Entering A Survival Situation

Entering A Survival Situation

Panel makers are entering a survival situation in 2019–2021. They are retreating from the business due to cash losses and poor prospects. They are shutting down old fabs and reducing staff to optimize their financial structures. And, the coronavirus outbreak is only adding to the miseries.

The display industry has been experiencing a substantial oversupply due to saturated demand and aggressive investment. In 2019, global demand for flat-panel displays fell short of expectations amid escalating trade tensions between the US and China, and a slowdown in global economic growth rates. Area demand for flat-panel displays increased by a negligible 1.5 percent compared to the previous year.

As the Gen 10.5 fab has stabilized and increased shipments, Gen 8.5 has become less competitive for super-large TVs, and most panel suppliers are considering changing their product mix at their Gen 8.5 fabs. Some suppliers are considering restructuring capacity for other technologies like OLED and QD-OLED, and some suppliers have a plan to increase shipment volume for IT products.

Panel prices were forecast to trend downward in 2Q2019; while previously, they were expected to remain flat. The main reasons are high inventories and subdued demand, which would result in an oversupply. Prices have been falling since May 2019. Panel makers have been suffering from poor profitability and continue to reduce utilization. Panel makers are looking for ways to stabilize prices. CEC Panda and China Star (CSOT) pushed out 50- and 58-inch products from new Gen 8.6 fabs. The 50-inch panel has advantages over the current 49-inch panel. It could replace the 49-inch and gain a larger share of the market.

Panel makers increased their 2019 business plans for 8K LCD TVs from a total of 308,000 to 340,000, and the latest forecast is for 385,000. Samsung Display increased its target to 312,000, including shipments of a new 55-inch 8K LCD TV panel. Other regional players like the Chinese panel makers have been focused more on ramping up new fabs than 8K. They want to achieve a soft landing in the large-LCD TV panel market first. Taiwan panel makers are watching market trends, because the 8K SoCs are not ready except at a few Tier-I TV brands.

CSOT started mass production at its Gen 10.5 fab in 1Q2019, and HKC started mass production at its second Gen 8.6 fab in 2Q. BOE is constructing a second Gen 10.5 fab in Wuhan, China. LG Display started mass production at its new Gen 8.5 OLED fab in Guangzhou, which will increase shipments of OLED TV panels, and IHS Markit estimates that OLED TVs will clock sales at around 3.4 million units in 2019. Panel prices have been decreasing, making panel makers even less profitable. Fab loading rates lowered to an average of around 81 percent and 79 percent in 3Q and 4Q from 84 percent and 85 percent in 1Q and 2Q2019.

The future direction of the market will hinge upon the progress of talks between the US and China, which have been engaged in negotiations since October 2019. Despite remaining uncertainties, the demand for flat-panel displays was earlier projected to increase by nearly a double-digit rate in 2020 due to several factors. One significant growth driver expected is Tokyo Olympics, which is scheduled to take place in July and August 2020. Japan’s NHK plans to broadcast the 2020 Olympics in 8K resolution. Many TV brands are expected to try to boost sales ahead of the Olympics by promoting their 8K capabilities. Alongside the rise in resolution, TV brands were expected to cater to demand for larger-size sets. The weighted average size of an LCD TV is expected to expand to 47.6-inch in 2020, up from 45.1-inch in 2019. This increase in size is the result of rising production and increased yield rates at new Gen 10.5 LCD fabs.

However, the outbreak of coronavirus in the mainland China has left the panel makers in a state of turmoil.

Can LCD panel oversupply drive TV demand?

LCD TV panel capacity has increased substantially in 2019 mostly due to the expansion of Gen 10.5 fabs. After growth in 2018, LCD TV demand weakened this year, caused by slower economic growth, concerns about a trade war, and tariff rate increases. Capacity expansion and higher production, combined with weaker demand, have resulted in considerable oversupply of LCD TV panels in 2019 leading to drastic panel-price reductions.

Some panel prices went below cash cost by the end of 3Q, forcing suppliers to cut production and delay expansion plans to reduce losses. What will be the implications for the industry in the holiday season and 2020? Can these very low panel prices help to drive TV demand?

Intense expansion of LCD TV panel capacity

Massive Gen 10.5 capacity that can produce 8-up 65-inch and 6-up 75-inch panels from a single mother glass substrate are coming to display market in the next 3 years. The trend already started in 2018 as BOE started its a-Si TFT LCD Gen 10.5 fab from the first quarter. It ramped up to its full capacity in the first half of 2019. CSOT also started its a-SI TFT-LCD Gen 10.5 fab in the first half of 2019, focusing on 65-inch and 75-inch TV panels. There were also increases in capacity from other Gen 8.5 fabs. Foxconn/Sharp’s Gen 10.5 fab was also expected to start in 2019, with full production ramp up in 2020, but it has been delayed now.

