riskier investment: a flat-panel television factory.
Japanese electronics-maker Sharp invested $300 million in the brand-new plant and adjoining complex, which churns out liquid crystal display (LCD) TV sets for the North and South American markets. Inside a pristine white building — surrounded by the tough, dirt-road neighborhoods of this border city — a staff of about 2,300 builds huge flat-panel sets that sell for as much as $8,000. The workers make about $150 a week.
Yet there's no guarantee that the factory will be profitable.
Televisions may seem expensive, but they're actually among the best deals on the planet. An extremely competitive market causes TVs to get better and cheaper every month. Consumers who benefit from this may not realize that competition also puts pressure on manufacturers such as Sharp. TV makers must constantly decide whether add-ons such as good customer service, tech support and design are worth it.
"We have to watch out (for competitors)," Sharp Electronics CEO Toshihiko Fujimoto says through a translator at the opening of the new factory, which drew dozens of executives from Japan and several high-ranking Mexican officials.
On a good day, a TV maker may earn a profit of about 10% on each set it sells, says tech analyst Rosemary Abowd at researcher Pacific Media Associates. But on a bad day — and there are many — they lose money.
Prices fall fast. The price of a typical set tumbled from $2,100 in January to $1,592 in August, a 24% drop, says the most recent data available from Pacific Media. Yet TV makers must frequently upgrade factories and equipment to keep up with the fast-changing technology. Sharp is also spending $3.3 billion to build a high-tech LCD component plant in Sakai City, Japan.
Companies that hit the market just right can make a fortune. But it takes only a few missteps to lose millions, says tech analyst Eddie Taylor at researcher DisplaySearch.
Sharp is reinventing itself in hopes of getting it right. But "It's a risky strategy and a huge investment," Taylor says.
Sharp boldly began phasing out traditional cathode ray tube (CRT) TVs in 1998, when flat-panel TVs were still new, unproven and incredibly expensive. At one point, it was the overwhelming leader in LCD TV sales.
Then rivals moved into the market with low-priced products. Sharp was unable to hold onto its market share and quickly fell to its current No. 4 spot in the USA.
"It was a kind of tough time. There was a push back," Fujimoto says.
The company did carve out a small niche for itself as a manufacturer of large, high-end sets and managed to remain profitable. Sharp doesn't break out TV sales, but its overall consumer product division posted net income of $698 million on revenue of $18 billion in its most recent fiscal year.
Now, Sharp plans to again become a leader in the U.S. market. Its strategy:
• Even bigger TVs. Sharp already has some of the biggest sets on the market, including a 65-inch whopper that would look ridiculous in many living rooms. (TVs are measured by the size of the screen, measured on the diagonal from the upper left corner to the lower right. A 65-inch set has about 1,800 square inches of viewing area.)
Sharp can make these big sets because its LCD glass-panel plant in Japan, which makes the TV screen component, is among the most sophisticated in the industry, says component analyst Sweta Dash at researcher iSuppli. But Sony and Samsung are catching up through an LCD-panel joint venture that recently opened its own high-tech glass plant.
That's one reason Sharp is investing in a new glass plant in Sakai City. The factory will make master sheets of glass, called motherglass, 1.6 times bigger than most available today. The glass can be cut into a variety of increasingly huge TV screens.
When asked how large the sets will get, Fujimoto smiles. "How big do you want?" he asks.
• Low-cost manufacturing. TV makers must keep manufacturing time as short as possible, because prices fall so quickly. A TV on a boat from Asia to the USA usually loses value each day it is at sea.
Many early flat-panel TVs were made in Japan or China and shipped to the USA, but Sharp began manufacturing LCD TVs in Rosarito in 2003. The proximity to the USA keeps shipping costs low. Yet the minimum wage in the Mexican state of Baja California is about $4.50 a day, vs. about $46.80 a day in the USA.
