Price wars zap console parts firms

Nintendo Inc became the third company to slash the price of its video-game system yesterday, and while consumers may cheer the move, it's no fun for the Taiwanese firms that manufacture the systems.

Nintendo cut the price of its GameCube console by US$50, lowering it to US$149 per unit to keep ahead of rivals Sony Corp and Microsoft Corp. Last week, the two companies lowered the prices of their PlayStation2 and Xbox, respectively, by US$100 to US$199 per console -- to match Nintendo's price at the time.

"Nintendo is committed to offering our players the best games and the best price. We were the first manufacturer to reach the US$199 price level and now we're leading the industry to US$149," Peter MacDougall, executive vice president of sales and marketing at Nintendo of America Inc, said in a statement.

In Taiwan, where a number of companies manufacture parts for the consoles, the discounts are zapping profit margins.

"The situation has become quite severe [for Taiwanese manufacturers]," said William Feng (方偉昌), an analyst at Primasia Securities Co.

Feng believes companies such as Hon Hai Precision Industries Co (鴻海精密), which counts on the Sony PlayStation2 for as much as 20 percent of revenue this year, have seen their margins cut to below 5 percent on the game consoles -- and in some cases companies are producing at close to cost levels just to keep production lines humming.

Local chipmaker Macronix International Co (旺宏) could also feel some pain in the coming months. The company produces various kinds of microchips for Nintendo, with sales to the Japan-based company making up around 20 percent of its revenue, according to a UBS Warburg report.

Shares of Macronix plummeted NT$1.4 to end at NT$21.8 on the TAIEX yesterday.

Video-game companies are starting to sell consoles at or below cost in an effort to hook customers on their game software in a quest for long-term profits.

Major video-game makers now have plans to move their operations to the Internet, turning personal computers into the game console. Microsoft is expected to unveil a US$1 billion online system, dubbed Xbox Live, later this week, the New York Times reported yesterday. By moving the games online, the company can take advantage of multi-player games, the report said.

Sony and Nintendo also have plans to put their games online.

The silver lining for Taiwanese console makers could turn out to be sales volume. As prices plummet, more consumers will be able to afford game machines, some analysts say.

Others believe that with the economy still struggling to grow, consumers for the near-term will be less likely to spend money on video-game consoles.

Sony is expected to sell around 16.5 million PlayStation2s this year, while Nintendo should sell around 10 million GameCubes and Microsoft 8.5 million Xboxes, the UBS Warburg report said.

Hon Hai produces PlayStation2 and Wistron Inc (緯創資通), a division of Acer Inc (宏電), assembles the Xbox.

GameCube is made in Japan.

A number of local manufacturers, including Delta Electronics Inc (台達電子), Cheng Uei Precision Industry Co (正崴精密), Benq Corp (明電) and Mustang Industrial Corp (同協) sell parts for these game systems.