By the year 2021 and 2022, about eight to ten 10.5 Gen fabs with huge capacity are expected to be in production. Fear of panel oversupply is looming even larger for future years. With considerable growth in capacity and the entrance of new panel suppliers and TV brands, competition has accelerated with intense price pressure. Capacity expansion in 2019, combined with low TV demand, has pushed the market in severe oversupply situation in the second half of 2019.

Fear and uncertainty lead to slower TV demand

Fear and uncertainties due to the trade war between the US and China, and an anticipated tariff increase in 3Q2019 pushed TV brands to move panel orders to earlier in the first half of the year. Weaker TV set sales led to an inventory build-up by the end of 2Q. Also, fear of TV price increases due to tariffs reduced the second-half outlook, suggesting reduced panel demand and increasing inventories, also on the panel side. Panel prices also started to decline.

By 3Q2019, too much capacity was chasing too little demand, pushing the market to oversupply. Fierce competition has led to drastic panel-price reductions, pushing prices below even cash cost for some products. Panel suppliers’ financial results suffered in 3Q as many lost money. Suppliers from China, Korea, and Taiwan all started lowering utilization rates by the end of 3Q to reduce oversupply and in the hope of stabilizing panel price. Very low prices, combined with lower utilization rates, are making the revenue and profitability outlook for panel suppliers difficult in 4Q2019.

Suppliers forced to cut production as price dipped below cost

BOE and China Star have cut utilization rates of Gen 10.5 fabs. Sharp has delayed the start of production at its Gen 10.5 fab by 6 months and plans to start in 2020. LGD and Samsung display have already decided to shift away from LCD, more toward OLED and QD-OLED, respectively. Both companies are cutting utilization rates in their Gen 7, 7.5, and 8.5 fabs. Taiwanese suppliers are also cutting Gen 8.5 fab utilization rates.

According to industry data, some panel suppliers are already cutting utilization rates below 50 percent to 60 percent for their Gen 8.5 fabs. And Chinese suppliers are cutting their fab capacity by 20 percent to 25 percent. Some have shifted capacity away from TV to other applications. In summary, drastic price reduction has resulted in cut in utilization rates, delay in fab construction and ramp ups, and closing down of older fabs, or conversion to OLED or QD-OLED fabs. This can help to reduce oversupply. Still there is a need for an increase in demand, especially for larger-size TV to absorb the massive LCD capacity.

Capacity expansion, price reduction, and demand creation

The history of LCD industry has shown that the industry follows a strategy of capacity expansion, price reduction, and demand creation to drive application market growth. This strategy has resulted in periodic cycles of oversupply (some call it the crystal cycle) that pushes price to below cost level. Then production cuts, investment delays, and increased demand due to low prices push the industry back to tight supply and increased prices. There is a time lag between each stage and between oversupply and tight supply. That creates heavy collateral damage for suppliers, leading to loss of revenue and profitability.

In extreme over-supply situation, only a few companies with strong financial strength and commitment to LCD can survive. Others have to move away to other new technologies or shift to specialty-type applications, away from the commodity markets. In the last 20 years, there are plenty of examples in the LCD industry of this change. This capital-intensive industry requires billions of dollar-investments with uncertain outlook.

Pushing forward OLED panel shift

Facing fierce competition from Chinese rivals with lower production costs, South Korean display makers have been pushing forward a shift to the production of high-resolution OLED panels.

South Korea was the world’s largest display-producing country until 2017. However, China took the number one spot in 2018, gaining a global LCD market share of more than 30 percent, leaving Korean makers with a share of 29.5 percent. Chinese panel makers benefit from low production costs and a narrowing technological gap, with their Korean rivals, allowing them to mass-produce lower-priced LCD panels.

Consequently, LCD prices fell significantly, leading to an operating loss for Korean display makers. The Korean display industry was forced to shift its business to higher-end OLED panels, where it still has a competitive edge.

Chinese panel makers are focused on LCD production, and lag behind the Korean rivals in the OLED sector. In making large-size OLED above 9-inch, Korea is 3–5 years ahead of its Chinese rivals. In a smaller-size OLED, less than 9-inch, the technological gap has narrowed to about 1 year. Korean panel makers have been trying to increase the use of OLED and create more OLED demand; hence, they can regain the dominant position in the global display market.

