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An Uncertain Panels Market

An Uncertain Panels Market

The industry is experiencing a supply-push market, and panel makers will be pressured to push out panels to speed up migration.

The global flat panels industry got off to a bumpy start in 2018 amid growing concerns of oversupply resulting from continued capacity ramps by Chinese firms. In fact, the year ended up with the highest capacity growth since 2013, due largely to BOE Technology’s 10.5G fab coming online and CEC Group’s explosive capacity expansion. On the demand side, a number of factors did help rack up panels demand, including the FIFA World Cup 2018, a pick-up of gaming panels and the growing popularity of large-size TVs.

Quarter-by-quarter, demand and prices for large-size panels weakened in the first quarter of 2018 amid an off-peak season correction, with panel prices continuing falling in the second quarter despite a rebound in demand. Prices of TV panels staged an upswing starting the third quarter propelled by peak-seasonal effects and shipments of gaming panels and bezel-less panels also gained momentum in the quarter. But the upswing was proved to be short-lived as prices were plunging again in the fourth quarter amid inventory adjustments at clients and the availability of new capacities from China.

Overall profitability for the entire industry was lower in 2018 as compared to a year earlier but was not really too bad. AU Optronics (AUO) had been operating with profits for nine consecutive quarters as of third-quarter 2018 and Innolux also was profitable in most of 2018 with the exception of the second quarter, in which the company posted losses due to the appropriation of retained earnings.

Global shipments of large TFT LCD panels rose again in 2018 despite concerns of over-supply in the market. In particular, area shipments increased by 10.6 percent to 197.9 million square meters compared to the previous year, driven by TV and monitor panels.Fierce price competition in large 65- and 75-inch display panels was ignited as Chinese panel maker BOE started the mass production of the panels in 2018 at its B9 10.5G facility. With BOE operating the 10.5G line, panel makers have become more aggressive on pricing since early 2018 to digest their capacity. Large panels are still more profitable than smaller ones. Rising demand for gaming-PC and professional-purpose monitors boosted shipments of high-end, large panels. Some panel makers have allocated more monitor panels to the fab, replacing existing TV panels, to make up for the poor performance of that business. LG Display led the area shipments of large display panels, with a 21 percent share in 2018, followed by BOE (17%) and Samsung Display (16%). BOE boasted the largest unit-shipment share of 23 percent, followed by LG Display (20%) and Innolux (17%).

Burgeoning large TV panels

Demand for super large TV panels in 60-inch and larger is burgeoning and their annual shipments will nearly quadruple in 10 years after first topping 10 million units back in 2016. Annual shipments of 60-inch and larger TV panels, including LCD and OLED, are estimated to have exceeded 20 million units in 2018 and to reach 54 million units in 2025, accounting for 19 percent of the entire TV panel demand. Their combined share by shipment area is projected to almost triple to 33 percent in 2025 from 12 percent in 2016. Growth in the super-large TV panel market will be mainly driven by increasing investment in 10.5G fabs, which is capable of producing super-large TV panels with an economy of scale. This will, as a result, cut production costs and supply prices that will be translated into a drop in TV prices.

BOE embarked on the mass production of panels at the 10.5G fab in 2Q18 for the first time in the world. Once the yield rate of super-large TV panels at the fab stabilizes following production optimization, production costs at the fab are expected to fall below that of the 8.5G fab. To catch up BOE, CSOT, and Sharp are revving up investment in their 10.5G fabs with an aim to mass produce super-large TV panels in 2019, a move that would rapidly increase panel supply of the size. The rise in capacity will intensify competition in the market, which will further drop TV set prices that would help boost ultra-large TV set demand.

Such high demand for ultra-large TV sets is also expected to lead panel makers to jump in another round of race to further improve picture quality with the adoption of UHD and 8K technologies. It will also contribute to the advancement in broadcasting system and the content business that would further spur consumers’ demand for super-large TVs. The ultra-large TV set market’s expansion will eventually help the panel industry digest fast-rising capacity and play a vital role in offsetting the fall in panel prices that could eat away overall revenue in the entire panel market.

