It’s Not the Economy, It’s the Crystal Cycle
December 12th, 2007By David Barnes, VP, Strategic Analysis
Clients of DisplaySearch, particularly those in Asia, have been asking us about the so-called sub-prime mortgage crisis and what it means for the flat panel industry. While I am flattered to be chosen as the company’s speaker on this subject, I wonder how to do the subject justice in a few paragraphs. Perhaps the way is to concentrate on that I think is important for our clients’ businesses.
As mentioned in this web-log previously, sub-prime loans were made that should not have been made but the global impact occurred because financial service firms created risky derivatives (some put them in off-balance-sheet entities, à la Enron) and mortgage defaults occurred after the housing market bubble burst. The first of these reasons is simply another chapter in the story of financial markets developing new products that are misunderstood or untested. Financial firms are learning their lessons, writing-down bad risks, and changing managers. This has happened before and US firms are able to make rapid changes, despite the pain. The second of these reasons is simply another domestic business cycle. The real estate market, particularly private home prices, tends to be a leading indicator of this cycle. The most recent boom lasted longer than usual, partly because of Federal Reserve stimulus, so the correction is something of a shock. Other aspects of the US economy lag housing prices (and sales). That is why the news on consumer spending, factory utilization and durable goods are just turning negative.
On December 11, the Federal Open Market Committee (FOMC) voted 9:1 to reduce the target interest rate by 0.25% to 4.25%. Most analysts expected this rate reduction. Some think further reductions may be needed, but most of the committee thought some risk of inflation remains. In addition, some on the FOMC do not want to please stock traders too much because the market needs to work itself through some problems. The hope is that gradual easing will soften the fall in this business cycle and sustain the dollar as the world’s main currency.
Meanwhile, China’s central bank raised the reserve requirement 0.1% to 14.5% of deposits last week. Chinese consumer prices in November rose 6.9% Y/Y. While China tries to manage its boom, the US tries to manage its bust. Overall, the global economy cannot grow quickly if the US economy weakens. On the other hand, many display-intensive products, particularly LCD TV, are way too popular and attractive for a global slow-down to have much impact.
In my mind, the more important cycle is the crystal cycle. We have been hearing a lot more talk about TFT LCD fab expansions and new investments in recent weeks. Panel makers are making lots of money as a result of letting supply tighten this year. Several producers are planning to make more money in 2008. Reinvesting the profit in new plants for TV displays seems like a good idea when prices are high. It always does. That’s why we expect Gen 7 and larger fab capacity will increase more than 60% in 2008 and more than 45% in 2009. By 2010, almost 50% of all TFT LCD fab capacity will use Gen 7 or larger glass. Based on history, I expect PC panel prices will remain strong but that TV panel prices will continue falling. The average area-price for 40” and larger panels has fallen 35% a year for some time. The area price of 32” panels is strong today, but how much will they be worth after larger panel price fall 50% or more?
The global economy will affect many aspects of our lives, but the crystal cycle will affect our industry much more. The PC display market is maturing and the CRT era is almost over. The LCD TV era has just begun and demand is elastic: panel prices will fall as supply rises. Making money in the future will take the same skills required to make money in the past.
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