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COVID-19 Widens The Supply-Demand Gap

COVID-19 Widens The Supply-Demand Gap

The question for TV manufacturers is whether the market will recover once the lockdown is removed or will this have a longer impact? TV display supply chain participants will need to prepare counter measures for potential worse-case scenarios now.

Coronavirus (COVID-19) has now become the most important swing factor influencing everything from demand, to supply, to the evolving TV-competitive landscape.

Demand for TV and display panels has taken a hit from the COVID-19 pandemic, which has dampened significantly consumer demand for TVs and other CE products in the end market. The TV industry estimations are that the effects of the virus have reduced production by ~30 percent in February and March, and production will not see a return to normal levels until the end of May. The reductions in April will be ~20–25 percent and ~15 percent in May. Most TV set makers have not lowered their full-year shipment goals, but those same producers were expecting to see production resume full levels in April just a short time ago, which now is expected to be pushed out further into June. It is optimistic to expect that shipments and sales lost during much of 1H will be made up in the 2H, especially as TV panel prices continue to rise, building higher costs into new inventory.

Xiaomi reported it will be cutting its domestic (China) TV supplies between 10–15 percent in April 2020. In 2020, TCL will likely see around a 10 percent decline due to the panel supply shortages and lower global demand. Hisense assembles TVs in Hungary and its Guangdong facility is coordinating with other factories to ensure the supply. Due to this manufacturing slow down, panel prices are likely to rise, which may increase the price of the finished goods. However, the expected lack of demand will likely offset this.

January–March 2020 update

The display industry revenue in January 2020 was down 18 percent sequentially and down 16.5 percent Y-o-Y. January typically averages (5 years) up 1.4 percent sequentially. HKC, CHOT, BOE, and Panda, which were either new or had expansions, countered the trend and the Samsung tabled results do not include small-panel OLED sales. Adding a bit of granularity, the large-panel sales were down 15.7 percent sequentially and down 16.5 percent Y-o-Y, while small-panel sales were down 26.3 percent M-o-M and also down 16.5 percent Y-o-Y.

During February, two panel producers were able to show an increase in revenue – AU Optronics and Samsung Display – although the Samsung numbers only show large-panel production, excluding the company’s OLED small-panel business. The panels industry in total saw a decline of 8.4 percent in sales sequentially and a 12.1 percent decline Y-o-Y, with large-panel sales declining 6.7 percent sequentially and 12.8 percent Y-o-Y, while small-panel sales declined 15.8 percent sequentially and 8.2 percent Y-o-Y, all of which took place while panel prices increased.

February TV panel shipments were propped up by rising panel ASPs and panel manufacturers’ existing stock. Monthly TV panel shipment decreased by 3.5 percent M-o-M, reaching 20.073 million units – a 10.2 percent decline from the shipment target set in 2019 but remains higher than previously projected decline of 18 percent, according to the WitsView research division of TrendForce. As TV panel shipment ranking saw a major reshuffle, CSOT led the pack for the first time.

In terms of the top six panel manufacturers’ performances, CSOT was the first to resume operations, and maintained a healthy component-inventory level. Not only did the company suffer the least damage from the pandemic, but it also took advantage of the twin surges in panel price and demand by aggressively escalating its shipment. CSOT registered February shipment of 3.726 million units, a 0.2 percent M-o-M increase, and gained pole position for the first time by overtaking BOE.

Although second-ranked BOE obtained a special government permit to bypass lockdown and stay open after the outbreak, the company operated various fabs located throughout China; the scattered nature of these facilities meant BOE was more affected by the labor-shortage issues than other panel manufacturers were. It suffered from the shortage of upstream components, such as polarizing films and PCBs. These factors resulted in an M-o-M reduction of 14.1 percent in BOE’s February shipment, which registered 3.46 million units, the company’s worst performance since June 2017.

Despite issues with material shortage, HKC fulfilled its deferred January shipment in February, in turn scoring a considerable M-o-M increase of 64.7 percent by shipping 2.6 million units. The company leapfrogged to reach the third place in monthly shipment performance and became the dark horse of the month.

In addition to delayed work resumption at its back-end IC bonding fab, fourth-ranked Innolux also faced labor and material shortages, leading to a massive 15.2 percent M-o-M shipment decline, down to 2.511 million units.

In comparison, Korean panel manufacturers suffered relatively limited losses from the pandemic. Despite temporary labor shortages at its Suzhou-based IC bonding fab in February, fifth-ranked SDC was able to increase the capacity-utilization rate of its Korean fabs due to panel price hikes in early 2020. SDC shipped 2.05 million panels in February, a 1.4 percent M-o-M increase. LGD did not face major shortages in raw materials, but owing to the fewer available workdays in February, and the impact on shipment performance from the company’s decision in 2H19 to slash its Korean fabs’ LCD TV production capacity, LGD posted an M-o-M shipment decrease of 4.4 percent in February, shipping 1.983 million units and ranking sixth on the list, while setting a historical low in single-month shipment.

In March, notebook-panel prices have risen by between 0.5 percent and 0.75 percent, while monitor-panel prices are up between 0 percent and 0.3 percent. TV panel prices, however, have the double whammy of both the effects of the virus on TV panel production capacity and the lingering effects of the South Korean panel fab closings, which leads the expectation of TV panel price increase ranging from ~1 percent to almost 6 percent.

Regional update

Most Chinese TV makers had reduced their inventory levels by the end of 2019, and planned to replenish their stockpiles in 1H20. TV makers all sensed that panel supply would be tight in 2020 owing to reduced production and the impact of COVID-19 on manufacturing in China in February. Moving into 2Q20, supply conditions had been expected to improve, as China began to manage the crisis more effectively. Moreover, the demand situation was looking up, with demand in North America remaining solid. Chinese TV makers were planning to increase their panel-purchasing volumes in 2Q as conditions in China returned to a more normal state. Most TV production in China is expected to be completely resumed in 2Q.