The move to 8K panels

As of now, the use of 4K panels is preponderant in the market but it appears that this panel is quickly losing track of the current trend. 8K TV panels manufacturing is becoming the focus of competition in the global LCD panels industry in 2019. At present, all screen manufacturers are focusing on this field, and some terminal manufacturers are also gearing up. Many tablet manufacturers are stepping up their deployment in the 8K space, as 4K panels have become the standard in the TV industry. Almost all TVs above 43-inch use 4K panels, while 65-inch and 75-inch models are now the targets for 8K LCD panels. At present, Samsung, BOE, AU Optronics, Huaxing Optoelectronics, and Group Optoelectronics are all focusing on large-size LCD screens of more than 85-inch. Samsung and Innolux are expected to focus on 82-inch 8K panels; AUO and CSOT may roll out 85-inch models, and Sharp is expected to release 70-inch and 80-inch models. However, LG Display, Samsung, BOE and CEC are also likely to launch 98-inch 8K panels. Meanwhile, LG Display will remain the sole supplier of large-size OLED TV panels in 2019, and the company’s OLED TV panel shipments are expected to reach 3.7 million units in the year, buoyed by the planned kick-off of its new 8.5G OLED line in China in 2H19. Although the production of 8K TV panels is about to take off in 2019, initial shipments will be limited due to a lack of SoC solutions, low yield rates, and high production costs; and the global 8K TV panel shipments are expected to reach 300,000 units in 2019 for a penetration rate of 0.1 percent. In 2019 makers will partly switch to producing LCD panels for televisions with 8K resolution.

Regional analysis – China, South Korea, and Taiwan

Chinese panel makers are still expanding their production capacities for LCD and OLED displays, putting pressures on other industry players. South Korean panel makers still lead the TV panels market in terms of unit shipments – LG Display with a 26 percent share and Samsung Display with 25 percent. Being key panel suppliers to global top-tier TV brands that are focusing on larger TV screens helps them maintain the market leadership position. However, as Chinese panel makers just began their 10.5G fabs, the competition will be more intense between Chinese and South Korean panel makers. Samsung is closing its 8.5G production line in 2019 and shifting the focus to QD-OLED panels in response to the price competition. LG Display also plans to expand its OLED production capacities in China and Korea targeting large-sized TV displays. It is estimated that by 2020, the OLED investment of LG Display will reach USD 13.5 billion. Chinese panel maker BOE has increased its 6G AMOLED production as the penetration rate of OLED panel in the smartphone is increasing. However, as the smartphones market has become saturated, the investment of BOE might lead to a further price war for small-sized OLED panels.

On the other hand, Taiwanese panel manufacturers have never targeted OLED. Instead, they have focused on mini LED and micro-LED technologies. AUO has begun shipment of its mini LED backlight products for high-end applications including gaming monitors and notebooks. AUO has been adjusting its positioning and addressing high-value products to avoid price competition in the panel market. Innolux also concentrates on the development of mini LED. The company believes that the mini LED is compatible with OLED as the production cost might be lower for similar performance quality. Innolux has targeted large-sized displays including public information display and TVs.

Open cell manufacturing in India

Brands such as Xiaomi, TCL, Skyworth, BPL, and Thomson which until recently were importing televisions for sale in the country, have started local production at the component stage. Top brands like Sony and LG are also now expanding TV production — as opposed to just assembling imported modules — after the government changed the duty structure earlier in 2018 to make local manufacturing cheaper by 5–7 percent. The shift includes premium OLED and 4K models. The companies are now locally assembling the TV panels itself as well as manufacturing printed circuit boards (PCB) and molds. While most of the manufacturing is by contract companies, LG is expanding its Pune factory and TCL has plans to set up an industrial park to manufacture components. Sony India is soon going to start similar manufacturing at the Foxconn plant where it already assembles television sets apart from increasing overall local manufacturing. Xiaomi India too has started local production of 32-inch and 43-inch models in India through the open cell process and plans to completely localize production by the end of this fiscal.