LG Display increases investment

LG Display increased investment in its OLED production facilities since 2011 and has accelerated it in recent years. The company announced in July 2019 its plan to invest 3 trillion won (USD 2.53 billion) in Gen 10.5 OLED production facilities in Paju, about 50 km north of Seoul, following a 1.84-trillion won investment in 2015 and 2.8 trillion won in 2017.

Currently, LG’s plant produces OLED with Gen 8 facilities, which were optimized for 55-inch OLED panels. They can produce larger OLED panels than 55-inch, with the current facilities but productivity drops when manufacturing larger OLEDs. On the other hand, Gen 10.5 facilities are the best fit for a 65-inch OLED panel. Their productivity thus improves when producing OLEDs larger than 55-inch.

The panel maker has planned to start mass-producing 30,000 units of 65-inch or larger OLED panels per month in the first half of 2022 at the new facilities. It is planning to mass-produce an additional 15,000 panels per month starting in the first half of 2023.

Quantum dot displays to spur premium display market growth

Ever since the start of the digital display era, display size, design, and resolution have been used as barometers of innovation in display technology. Display makers marketed size and design as their distinctive features to lure consumers. To make a display slimmer, light-emitting diode backlight unit liquid-crystal displays (LED BLU LCDs) widely adopted edge BLU and bezel-less designs. Curved and bendable display technologies that enabled the production of super-large sized and flexible display designs also gained consumer’s attention.

Recently, OLED displays, with improved resolutions and designs as well as outstanding color reproductions, have emerged as next-generation displays for smartphones. This had led to OLED rapidly replacing LCD as a premium smartphone screen. The newcomer microLED display that has advantages of both LCD and OLED display technologies, and can enable a modular display is also seeking to expand its presence in the market. Aside from the aforementioned technologies, other display technologies, such as 3D, hologram, and HDR, have been introduced, which raise expectations of a steady growth in demand for premium displays.

WCG and QD display in limelight in line with OLED’s ascent

The OLED display, having helped to significantly improve color reproduction and enable foldable smartphone screens, is cementing its position as a premium display technology after it ushered in the new premium display era. To fend off the ascent of OLED, the LCD sector has also rolled out its own premium display, using QD display technology that enables a very wide color gamut. The demand for QD displays is estimated to have reached 6 million units in 2019 after an increase of a million units yearly since 2015 when its demand started to show substantial growth. Producing 75-inch or larger-sized displays with QD display technology, which is a challenge for OLED display technology, has become easier with QD films. This has given QD displays the upper hand in the large-display sector.

The second-generation QD display uses a QD color filter with blue OLED. However, it will take a long time to develop a QLED display, which is a self-luminous QD display that is touted as the highest-level QD display technology, and would be realized after first- and second-generation QD display technologies are perfected. The priority is to secure all the necessary QD materials and processing techniques.

However, the quantum dot display market is still at its infancy, with plenty of room for improvement. Manufacturers are thus channelizing their efforts in developing new technologies and products, using quantum dot display to gain a competitive edge in the global market. Pricing strategy among manufacturers is on the cusp of a major change, with implementation costs falling and new pricing options becoming more viable. Several competitors have seized the opportunity to create a product range spanning different price ranges.

Samsung Display invests 13.1 trillion won

Samsung Display is in the frontline of developing QD display technology and expanding its distribution network. The company has planned to invest 13.1 trillion won over the next 5 years to upgrade its display manufacturing line. South Korean President, Moon Jae-in attended the signing ceremony for the investment plan in the Korean city of Asan. Samsung plans to use one of its LCD production lines in Asan for high-resolution quantum dot display panels.

Micro LEDs open new growth windows

Micro LEDs, an emerging flat-panel display technology with immense growth potential, are expected to be applied in a range of fields, such as large-sized display products, wearables, augmented reality, virtual reality, optical sensors, and fingerprint recognition. The market value of micro LED products will reach USD 694 million by 2022. The technology will be gradually applied to AR micro projections, which require high brightness, automotive head-up display (HUD) projection applications, and ultra-large digital display in the near future.

Chinese television manufacturer Konka Group Co. Ltd., will increase its investments in 5G, 8K ultra-high definition, the internet of things powered by artificial intelligence (AIoT), and micro LED, as part of a broader push to propel the development of the semiconductor display industry. Konka also plans to invest 1.5 billion yuan (USD 213 million) to establish a micro LED research institute together with Chongqing Liang Shan Investment Co. for R&D, production, and sales of micro LEDs.

