Utilization Down, Fab Closure, What’s Next for Taiwan?

November 13th, 2008

By David Hsieh, Vice President, Greater China Market

TFT LCD makers are now suffering from a deep downturn. According to the latest Quarterly TFT LCD Cost Forecast Reports with Annual and Quarterly Projections, panel prices are approaching cash costs, and some panel makers are already selling products for less than cash cost. Meanwhile, prices continue to fall. DisplaySearch estimates that in Q3’08 global capacity utilization was merely 84.5%, the lowest in 12 quarters. Suppliers based in Taiwan—like AUO, CMO and CPT—have indicated that their capacity utilization will be only 60-70% in Q4’08. In the meantime, depreciation of the Korean Won gives Korean TFT LCD makers a cost advantage in their efforts to take market shares from Taiwanese makers.

As reported in the Q4’08 Quarterly Large-Area TFT LCD Shipment Report, Taiwan’s share of large-area TFT LCD unit shipments fell from 47.5% in Q3’07 to 43.5% in Q3’08, while Korea’s grew from 39.7% to 43.8% in the same period. DisplaySearch expects Taiwan’s share to fall further to 42.7% in Q4’08, when Korea’s will reach 44.5%. TFT LCD makers are suffering, and Taiwanese are suffering the most.

The TFT LCD industry is a survival contest right now. As the CEO of a leading panel maker said “It is a test where everyone’s going underwater, so it is time to see who can hold their breath the longest.”

The low utilization rate has pushed panel makers in Taiwan to consider fab closures to cut down the overhead and facility operation costs. Rumors indicate that two Gen 5, two Gen 3.5, and three Gen 4 fabs in Taiwan will shut down for the next couple of months. I believe this is the first time in the history of LCD manufacturing that array fabs have been completely shut down due to weak demand, certainly on this scale. When the fabs would be restarted, and how long it will take to ramp back up to full capacity after being shut down for 2-4 months, is unclear.

So what’s next? In order to compete with Korean opponents, consolidation among Taiwanese to reach a larger scale would be one possibility, and has been mentioned in every down cycle. But the capacity remains after a merger. And who should acquire whom is a big question. Meanwhile, would fab closures change the over-supply situation? We will provide further analysis in the upcoming Quarterly TFT LCD Supply/Demand and Capital Spending Report.

  1. 5 Responses to “Utilization Down, Fab Closure, What’s Next for Taiwan?”

  2. By synapsid_on_SI on Nov 16, 2008 | Reply

    I would like to make a commment on the reason for the dramatic market share shift to Korea away from Taiwan, and I certainly don’t think the Korean currency is the most important reason.

    A year ago LCD TV brands like Samsung, LG and Sony bought 50% of their large panels (like 32″, 37″, even 40″) from Taiwan. They were by far the biggest customers of Taiwan fabs like AUO and CMO. What has happened is that Samsung, LG Display and Sharp have expanded their fab capacity, and with worldwide demand being softer the dominating TV brands (who have increased their market share) now find themselves in the position to supply almost all TV panel needs from their own affiliated fabs (Samsung, LG Display, Sharp). A related reason is that the shortfall in 40″+ sales allowed these companies to produce many more 32″-range panels in advanced fabs. What does that leave for Taiwan companies like AUO and CMO? Almost nothing and the loss of a huge portion of their revenue stream.

    Additionally, I think the market share figures you gave, based on unit shipments, dramatically understate the severity of the market share shift in terms of revenues. With the dramatic product mix shift in Taiwan away from large TV panels and strength in large TV panels in Korea, Taiwan’s ASP per panel has decreased dramatically compared to Korea resulting in a severe revenue market share shift to Korea, as reflected in your monthly PanelTrack publication.

  3. By synapsid_on_SI on Nov 16, 2008 | Reply

    Having just checked AUO and CMO’s earnings reports from last quarter, I would like to make one additional comment. AUO and especially CMO did show product mix shift (in terms revenues) to large TV panels last quarter, which seems to contradict some of the statements that I made in the previous comment. I would like to characterize this trend as “paradoxical”.

    The biggest reason for this shift is the unprecendented ASP drop for IT panels, which greatly increased the relative value of TV panel revenues as TV panels did not drop as much.

    Additionally it reflects flight to product s with positive gross margin, considering the negatives margins of IT panels, and also fits with CMO and AUO’s strategy to maintain utilization in their most advanced fabs (7.5G).

    I suspect however that the level of TV panel panel production by AUO and CMO last quarter is wholly unsustainable, especially in the light of the trend described in my previous message which is only getting stronger due to market weakness. I also suspect the last quarter’s TV shipments of CMO, AUO and their customers are highly susceptible to panel inventory and channel inventory of LCD TV sets, more so than the big TV OEMs.

  4. By steve on Dec 10, 2008 | Reply

    I thought Synapsid’s comments were excellent with respects to the large brands moving to source a greater percentage of their own internal production which will ultimately cause strain on the Taiwanese TFT manufacturers. This “fact” was actually discussed by one of my contacts within one of the large Korean TFT manufacturers as a cautionary tale with respects to future sourcing from these Taiwanese manufacturers. Although further research may suggest a “paradoxical” trend afoot, I’d agree that the trend is not sustainable and that all signs suggest, if large format display sales continue to soften, that Taiwan will be hurt. To that end, however, Taiwan will not go down quietly. We should expect huge price deterioration before we see anyone close down a fab in Taiwan (and I don’t think anyone suggested that was a possibility either). Moreover, I’m told that the cost of money within Taiwan is minimal (for Taiwanese-based businesses), so these manufacturers could potentially ride out the economic malaise for an extended period of time (while making it painful for the big brands not to source from Taiwan). The next several months will be interesting.

    One story that I don’t see anyone talking about is the impact that fines to Sharp, LG and CPT will have on the overall TFT business. It doesn’t matter how large a corporation is, a $400M fine (in the case of LG) is difficult to swallow. $120M by Sharp doesn’t feel good either. Moreover, there are plenty of other big names in the TFT business that haven’t been discussed yet. I cannot find any type of analysis or detailed reporting on this subject. I think this could be one of the most impactful events within the display industry in years, but no one’s talking…

  5. By David Hsieh on Dec 12, 2008 | Reply

    Dear Steve, your comment is very appreciated. In my experience talking with those large brands who are intending to source more panels from their in-house TFT LCD, I realize that actually they don’t think they can continue to raise the internal soucing ratio. One key is that for them, panel is not the whole story, the brands (sets) competition is their final objective. Panel is one of the tools they can use to achieve the final objective (market share dominance and make LCD TV the center of their multimedia business). Therefore I think Taiwanese will not die because of this. Because these brands always need an external panel source to leverage their internal panel guys.

  6. By synapsid_on_si on Dec 19, 2008 | Reply

    steve,

    Thanks for your comments. I think the scenario that we are discussing has pretty much unfolded already almost to completion. The major TV brands have virtually stopped buying from Taiwan, and recent TV panel price drops have been unprecedented due the huge pressure in Taiwan.

    Regarding the cost of money in Taiwan, I am not an expert on that but I think Taiwan financial sources may recently have woken up to the realization that the huge amount of money they have provided in financing over the years is in grave danger of financial default. The level of leverage and indebtedness is unsustainable and with fundamentals of demand collapsing something has got to give.

    Regarding the US judicial fines, that’s best not discussed here. My impression is that it is protectionist hardball played by a certain Texas-based US company. DisplaySearch probably has good reasons (conflict of interest etc) for not touching this subject.

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