The government increased import duty on television sets to 20 percent from 10 percent, which made imports from China, Thailand, and Malaysia unviable. The duty on components was also changed to promote backward integration. The government imposed 15 percent duty on ready-to-use LED TV panels, while 10 percent duty was initially levied on open cell TV panels, subsequently reduced to 5 percent. Open cell TV panels involve manufacturing at the component stage since the TV panel requires further production processes before becoming ready for final assembly. However, the industry is concerned that the government may need to bring down import duties on open cell panels to zero percent to compete against imports from some countries with which India has free trade agreements (FTAs), which mean nil duty if there is any value addition. Samsung is contemplating the reduction of local manufacturing and instead importing TVs from Vietnam, with which India has an FTA, at least when it comes to large screen models.

The volatile FPD equipment market

The FPD equipment market is expected to start to decline after an unprecedented build-up in 2017 as panel makers take a more cautious approach as they wait for demand to catch up to rapidly ramping capacity. The FPD equipment market is forecast to fall from USD 20.2 billion in 2017 to USD 14 billion in 2020, declining at a CAGR of 11.6 percent. The expansion of the FPD equipment market that started in 2016 has been driven by the high equipment intensity of new flexible AMOLED display factories and the scale of 10.5/11G LCD factories. This expansion has been further fueled by Chinese local governments, which have supported panel makers with various mechanisms, such as financing, land grants, reduced taxes, infrastructure, and direct subsidies. Such broad government support of Chinese FPD fabs for all types of display technologies and factory sizes is starting to distort the supply/demand balance as the new capacity begins to ramp.

Even so, Chinese local governments continue to fund selected projects despite the tightening of credit, particularly for 10.5/11G LCD factories. These projects are predicted to keep equipment spending relatively firm through 2020. However, it threatens to push the large display supply/demand glut level to a record annual high of 18 percent in 2020, unless panel makers reduce excessive LCD TV panel capacity by converting some of it to OLED TV panels production and shutterless productive legacy factories.

High-end OLED TV is one segment that is still expected to face tight panels supply for the next few years. Although demand is low compared to standard LCD TVs, OLED TVs are a growing niche, whose panel demand is forecast to rise from 2.9 million units in 2018 to 6.7 million units in 2020. Being the only panel maker to have commercialized OLED TV panels to-date, LG Display is shipping all the panels it fabricates and running its current factories at full utilization.

Equipment spending in 2019 will be significantly supported by the conversion of legacy LCD fabs to advanced AMOLED factories. JOLED, Samsung Display, and others are utilizing previously purchased TFT tools, while adding OLED frontplane, color conversion, cell and module equipment, hoping that they will keep them ahead of rivals and enable them to ride the growth of the AMOLED TV market.

The FPD equipment market has always been highly volatile depending on market and technology changes. Some slow-down is not surprising following years of record high equipment spending. How all the equipment being installed will affect the future opportunity is a question that equipment makers are now struggling to answer. The correction will continue beyond 2020.

Tight supplies of display panel materials and components, such as driver integrated circuit (IC), glass substrate and polarizer, are expected to slow the decline rate of LCD panel costs. Supply of driver IC tightened throughout 2018, and exceeded demand by 4 percent. Tight supply of driver ICs has impacted the prices of IT panels, such as desktop monitors, notebook PC, and tablet PC panels, and has also extended into TV and smartphone panel prices since 3Q18. Glass substrates are also in a tight supply situation since the beginning of 3Q18. Major glass makers are investing in glass-melting tanks in China, but the higher glass consumption of Chinese panel makers’ means it exceeds more than double the glass production capacity of the country. Chinese panel makers also import products from Japan, South Korea, and Taiwan but they are stymied by glass production delays and delivery. Polarizers have been in a tight supply situation since 3Q18.

Way Forward

As 2019 has begun, the global panels industry is primed to cash in on various continuing advances aimed at producing larger and better-quality displays. Even so, the specter looms of a possibly serious oversupply situation, caused by the coming online of new fabs, mostly located in China. The preliminary 2019 business plans of TV and panel makers show forecasts trending in different directions. After hitting 7.3 percent growth in 2018, global demand for FPDs in terms of area is forecast to expand 6.4 percent to 228 million square meters in 2019. It is the first slowdown in year-on-year growth in 4 years.