Leading Korean TV brands are moving more confidently to mitigate supply-chain disruption risks compared to their rivals from other regions. As a result, the Korean companies rapidly increased panel demand in 1Q to bolster their stockpiles. TV brands have aggressive shipment plans for 2020 as they strive to maintain their revenue and profits. Some of these companies want to gain market share from industry rivals, who may be more negatively impacted by the pandemic. With reduced availability from their own captive sources, the leading Korean TV brands need displays from other panel suppliers to meet their shipment targets. However, the unexpectedly fast spread of COVID-19 – particularly in European countries – now is attracting the intense attention of the Korean TV brands that have a major presence in the region.

They are accelerating their plans to shift their focus from the money-losing LCD business to the growing OLED industry. But there are worries about those plans being carried out at a slower pace than initially expected. According to IHS Markit, LG Display and Samsung Display came in fourth and fifth place, respectively, in terms of market share for large-sized LCD panels in 4Q19. Both LG and Samsung planned in 2019 to downsize the LCD businesses owing to fiercer competition over prices against Chinese players and to focus more on premium OLED panels. However, those plans seem to be facing inevitable delays due to the outbreak. LG Display’s schedule to start operating its newest Gen 8.5 OLED fab in Guangzhou, China, within 1Q20 appears inevitable to be postponed again to 2Q20. Samsung, which has TV manufacturing facilities in Hungary, Czech Republic, Mexico, and Vietnam, was relatively less affected at the beginning of the outbreak. But with Hungary closing its borders and the Czech Republic locked down, the company may face difficulties operating its European facilities.

Efforts by BOE Technology to ramp up the output from its Gen 10.5 line in Wuhan have been undermined by the outbreak, which is pushing back the company’s goal of reaching full capacity by February 2021. BOE kicked off official operation of the Wuhan Gen 10.5 plant – its second Gen 10.5 fab – in November 2019, focusing on production of 65- and 75-inch LCD TV panels. BOE’s original roadmap had the plant’s capacity at 30,000 substrates/month in its Phase-I volume production starting one quarter after initial trial production, then reaching 90,000 substrates by year-end 2020 and full capacity at 120,000 substrates by February 2021. However, the Gen 10.5 fab is currently operating at about 10,000–20,000 substrates a month, which pushes the initial 30,000 ramp-back by at least one quarter, so that orders for delivery in the second and third quarters will be similarly delayed.

If COVID-19 in China continues to recede, the 2020 impact on UDC should be minor, although there may be some inventory build-up in 1Q20 as production will be down and it could take two–three quarters to recover. Looking beyond 2020, UDC should continue to grow in parallel with the OLED industry with several variances. Samsung and CSoT will enter the TV market but they will not use UDC material, so any shipments by these companies will not result in UDC revenue.

According to AU Optronics Corp, the outbreak has not dented customer demand or halted production, but the industry might face more headwinds after the second quarter, as the pandemic is escalating in the US and Europe. The 3-year average February sales for AUO were down 4.7 percent sequentially and up 3.7 percent Y-o-Y. Large-panel shipments were 7.55 million units, up 23.2 percent sequentially and down 7.1 percent Y-o-Y. It was a surprisingly good month for AUO. The outbreak has not yet affected manufacturing, as the company’s customers have continued to replenish their TV panel inventories, which helped boost panel prices in 1Q. Demand for TVs might remain unscathed, despite the postponement of the Tokyo Olympic Games. The company did not suspend any production lines in Taiwan or China during the Lunar New Year holiday. The company has helped its suppliers of materials and components to resume production in China. However, it still took much longer than expected to ship products to customers due to large-scale lockdowns in China. To minimize logistics risks, AUO is assessing the feasibility of allocating production in other facilities. The company has resumed 95 percent of its production and the situation is expected to become healthier in April as suppliers are restoring production.

Innolux did not fare as well, reporting February sales of NTD 14.13 billion (USD 471.6 million), down 14.8 percent sequentially and down 22.1 percent Y-o-Y. The company shipped 6.59 million large-panel units, down 25.8 percent sequentially and down 20.7 percent Y-o-Y, and shipped 13.9 million small-panel units, down 35.8 percent sequentially and down 19.8 percent Y-o-Y. Both large- and small-panel shipments were the lowest of the last 5 years.

Outlook

The outlook for TV manufacturers does not look as rosy as it once did, as new display-panel purchases could see a slump related to a potential COVID-19-related recession. TV makers that had been planning to significantly boost their display-panel purchasing in 2Q now are forced to curb their ambitions as concerns rise over a potential coronavirus-driven recession, reports Omdia.

Korean and Chinese TV makers were hoping to take advantage of improving panel-availability conditions in 2Q to build up their inventory in advance of increased consumer demand. China’s top-tier TV makers currently are expected to increase their unit purchases of display panels by 5 percent sequentially in 2Q, following a 6 percent decrease in 1Q. However, these plans are now in serious doubt.

Any changes will first include supply chain disruptions that occurred as a result of the pandemic, like labor and component shortages, logistical problems, and rising costs. Then, starting in April, they will have to take action to try mitigating the impact of the demand downturn. As a result, April will be the time when the panel market is likely to experience a major demand correction.

As the pandemic is yet to come under control, many major sports events are getting postponed, stalling demand for TVs, and adding more pressure on panel prices. Overall demand for TVs will remain lackluster in 1H20, and whether TV demand could pick up in 2H20 will depend on when the virus can be contained.

All in all, it will be a difficult year for the TV set and display panel business, both a result of the virus on production and demand and the secondary effect of higher panel prices. 

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