Japanese makers of the high-end TV screens will have to trim costs of key components in order to maintain profitability and cash in on a booming global market, the analysts said.

Matsushita Electric Industrial Co., Pioneer Corp. and other electronics giants have begun accelerating plans to boost production of key digital product components, according to Japanese media reports in the past week.

On Tuesday three of Japan's largest consumer electronics makers -- Matsushita Electric, Hitachi Ltd. and Toshiba Corp. -- announced plans to invest 110 billion yen (one billion dollars) to jointly produce liquid crystal display (LCD) panels for flat-screen TVs.

The three companies plan to build a factory in suburban Tokyo with the capacity to make the equivalent of 2.5 million panels a year for 32-inch TVs.

Production is expected to begin in the September quarter of 2006.

But Japanese industrial output data in July showed big inventory build-ups in the critical electronics industry, with a 24.9 percent increase in the inventory to shipments ratio for electronic parts and devices.

While that includes other items, analysts noted the sector would be losing temporary spur to demand with the Olympic Games now over.

"In a nutshell, cost reduction is the key for electronics makers (to compete) in the market for flat-panel displays that is expected to expand rapidly," said Kazumasa Kubota, an electronics industry analyst at Okasan Securities.

Japanese manufacturers, which also include Sharp Corp., will be competing with South Korean heavyweights such as LG Group and Samsung.

Kubota pointed out cost reduction would be all the more important as the high-end TVs are low-margin products compared with conventional cathode ray tube TVs.

"Roughly 60 percent of the revenue from shipments of LCD TVs appear to be costs for components, compared with 20-30 percent of the revenue from CRT-based TVs," he said.

"That is to say, makers have to address personnel and other costs from the margin of just 40 percent of revenue."

The analyst said the lower prices would hurt profits in the near term although eventually this should boost demand for the now relatively expensive product.

A 26-inch LCD television costs about 250,000 yen (2,280 dollars) in Tokyo while a 25-inch conventional cathode ray tube TV is worth just 30,000-40,000 yen.

Tetsuya Furumoto, an analyst at Shinko Securities, said: "The price cuts themselves will have a positive effect on boosting replacement demand... what matters is the ability to reduce costs to maintain profits."

Kubota noted there could be a replacement demand potential for 100 million flat-panel TVs worldwide now, but in 2004 only five million LCD TVs will be sold and three million plasma-display-panel TVs are likely to be sold.

"There is potentially nearly 10 times as much demand as the current volume of sales," he added.

In 2004 world sales are expected to reach 133.4 million color televisions with flat-panel TVs constituting 7.9 million or only 5.9 percent of the total, according to a forecast by the Japan Electronics Information Technology Industrial Association.

Kubota said, however, the leverage of TV makers over the pricing of key components is weaker than it used to be, as they partly depend on electric parts makers for components rather than making these parts at their own facilities.

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