Although the FPD demand will continue to grow, mainly driven by migration to larger displays for major applications, such as TVs, desktop monitors, mobile PCs, and smartphones, the pace is expected to slow through 2021. The uncertainty from rising global trade tension may pose a threat to the panels demand. Huge investment in panel factories in China is also expected to continue to cause oversupply in 2019.

World real GDP growth is forecast to grow 3 percent in 2019, following 3.2 percent in 2018 and 3.3 percent in 2017. The 2019 world real GDP growth was revised down from a 3.4 percent forecast in April 2018 as trade disputes between the United States and China worsened. This will partially contribute to slower growth in end-market demand and the lower demand for FPDs in 2019. Oversupply is also expected to have an impact as China Star initiates mass production of FPDs from its 10.5G fabrication plant in Shenzhen, China, in 1Q19. HKC will also contribute to an increase in the production capacity by mass producing panels at its new 8.6G fab in the 2Q19.

As a result, the production capacity of TFT panels is expected to increase by 11 percent in 2019 compared to 2018, and the supply will surpass demand at a greater magnitude than 2018.

LCD TV panel business plans show an aggressive year-over-year growth of 8 percent, while LCD TV set business plans conservatively are at 3 percent. The comparison of worldwide TV panel shipments and TV manufacturer set shipments reveals a shipment gap. On a practical basis, 3-4 weeks of panel safety buffer, a panel supply that is at least 6 percent higher than demand, and adequate lead-time are required for the smooth production of TVs. In the UHD TV panel space, panel makers from China and Taiwan are hoping to ignite interest in 8K panels, touting the high numbers in 8K resolution. Chinese brands are especially eager to see significant 8K panels volume materialize in the country, as the number 8 is considered very lucky in China.

The global 4K panels market in 2019 will reach approximately 142 million sets or 52 percent of the total display panels space. Meanwhile, the nascent 8K panels market will top out at 700,000 sets in 2019. Global demand in 2019 for OLED TV panels is projected to reach 4 million units in 2019.

Though panel prices rebounded in the 3Q18, the long-term LCD TV business outlook may be shaky for Korean and Taiwanese panel makers, considering the intensifying competition from China. As a result, some panel makers are expected to be more aggressive in restructuring or converting existing LCD capacity to more advanced premium-display technology, focusing on larger sizes and OLED/QD OLED TV panel production. These business scenarios are still in the discussion phase and are not expected to be implemented soon, which is likely to affect the supply-demand outlook in 2019.

For large-sized displays, the oversupply will be the result of ongoing aggressive investment in China forecast to drive the growth of more than 10 percent in glass-area capacity yields. Chinese panel makers, already frazzled by various stresses, could find themselves plunged further into perilous territory. By all accounts, China continues to be the highest-profile player in the overall displays market. Area capacity from all Chinese fabs is projected to reach 155 million square meters in 2019, up from 120 million square meters this year.

As demand grows for larger TV panels, the panels will increasingly be produced at 8.5G, 8.6G, and 10.5G fabs. But as 10.5G fabs stabilize and shipment volumes grow, 8.5G fabs, being older than their 10.5G counterparts, will be less competitive in their bid to make super-large-sized panels. There will be more 10.5G capacity coming on stream, so that the supply base for large displays, including 65-inch, will continue to improve.

Three new 10.5G fabs – CSOT’s T6, BOE’s second fab, and Foxconn/Sharp’s Guangzhou line – are expected to start mass production. All of them are assigned to manufacture TV panels, further boosting TV panel supply. The tension between the US and China will bring more uncertainty to the market, affecting the global economy and weakening consumer demand in the end market, which is likely to work to slash panel demand. Adding the pressure to the negative impacts of the US-China trade dispute is the continued capacity ramps by China’s flat-panel makers.

The production capacity of BOE Technology’s 10.5G line is expected to reach 90,000 substrates a month by the end of 2018 and to climb to a full capacity of 120,000 units by March-April 2019. And more capacities will become available in 2019, including an 11G line of CSOT in 1Q, an 8.5G OLED line of LG Display in May, newly added capacity from an 8.6G line of HKC in June, and a 10.5G line of Sakai Display Products (SDP) in September. The industry is experiencing a supply-push market, and panel makers will be pressured to push out panels to speed up migration.

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