Panel Paradigm Shift

by Sweta Dash

iSuppli Corp. believes that the supplier-driven expansion that has characterized the market for large-sized liquid-crystal-display (LCD) panels during the past few years has run its course, marking a fundamental shift in the dynamics of the industry.

Since the late 1990s, panel suppliers have attempted to expand the LCD market by following a strategy of supply expansion, price reductions, and demand creation. However, with the LCD industry having suffered yet another cyclical downturn in the first half of 2006 due to oversupply and weaker-than-expected demand, panel makers are re-examining the wisdom of their aggressive capacity-expansion plans. Every major LCD-panel supplier now is making decisions about investing in newer-generation fabs based on customer needs, rather than to promote demand.

With the makers of large-sized LCD panels transitioning away from its strategy of frenzied expansion toward a more rational customer-driven approach to growing sales, iSuppli foresees that the market will be on the path of recovery.

LCD Retrenchment

Evidence of this customer-driven approach to market expansion can be seen in LCD suppliers' recent moves to cut capital spending for new panel fabs. Most of the major LCD-panel makers have announced cuts in their 2006 and 2007 capital-spending plans, including delaying expansions or construction of Gen 7.5 and Gen 8 fabs. These cuts are considerable in scope.

Leading large-sized LCD-panel supplier LG.Philips LCD has decided to cut $1 billion in capital expenditures in 2006, slowing expansion plans for a Gen 7.5 fab and delaying a Gen 8 fab. Instead, it is planning to set up a Gen 5.5 fab in the fall of 2007 to focus more on the monitor market.

AU Optronics (AUO) has decided to keeps its 2006 capital spending plan intact, but will slash its expenditures in 2007 to about to $2.4 billion, down more than 30% from 2006. The company also is decelerating its Gen 7.5 expansion plans.

Chi Mei Optoelectronics Corp. (CMO) also has reduced its capital-spending plan in 2007 by 20–30% compared to that for 2006.

However, both Samsung and Sharp Corp. have decided to continue their expansion plans for Gen 8 fabs. Sharp expects to start its Gen 8 fab in August 2006, while Samsung plans to open its Gen 8 fab in October 2007 as part of its S-LCD joint venture with Sony. For more on these developments, see the Industry News section on page 6 of this issue.

To date, Sharp and Samsung have been successful in cultivating demand for large-sized LCD TVs – Samsung reported an 87% increase in 40-in.-and-larger panel shipments in Q2 2006 compared to that for Q1. Accordingly, Sharp and Samsung want to establish Gen 8 fabs in order to get the "first mover advantage," allowing them to capture sales from early adopters

World Cup Defeat

Reductions in LCD-panel fab utilization and capital spending are the general result of disappointing sales and negative profit margins in Q2 2006. The market for large-sized LCD panels decelerated considerably in the second quarter as demand failed to match suppliers' expectations for sales related to World Cup soccer.

The market was further depressed by slowing sales to the monitor and mobile-PC businesses due to extensive inventory build up and weak seasonal demand.

Even before the World Cup letdown, prices for certain large-sized LCD panels had been beaten down by a number of factors, including increased panel inventory in the PC distribution channel, seasonally low demand in the first half, rising capacity at LCD fabs, and brand manufacturers' efforts to reduce inventory in order to mitigate risk. Collectively, these factors increased LCD-panel availability and spurred drastic price reductions.


LCD Rebound

However, by July, signs of recovery began to appear. After months of decline, pricing began to rebound in mid-July for 17-in. LCD desktop-PC-monitor panels, the most popular size in today's marketplace. This indicated that LCD market conditions had made a fundamental shift away from a state of over-supply and falling prices toward a condition of slowing production increases and firmer prices.

In further evidence of the change in market conditions, most monitor suppliers in July started to report normal inventory levels, as price reductions spurred demand and helped clear out stockpiles. The recovery came just as the panel suppliers began to cut their fab-utilization rates in the 85–90% range, down from as high as 95% at the end of 2005.

Capital Tightening

The decision by panel suppliers to cut capital spending in 2006 and 2007 will tighten supply and decelerate LCD-TV-panel cost reductions in the second half of the year. It could even lead to price stabilization toward the end of 2006, when demand is expected to be strong due to the holiday season.

This trend is illustrated in the figure, which shows pricing trends for 32-in. LCD televisions.

Furthermore, less expansion of higher-generation fabs will mean that when television demand is strong, the supply of monitor and notebook panels will be squeezed, spurring panel price hikes.

The End of the Supplier-Driven Market

The latest market downturn indicates that the LCD-panel makers' strategy of supply expansion, price reduction, and demand creation fails in the television market unless they or a partner has the market presence and price structure to create end-user demand, such as is the case for Sharp and Samsung.

Although the end of the supplier-driven expansion of the LCD market may appear to be a setback for the industry, in reality it means a return to a more rational approach to expanding sales. For LCD-panel makers, the long-term impact of taking a more-practical approach to production increases will mean less market volatility – and hopefully more predictable profitability. In the near term, it will mean a recovery in sales, pricing, and profitability by the end of this year.

Sweta Dash is the Director of LCD and projection research at iSuppli Corp. She can be reached at