Gen-10 Fabs Will Create Upheaval in the Display Market
Several display companies have recently announced Gen-10 fab construction projects. If Gen-10 capacity is built out as anticipated, the industry could face risks of systemic oversupply as a result.
by Ian Hendy
OVER the past 12 months, several different Gen-10 fab construction projects have been announced or rumored. These are primarily intended to support the market for TV panels that are 65 inches diagonal or larger. Among companies thought to be considering Gen 10 are BOE (2 fabs), HKC, LGD (for OLED), ChinaStar, and Sharp/Foxconn. Market research company IHS reports that there is a potential for up to 735K/month of motherglass start capacity at the substrate size of 2,940 × 3,370 mm.a,1 The issues we will discuss in this article are the impacts of these proposed factories, focusing mainly on LCD fabs, and including predictions of who will win and who will lose as a result.
Figure 1 shows the impact of Gen-10 capacity on total input capacity for large-area displays. While the final build-out in terms of total capacity for Gen 10 is yet to be seen, it could represent an increase of up to 60 percent of the current large-panel installed capacity, based on plans that have been discussed by various players.
Fig. 1: Gen-10 fab rollouts are predicted to increase substantially over the next five years. Additional source: IHS 2017
In the follow-up to Gen 8, Gen-10 facilities supporting substrates around the above size are the new key platform for production of LCDs and OLEDs, especially as Gen 9 didn’t really happen. Gen-10 facilities are specifically well set up to produce 8-up, 65-in. and 6-up 75-in. displays (Fig. 2).
Fig. 2: Above are shown mass-production specifications for different key platforms, including the number of panels per substrate and the approximate glass use. These differences in glass utilization make a big difference in the profitability of the production lines. Gen 10s support 65- and 75-in. displays particularly well.
It is difficult to know how to interpret the strategic impact of all this new capacity. First, we need to understand the general background of substrate economics. In general, the profit margin at a cell level created by a set of different fabs varies directly with area. The capital expenditure (capex), on the other hand, increases with only the square root of the substrate size. This tends to lead to the finding that larger is better, economically. However, defect density, handling costs, and other problems have always meant that there is a diminishing return to substrate size beyond a certain value. Gen 10 is on the table largely due to fundamental belief in strong markets for 65-in. and larger displays. If you believe in these markets, then Gen-10 fabs make sense; otherwise, they may not.
We present here our own intellectual framework of 10 factors that we consider important in thinking through the question of the impact of Gen 10 on today’s industry (Fig. 3).
Fig. 3: It is useful to consider the impact of Gen 10 in terms of 10 different factors.
Issue 1: Fungibility of Capacity
Fungibility in the context of this article refers to the ability of large LCD factories to serve nearly all markets (at some level of technical abstraction that we will discuss further on). The author’s colleague, business partner, and friend, analyst David Barnes, first publicly discussed the concept of fungibility at Display Week in 2011. For now, the industry seems to have decided that Gen 6 (and half-Gen 6 for OLED processing) is the key platform for small-panel manufacturing. However, Sharp has also shown that its Gen-8 (2,200 × 2,500-mm) fab in Kameyama, Japan, can make a large number of oxide-TFT AQUOS smartphone displays.
The general point underscored by this article is that unlike the semiconductor industry as a whole, where a 7-nm dynamic random-access memory (DRAM) fab serves a specific market, and a radio-frequency (RF)-capable fab serves a distinctly different market, display-industry Gen-8 fabs are able to serve all of the display markets served by Gens 2-7. While there is some lithography gear that allows for tighter overlay and is only available in smaller generations from Nikon, overall, larger fabs serve more markets and thus have the capability to negatively impact the economics of more markets (Fig. 4).
Fig. 4: Larger fabs reduce value in the display market since they can serve all markets.
Issue 2: Panelization
We often help people understand display making with the example of gingerbread making. You can roll out the dough to different sizes, and then the issue is how many whole gingerbread men you can get out of the one piece without cutting off a vital leg or arm. The larger the cookie cutter for the gingerbread man, the fewer of them you can make. This correlates to specific product sizes in the display industry. Clearly, as the panel size gets larger, the amount of what the glass industry calls “cut loss” – expensive processed glass that is not sold as finished displays – increases. When we get down to processing fewer than, say, 10 displays on a motherglass, then the exact handling, scribing, and metrics such as the shape and area of the panel are key to working out how much “gingerbread” is thrown away.
