Taiwan's world-leading compact disc makers are pumping up production of DVDs to tap into the fast-growing home entertainment market, raising fears of a return of a supply glut that forced firms into the red last year.
CMC Magnetics Corp, the top player in the US$2 billion optical disc industry, second largest Ritek Inc, Prodisc Technology Inc and Lead Data Inc all plan to increase digital versatile disc (DVD) production lines.
While DVDs have more storage capacity and enjoy higher selling prices than compact discs (CDs), translating into wider profit margins for manufacturers, analysts say excessive supply could mean a repeat of the industry's hard times of 2002.
All Taiwan's big optical disc makers, who together make nearly 80 percent of the world's recordable CDs and about 50 percent of DVDs, lost money in 2002 due to poor demand and price wars caused by oversupply.
They are scrambling this year to shift into more advanced DVD production, especially as more movies and music videos are put on DVDs and DVD players make their way into more households.
Industry analysts said DVD output from Taiwan firms would grow sharply to make up nearly half of their revenues next year, from an average 10-15 percent this year. World No. 3 CD maker, Moser Baer India Ltd, also makes DVDs.
DVDs are pricier to make at 30 U.S. cents a piece compared with 10-20 cents for CDs, as producers use a higher quality chemical dye that allows more information to be packed on to a disc.
Profit margins are therefore higher, with DVDs retailing at around $1.20 each, compared with 22 cents for a recordable CD.
Taiwan is expected to make 1.5 billion DVDs in 2004, outpacing projected demand of 800-900 million, and more than double the 600 million estimated for 2003 by Polaris Securities. Fueling the growth is a belief that DVD recorders will become a popular alternative to the video cassette recorder in homes.
But sales have been relatively slow, and market researcher iSuppli predicted DVD recorders were unlikely to become commonplace until 2007, because they cost $600-$800 each compared to just $100 for a simple DVD player.
Nevertheless, major Taiwan players say orders from brand name clients in Japan, Europe and the U.S. will remain steady.
Smaller rivals in Taiwan, China and India that target developing countries with lower prices, or those firms that produce DVDs for copyright pirates, are more likely to suffer from pricing wars once overcapacity kicks in, they said.
With the pick-up in computer demand and growing sales of DVDs, most Taiwan disc makers are expected to be profitable this year, but analysts are not optimistic on growth in 2004 when DVD prices are expected to fall to around 50-70 U.S. cents each.