Wistron Buys In
May 2nd, 2008by David Barnes, Vice President, Strategic Analysis
Several news stories and our own survey of Q1’08 panel shipment results suggest a new trend in the LCD TV supply chain.
Wistron (TPE 3231, sales of $8,842 million in 2007) intends to acquire inventory, equipment, intellectual property and personnel associated with PC monitor assembly from Lite-On Technology (TPE 2301, sales of $2,551 million in 2007). A recent fire at the Lite-On facility in DongGuan China impacted production adversely. In contrast, Wistron is known as a high-quality assembler of notebook PC products; Sony is a key customer. I expect Wistron will put the acquired know-how into its own factory system.
Some equity analysts are not positive about the deal. They note that Wistron plans to fund the $300 million cash offer by offering 24 million new shares to Lite-On Technology in a private placement and offering up to 300 million new shares through global depository receipts (GDR). Current shareholders of Wistron face dilution of 20% or more. In addition, past Wistron operating results have benefited from its focus on higher margin notebooks rather than commodity monitors. The assembler may face working capital problems after the acquisition.
While I appreciate such concerns, I suspect that Wistron sees this deal as a way to buy into the TV assembly business. The step from monitor assembly to TV assembly is a short one and it is getting shorter. DisplaySearch noticed that TFT LCD designed for PC monitor applications were going into entry-level TV sets several quarters ago. We tightened up our surveys and now track this in our quarterly reports. In Q1’08, 56% of the panels going into sub-26” LCD TV sets were actually designed for PC monitors. We find this understandable, given the price strength of panels designed for small TV sets. The price per square inch of sub-26” panels designed for TV sets (brighter than panels designed for monitors and so forth) was flat Q/Q and Y/Y in Q1’08.
With interest in the Olympics rising in Asia and consumer costs rising in the USA, secondary brands must find alternate sources of panels if they want to deliver more attractive retail prices. The areal price of PC panels sold for TV applications fell 10% in Q1’08—this is what puts those low-priced 19” TV sets on the shelf. In Q1’08, 76% of such panels came from three suppliers: Chi Mei Optoelectronics, SVA NEC and BOE. As long as notebook PC demand growth outpaces demand growth of PC monitors, panel suppliers will sell into this entry-level or secondary TV market.
Indeed, the whole sub-40” TV market is ready for a make-over. Areal price development in the 32” and 37” regime has been stubborn in recent quarters. Panel makers have not invested in new capacity optimized for such panel sizes, instead preferring to invest in capacity for 40” or 50” panels. Some merchant panel suppliers have shifted their allocation of 32” and 37” panel capacity in favor of PC monitor panels, which earn a greater areal price. Some vertically integrated suppliers—Sharp most notably—have increased their ability to yield 32” panels from larger substrates but these benefit their own brands, primarily.
The net result is that 32” and 37” panel prices increased 5% Y/Y on a square-inch basis. Meanwhile, the areal price of 40” and larger panels fell 15% Y/Y. This puts 40”regime panel prices on a collision course with 30” prices. A year ago, the average panel price in the 40” regime carried a 27% price premium over a panel in the 30” regime. Last quarter, that premium fell to 2% and I think all the Gen 8 capacity coming on line will eliminate that premium. Areal price parity would commoditize the LCD TV market. I guess retailers will reach for margin by up-selling consumers into the 50” regime.
No wonder we see global TV brands shifting their sourcing strategies. Samsung just decided to outsource LCD module assembly of some TV panels to TCL (SHE 000100) in Guangdong, China. Samsung also outsources TV assembly to TPV Technology (HKG 0903) and to Qsida (TPE 2352). Philips recently decided to make Funai Electric (OSA 6839) responsible for all its LCD distribution in North America. Sony contracts Sampo (TPE 1604) and Foxconn Technology (TPE 2354) for TV assembly. Global brands are preparing to fight fire with fire. They want to suppress new entrants like Vizio (related to AmTRAN Technology, TPE 2489), so they are adopting the same kind of low-cost TV supply chain. That supply chain strategy is similar to that used for PC products. It carries less inventory and is more flexible than the conventional consumer electronics chain. It can put commodity products on the shelf with minimal effort and cost for the brand owner.
I think Wistron is thinking ahead. It took less than ten years for the LCD monitor market to become commoditized. In the late 1990s, assemblers were adding $100 to $200 of material to a panel while making a monitor ready for shipment to a hub. Today, they add $10 to $20 and monitors are priced as a multiple of the panel cost. In the late 2000s, we are watching the same evolution occur in LCD TV. If Wistron can develop a high-quality reputation in TV assembly as it has in notebook assembly, then buying into the monitor/TV assembly business at a fire-sale price may prove to be a wise move.