Gen-10 fabs are particularly efficient at producing 65-in. and 75-in. displays. To build such a fab, you need to believe that you can sell a lot of those larger displays. The easiest way to help improve the net-present value (NPV) of a fab’s business plan is to increase the portion of the mix that sells super-premium (large) displays for higher prices than their fair share of glass size would indicate. The challenge the industry faces is that it may plan for a large portion of the fab output to sell at 65 and 75 inches, but the reality is that often much of the mix gets used for smaller product sizes and hence reduced prices and margins.
Issue 3: Implications of Large Glass
For Gen 10, it is largely accepted that glass facilities that supply the borosilicate glass will need to be co-located with the LCD or OLED production. This means that companies like Corning and Asahi will be deeply involved and influential in any major investment decisions. We would not be surprised to see the oligopolistic glass players demand strong terms from the related display firms before they commit to building furnaces.
Other issues raised by large glass sizes are more speculative, but it will be interesting to see whether they do or do not get included into concrete plans. The first of these is that Gen-10 fabs are by nature aimed at premium TVs and other large-panel applications (signage perhaps, video walls and large education displays). There is a very distinct cost to cover technology bets (though as a portion of the total investment perhaps not so huge), but we wonder to what degree companies will plan options for oxide TFT backplanes, quantum-dot color filters (QDCFR CFs) – perhaps in later phases of Gen-10 expansion – or other market opportunities. Gen-10 fabs will generate economic returns by
selling large portions of the capacity at the optimal panel sizes – how will display companies plan this into the equipment arrangements? We wonder the degree to which display firms will look into large-area coating methods now as a replacement for sputtering and perhaps as a way to transfer value that previously might have been seen in the optical film stack.
Issue 4: Game Theory for Fab Announcements
Of interest here is signaling behavior – the game theory around market announcements of capacity expansions vs. the likely true expansion. Display players make announcements – often very ambitious announcements – about their future investment plans in part to defer others from making similar investments. A historical review of actual capacity added after such signaling announcements reveals that around half of the total is actually built out. Increasing and decreasing prices as part of the so-called crystal cycle used to heavily impact this. The best economics are to ramp up the fab so that the first years of full capacity occur during a period of high or rising market pricing.
Issue 5: Gen-8 Case Study
It is useful to study the history of the Gen-8 capacity build-up that began in 2007 to illustrate the implications for markets and smaller substrate fabs. This issue may prove to be one of the most useful strategic elements to consider; that is, how has the display industry responded to previous build-ups of major capacity? Figure 5 illustrates the capacity build-up just for Gen 8 since that time. Two things are interesting in this picture. First is that the Gen-8 expansion continues – Gen 8 has been a very successful platform for the display industry. Second is that if you review the impact on other factories from the price changes accompanying the surge of Gen-8 capacity, then you see it takes between 2 and 10 years for players to begin to withdraw obsolescent capacity. This is an important insight, as it suggests that fabs that will ramp in 2018 might impact the way the display industry makes products toward the end of the following decade.
Fig. 5: The Gen-8 pile-up that started around 2008 is still happening, showing that the trickle-down that causes fab closures can take years.
Issue 6: Fab Owners and Portfolios
The next matter we address is: If all this
Gen-10 capacity is a bad thing because it will cause price declines across all markets (see Issue 7), then where will the greatest pressure be felt? Overall, we believe that large-panel fabs cause downward pressure on all smaller generations of factories.
However, there is a caveat – and that is that Gens 5.5 and 6 in particular are well suited to the production of small smartphone panels and the like. Some of the glass handling and other practical issues are simply more easily solved at this relatively more modest glass size (1.5 × 1.85 m). The reality is that much of the smaller capacity (Gen 4-5) has already been allocated to niche production opportunities or is being used as R&D lines. As a result, the pressure from Gen 10 will be primarily on the Gen-7
capacity that remains in the market and the options for the owners of such capacity (Samsung, AUO, and Innolux). Of these, Samsung may have a broader range of options for its remaining Gen-7 production capacity. One option may be selling the equipment and using the cleanroom for future flexible OLED capacity expansion if and when that is warranted.