That helped, but LCD glass still had to be made in Japan and shipped to China for processing before being sent to Mexico by boat for final assembly. Sharp's new Rosarito facility is sophisticated enough to process the glass in-house, eliminating the middle step. The time to build a TV has dropped from 40 days to about seven, Nobuo Harada, head of Sharp's Mexican division, says via translator.
This allows Sharp to keep up with rivals. The area just south of the U.S. border near San Diego is known in the industry as the "television capital of the world." Sony, Samsung and Matsushita (parent company of Panasonic) are among those that have factories there.
• Marketing. The Sharp brand name doesn't have the cachet of Sony, because marketing was never the company's forte, says Taylor. Now, Sharp is trying to change that. It is promoting its Aquos flat-panel brand through a multiyear Major League Baseball sponsorship and a related ad blitz.
Sharp is following the example of Samsung, which was able to capitalize on the name recognition of its cellphone business to bolster its TV division.
"Samsung has little (TV) share in the Japanese market. But yet in the U.S. market, their brand is big," Fujimoto says.
A crowded field
No matter how good Sharp's plan, it will be difficult for the company to stand out. There are nearly 120 TV makers worldwide, from giants such as Sony and Samsung to small newcomers such as Vizio, says Abowd.
Only a handful of the biggest players, including Sharp, Sony sne, Samsung, Philips phg and LG, make flat-panel sets and the key components that go in them (notably, the screen). They often sell their extra component inventory wholesale. And they buy parts from each other when supplies are short.
Many other TV makers don't manufacture anything at all. They buy components, then hire third-party factories to build the televisions to their specifications. Westinghouse Digital, for example, has just 100 full-time employees, mainly in marketing and engineering, says Rey Roque, the company's vice president of marketing.
That means, more often than not, that a TV's inner parts come from a jumble of companies that may or may not include the name on the box. Telling the difference between brands can be challenging, although some sets do contain higher-quality parts than others, says analyst Dash.
That makes it extremely difficult for TV makers to distinguish themselves. Each company responds to this challenge differently:
• Samsung is focusing on design, with sleek new TVs that feature a wineglass-shaped base. The company is also spending "tens of millions" of dollars on a U.S. advertising blitz that centers around a National Football League sponsorship, says Tim Baxter, a sales vice president at Samsung.
• Philips is emphasizing customer support and experience, including a new program that offers lifetime telephone support for all large-TV buyers, says Lucas Covers, a marketing executive at Philips.
• Westinghouse Digital is going after customers who want to trade in their CRT sets for an affordable flat-panel and is selling through mass-market retailers such as Target. It plans to keep costs low by outsourcing manufacturing, Roque says.
Some TV makers may not be around to answer customers' calls much longer. "In the end, 120 (TV makers) is too much," Covers says.
Smaller players, who don't have the resources to overcome stumbles, are especially vulnerable, Baxter says.
Betting on a boom
Sharp has a strong management team and plenty of staying power, Taylor says. But it must execute its ambitious plan in the tricky world of international business.
The trilingual event held to celebrate the opening of the Rosarito plant is a good example of how tough this can be. Amidst the tree-planting and ribbon-cutting, reporters peppered executives and officials with questions about government corruption, border politics and the nearby kidnapping of a tourist.
The facility is wrapped in barbed wire and heavily guarded. Many managers choose to live in San Diego, even though it means commuting through the congested U.S. border crossing at Tijuana. Is it worth it? Why bother with such a tough market?
Because somebody will make a lot of money in it, says iSuppli's Dash. The 2008 Beijing Olympics is expected to cause already fast-growing TV sales to jump. They'll also get a boost in 2009, when U.S. TV stations turn off their analog broadcast signals and transmit only in digital. That won't affect most TV viewers, especially those with cable or satellite. But some people with older sets, who still receive broadcasts via antenna, are expected to upgrade, she says.
Bigger TV companies have the resources to survive when smaller rivals may falter, says Samsung's Baxter. And it's crucial to have a foothold in a market that is just beginning to explode. After all, prices are falling enough to make flat-panel TVs attractive to many buyers for the first time, says Dash.
"They're reaching the sweet spot," she says.