According to Beijing-based consultancy All View Cloud, TV sales reached 22 million units nationwide in the first half of this year, down 2.7 percent compared with the same period last year, and related sales revenue totaled 64 billion yuan, a fall of 11.8 percent year-on-year.

Following LCD and OLED, micro LED is now one of the next-generation display technologies that are in the spotlight. Major panel and home appliance manufacturers have marched into the micro LED sector to expand their portfolios of TV products, as micro LED display technology works as a supplement to the traditional LCD and OLED TV industry. The technology will be adopted in 85-inch or above display products, while TV makers hope to enhance their competitiveness and profitability through developing diversified technologies.

However, the costs of micro LED remain too high for display panel makers, so it may cut into the market through high-end consumer products like gaming notebooks, gaming monitors, as well as niche products like high-end TVs with high resolution, high contrast, and high color saturation. Micro LED itself has a lot of potential and could one day shine in lots of applications, including VR devices, AR projection, optical sensors, and fingerprint recognition, but the LCD and OLED technology still dominates the 100-inch and below display products.

The biggest challenge is to find ways to enter into mass production in order to decrease manufacturing costs. The mass production requires efforts across different industries, including LED, semiconductor devices, and the entire display supply chain. New specification standards will raise the technology barrier for market entrants. The need for cross-industry collaboration will also prolong the R&D period for developers of micro LED displays.

An update – Panel makers

BOE started mass production of micro OLED panels in Kunming, Yunnan Province, in October, 2019. In May 2019, BOE demonstrated its innovative technology and solutions, such as the 0.39-inch micro-OLED AR with the highest 5644 PPI. According to BOE’s 1H2019 financial report, its Gen 6 flexible AMOLED production line in Chengdu increased by more than 300 percent year-on-year. According to IHS Markit, BOE’s overall display shipment is top globally, with shipments up 23 percent year-on-year.

JOLED completed construction of its mass production line of printed OLEDs at its Nomi site, Japan, looking to start mass production in 2020. The Nomi site has a monthly production capacity of 20,000 sheets (based on glass substrates input) of size G5.5 (1300x1500mm). The construction of the plant started in July 2018. It will now start operation of the mass-production line and proceed with trial production of samples to be provided to customers, with the aim of starting mass production in 2020.

LG Display reported an operating loss of 1.36 trillion won for the full year of 2019. Net loss amounted to almost 2.9 trillion won while revenue fell 4 percent to 23.5 trillion won. For the fourth quarter, LG Display reported an operating loss of 422 billion won, going from being in the black into the red over the span of a year. The steep decline was caused by the downturn in the LCD market, coupled with restructuring costs. Profitability was further aggravated by increased costs for the production of plastic OLEDs, aimed at mobile devices. The company also plans to stop making LCD for televisions in its home market of South Korea. Production of the panels at LG Display’s Paju plant will end within the year.

Samsung Electronics saw its annual profit drop 53 percent to 27.8 trillion won in 2019. Revenue also dropped 5.4 percent from a year prior to 230 trillion won. For the fourth quarter, the company reported operating profits of 7.16 trillion won, down by over a third compared to a year ago, and revenue of 59.9 trillion won, which is up 1 percent. In the fourth quarter, the weakness in display panels was one of the main causes of the profit drop. Its display panel business reported an operating profit of 220 billion won due to weak demand of OLED but this is forecast to grow in 2020 with the wider adoption of 5G phones.

Universal Display handily beat expectations during the 2019 third quarter. There was some US-China trade war worry after the last report from the patent holder and materials provider of OLED screens, but the OLED movement continues to build steam and is providing a strong tailwind that is filling Universal’s sails. In fact, Steve Abramson, president and CEO, Universal Display, said on the earnings call that his company’s prediction that square meter manufacturing capacity would increase by 50 percent from 2017 to the end of 2019 is on track. Though OLED screen adoption has been gaining momentum, it has not been totally smooth sailing for Universal Display. In 2018, many manufacturers took a breather as they geared up for the next run higher. That equated to a year of sharp sales declines, and the stock followed suit. But management had always said there would be an inevitable rebound, and 2019 had delivered.

The regional rivalries

Before 2011, China’s front-end FPD production capacity was negligible, while Korea accounted for almost 50 percent of the global market. However, backed by wide-ranging central government policy support and regional government financial assistance, China rapidly increased its share to 23 percent by 2015.