Issue 7: Price Response to Capacity
The effect on pricing of major chunks of new capacity arriving into the market is one of the most important implications to consider. What is clear is that for the targeted panel sizes (e.g., 65 and 75 inches) there will be head-on competition from the owners of Gen-10 fabs (and all others producing similar panels). Typically, prices for these
target panels start high but then skitter very rapidly toward arbitraged commodity levels. The less evident impact is that declining prices for these panels also transmit downward pressure on smaller displays. Gen-10 fabs will cause downward pressure on large TV-panel prices and this will transmit downward pressure elsewhere. Since all major players play in all markets, this affects all markets.
Issue 8: Rededication Options for Smaller Fabs
So then if you are the owner of a smaller Gen fab – what next? From our experience of strategy projects inside display companies, there is a hierarchy of options that are available to management for the use of the capacity. The way to think about these is that the options that cost nothing (in terms of additional conversion capex) or risk nothing (for example, the conversion to a new process for new market opportunities) are more valuable than those that require a one-way conversion or a definitive action like closure.
At the top of the list is rededication of capacity to compete in other established markets, leveraging commercial strength to take market share from others. Second might be the opportunity to use the current fab, as is, to compete in markets to be created by some action of the marketing and sales department. Third would be the option to spend some money changing the focus of the fab – say from a-Si to oxide to compete in different markets with better pricing. Options to sell equipment or factories to others would be at the bottom of the heap. It should be noted that for major players such as Samsung or LGD, the risks of a shift from a-Si to OLED are less than they might be for another player and hence an option considered more quickly for them than by others (Fig. 6).
Fig. 6: Options for rededication for Gen 7/8 fab owners include new uses of capacity, conversions, or sale. Closure of the facility is the least likely option.
Issue 9: Market-Creation Impact
New market-creation activities are often linked by top display firms to large-gen expansion projects. The business strategy of Sharp, the first owner of Gen-10 capacity, is helpful in thinking about this. After Sharp built its plant in Sakai, Japan, not only did it focus the positioning of its new AQUOS range of TVs toward the large end of the range, it also sought to build up B2B efforts in targeting the education market – with such programs as the massive Turkish classroom transition that put many flat-panel displays into schools across the country. As an adjunct to Gen-10 moves by the top players, we may see more business development by those firms into the areas of large-area signage, video walls, and the like.
Issue 10: Leadership Moves
Finally, it is useful to think about the impact that such large factories will have on the overall leadership of the industry. A number of players have been named as building Gen-10 fabs over the coming years and these include: LG Display, Foxconn, CSOT, BOE, and HKC.
For each of these, a factory of 60K/month 2,940 × 3,370-mm panels would represent a massive increase in capacity share and a move up the leadership board. Figure 7 shows our current thinking on how this might play out, but the final plans and peak capacities of the Gen-10 fabs are not yet known. The role of the Chinese government in coordinating who gets to invest is also not known.
Fig. 7: Gen-10 fabs will move some companies up the leadership board, and others down.
Winners and Losers
Who ends up as winners and who ends up as losers will depend in part on the degree of the final rollout of Gen 10. If the rollout is muted and Gen-10 capacity is effectively sold at premium prices into new and existing value chains, then the industry as a whole could benefit.
If, as we fear could happen, lots of Gen-10 capacity is built, then the risk is systemic oversupply in which the only major winners are consumers and the equipment companies that make tools for the industry. Prices and profits would decline, and materials makers would only be happy if they could make up for lost margins with greater volumes. Gen-10 fabs represent sizable fungible capacity and could threaten the economics of many markets. Their impact may be felt for 2 to 10 years after rollout, which means we may see market dislocations for another decade after the fabs appear.
aFor the purposes of this article, we refer to Gen 10 and Gen 10.5 interchangeably. However, some people may consider Gen 10 to be 2,880 × 3,130 as used at Sharp’s Sakai fab and Gen 10.5 to be 2,940 × 3,370 mm.
Ian Hendy is the CEO of Hendy Consulting Ltd., a boutique strategy company providing market entry and strategy services to the flat-panel industry. Hendy Consulting also publishes free strategic insights on the display industry, which are available on the news pages of www.hendyconsulting.com. He can be reached at email@example.com.