By David Hsieh, Vice President, Greater China Market

Perhaps surprisingly, TFT LCD panel supply is tight at present. End-product buyers at US retailers have been traveling to Asia to try to figure out why their branded suppliers are telling them they cannot meet demand. The shortage situation seems unbelievable considering the economic conditions over the past six months. The reasons behind the current shortage include the following:

• Brands and OEMs have reduced inventories down to a very low level during the past half year to minimize their risk given concerns over end-market demand in the recession. But LCD TV sell-through has remained healthy, so starting in February, brands, OEMs and retailers began rushing to refill inventories.
• Panel makers are taking the “BTTO” approach right now. “BTTO” means that they only build to “tolerable” order. What is “tolerable”? It is as simple as the selling panels for more than cash cost. Actually, many panels such as mainstream 19”W monitor, 15.4”W notebook and 32”W TV are still selling under or close to cash cost. Panel makers continue to bleed by selling these panels, so they are refusing to respond to any increased demand to avoid damaging their arteries too much. The more orders they refuse, the more chances they have to increase panel prices, as there is always someone who is willing to take allocation at higher prices.
• Demand is increasing from the China LCD TV market, which is partially driven by the government subsidy program, and partially by the healthy (still) purchasing behavior of Chinese consumers.
• While the global desktop PC market is expected to decline this year, economically priced mini-notes (as known as netbooks) are still hot products in the stores. 
• For LCD monitors, the product trend is rapidly shifting from 16:10 to 16:9 as brands try to seduce PC buyers in a slow market with new features. However, it takes time for capacity to shift, and it also takes time for the component makers to shift. The component supply chain in particular has struggled, as the collapse in demand in Q4’08 caused some suppliers to pull back or exit.
• For notebook panels, the product trend is also rapidly shifting, to LED backlights and 16:9 aspect ratios. Again, these shifts are a struggle when the component supply chain is not operating smoothly. Recently there have been serious shortages in PCBs (printed circuit boards) and passive components—resistors, timing controllers, gate-array ICs—on the PCB. These parts have been seen as unimportant components in the panel bill of materials, but the unexpected shortage indicates that the supply chain ruptures are not only in key components like glass, color filters, backlight units, optical films or CCFLs, but also in low-value parts supply, which might be more vulnerable to the market crash.
• Double-booking by brands and OEMs—placing the same orders with everyone on their qualified suppliers list to ensure allocation—creates an increased sense of tight supply.
• Some brands, OEMs and system integrators believe that the TFT LCD panel market will only get tighter in the second half of the year as the economy improves in 2H’09 and 2010. Just like stocks, everybody wants to buy at the bottom. As panel prices are still low, orders are rushing into the panel makers.

Given this situation, the question is whether the shortage situation will continue through this year. Are LCD TV panel makers really able to increase panel prices continuously when brands and retailers are not able to increase set prices given the current recession? Can a 2H’09 recovery of market demand really help the panel companies both increase prices and increase production? What do you think?