In 2019, China’s capacity rose to more than 153 million square meters or 46 percent of the total, compared to 24 percent for both South Korea and Taiwan. With five Gen 10.5 factories expected to be in full production by 2023, China is expected to control FPD production, with 62 percent of worldwide capacity, almost four times as much as any other region. Chinese companies originally focused on assembling modules and sets but over time, they have climbed the display value chain to full LCD production – and now they are aggressively pursuing OLED manufacturing.

Korean and Taiwanese panel makers are facing challenges, trying to compete with the overwhelming capacity advantage that China now possesses, and are rearranging their businesses to concentrate on unique and higher-end applications. For Korean suppliers, this means focusing on AMOLEDs, where they still maintain considerable advantages in both capacity and manufacturing technology. Korea’s display makers are aggressively bumping up R&D spending on next-generation display technologies to keep comfortable lead over Chinese rivals, who have been eager on the OLED display front after dominating the LCD market. The two Korean display giants are aggressively bumping up their R&D spending on the next-generation display technologies because their Chinese peers
are rapidly moving up on in the OLED market. To fend off the lingering oversupply issue in the LCD market, Chinese display makers have recently shifted their focus to OLED displays.

Tragedy looms over the Chinese panels market

The escalating coronavirus crisis is impacting production at display panel factories located in the semi-quarantined city of Wuhan, China, spurring a significant near-term reduction in the global supply of panels used in LCD televisions and other products.

The five factories in the city producing LCDs and OLED panels will experience near-term slowdowns in production compared to expected levels, according to IHS Markit technology research.

With the situation evolving quickly, the magnitude of the supply shortfall on multiple display types and markets is still being assessed. However, leading Chinese panel makers stated they believe that total capacity utilization for all LCD fabs in the country could fall by at least 10 percent and perhaps by more than 20 percent during
February 2020.

With China expected to own 55 percent of global display manufacturing capacity in 2020, the immediate impact of the production reduction has been a worldwide decrease in availability and an increase in pricing for LCD TV panels. This has resulted in turmoil throughout the display supply chain as suppliers and purchasers alike scramble to adjust to swiftly changing market conditions.

Display facilities in Wuhan currently are dealing with the very real impacts of the coronavirus outbreak. These factories are facing shortages of both labor and key components as a result of mandates designed to limit the contagion’s spread. In the face of these challenges, top display suppliers in China have informed the experts that a near-term production decline is unavoidable.

The leading Chinese suppliers of LCD panels for TVs, notebook PCs, and PC monitors now are planning to raise panel prices more aggressively. For example, the price for an open-cell LCD-TV panel was originally expected to rise by USD 1 or USD 2 per month in February. However, the actual increase may be USD 3 to USD 5 for the month. Notebook and monitor makers might also face panel shortage as a result of coronavirus-related production challenges.

The five display factories in Wuhan are:

  • China Star Optoelectronics Technology’s (CSOT) T3 low-temperature polysilicon (LTPS) LCD fab
  • CSOT’s T4 Gen 6 OLED fab
  • Tianma’s TM8 Gen 4.5 LTPS LCD fab
  • Tianma’s TM17 Gen 6 OLED fab
  • BOE’s B17 Gen 10.5 LCD fab

Beyond the immediate production impact at these facilities, the coronavirus is also likely to trigger delays in the ramp-up of manufacturing at new display fabs during the first half of 2020. This will reduce overall panel availability during the next few months. It also could result in further panel supply tightness as TV display buyers hasten the pace of their panel purchases to build stockpiles for future shortfalls.

While major panel makers are rightly concerned about the coronavirus’s impact on consumer sales, demand for their products from TV makers has actually increased. TV makers are pulling in their panel demand and sometimes double-booking orders to shore up their inventories. The panel makers indicated that the demand surge for orders delivered in February is as large as 10 percent above the previous demand forecast.

The labor shortage encountered by fabs in Wuhan is partly the result of the Chinese government’s move to extend the Lunar New Year holiday. The extension is designed to reduce travel and cut down on public gatherings to contain the spread of the disease. However, even after workers return, many will have to undergo testing procedures to check for contagion. This will have a continued negative impact on productivity.

China’s LCD panel suppliers may face an even more dire issue related to the coronavirus – an acute shortage of essential LCD modules. LCD panel makers outsource much of the production of such modules. However, production at several key third-party module suppliers has now ceased, impacting panel production severely throughout the country. Key module supplier SkyTech is sharply reducing production until mid-February.

Panel makers maintain their own captive LCD module factories. However, these operations are also facing production bottlenecks amid the coronavirus crisis. The module shortage potentially could expand the impact of the contagion beyond China – with a knock-on effect on production at display manufacturers worldwide. 

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