Dr. Doom Meets the Naysayers

July 15th, 2008

By David Barnes, Vice President, Strategic Analysis

Those of you who know me know that I do not suffer fools gladly and that I often play the role of Dr. Doom. Those of you who know Norse mythology also know that doom is not a bad thing, necessarily. In old English, doom implied final judgment. It is sort of like a wise old man saying, “If you don’t change your ways, you’re likely to end up where you’re going.”

So where is the flat panel industry going? I have read and heard a lot of nonsense on the subject over the past few weeks. All I can say is that it is following the path it chose for itself years ago. As I presented in March at the annual DisplaySearch US FPD Conference, the average areal price (per square inch or whatever) will fall below trend after Q1’08 and bottom-out in Q1’09. After that, it should rise smartly on trend through 2010 until the next wave of TFT capacity comes on-line in 2011-2012. Why? Because demand is a function of price, and price is a function of supply. Dump a boat load of anything (even iPhones) into the market, and its price will fall. At least it’s been that way since the dawn of micro-economic studies 200 years ago.

So, while I empathize with the blogs and news stories bemoaning the demise of Corning and other suppliers of flat-panel materials and of the certain collapse of leading panel makers like LG Display, I must ask, “What’s different now than in the past five Crystal Cycles?” As each cycle moved from boom to bust, panel makers held fast to investment plans as they adjusted capacity utilization in response to plunging prices resulting from their prior expansions. Three quarters later, demand caught up to supply, and they were happily preparing for the next fab and ordering more materials than ever before. Even during the down-turn, panel makers only reduced their material orders relative to a healthy rate of annual growth. Through it all, they moved forward, relentlessly.

Why do they do it? They do it because they operate in perpetual under-supply. Do you have a 42” TV set in every room? Would you if the sets cost only $100? That may sound silly, but it proves the point that demand is not the problem. Price is the problem and the only way to get price right is to increase scale. Sure, there’s the nagging little problem of discounted cash flow but who’s counting in Asia?

The only problem with the flat-panel industry is that some material suppliers and brands have figured out how to make money throughout the business cycle, while most panel makers have not. On the other hand, we consumers get to enjoy all the TV panels they make. There is no reason to judge this time as particularly bad. Things will get better next year. All we’ll need is something interesting to watch on all those HDTV channels.

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