Samsung’s Gen 7 Investment in China: Cost, Market, or Import Duties?

David Hsieh – Vice President, Greater China Market, DisplaySearch

As we noted in August, panel makers’ investment plans in China are heating up, and in September, we analyzed several possible investment cases including for Samsung. On October 16, Samsung announced that it will invest approximately $800M in a Gen 7 fab (1950 × 2250 mm, called Gen 7.5 by some) in Suzhou.

The announcement noted that the investment must be approved by the Korean government because current law prohibits transfer of TFT LCD front-end process technology to China. Originally, Samsung planned a Gen 8, but at the last moment they changed to Gen 7.5 in the hope that it might ease the government approval process, since Gen 7.5 technology is less sensitive than Gen 8, which is the most advanced generation of Samsung in Korea. Politically, the Korean government will find it easier to explain a decision to allow transfer of Gen 7.5 technology and the jobs associated with it to China. However, this makes me wonder: is it worth it to go to China? Is the reason cost, market access, or avoiding import duties? What is the thinking of the largest TFT LCD maker in the world, known as a very “Korean” company, in moving its advanced technologies and people to China?

Regarding cost, Korean TFT LCD fabs are likely the most efficient in the world. The supply chain is solid and strong in Korea. Samsung has huge campuses in Cheonan and Tangjeong, along with glass substrate factories, as well as talented and hard-working engineers. In China, water and electricity costs are actually higher due to shortages. Expatriates need higher compensation. The yield rate and production processes may take a long time to improve in China. Of course, labor costs are lower in China, but front-end processes are not labor-intensive, and back-end LCD module assembly was moved to China years ago. There will likely be many cultural and communication differences between Korean and Chinese engineers. In total, it is possible that, setting aside import duty costs, Samsung could have higher costs in China than it does in Korea right now.

China is definitely the bright spot for TFT LCD end-market demand. In Q2′09, China became the largest LCD monitor market in the world. DisplaySearch forecasts that in 2011 or 2012, China’s LCD TV sell-through will become the largest in the world. And the TV market is dominated by domestic brands, which are seeking domestic sources of supply. Since the Chinese government is encouraging TFT LCD investment in China, it may be that the way to win in China is to produce there. However, the US and Europe have been the largest LCD TV markets until now, yet there are no fabs in those regions. This leads to the import duty issue.

Currently, a 3% duty is levied on 26″ and above LCD cells imported into China and sold as end products there. There is concern that the Chinese government might increase this to 5% or more in the future to force panel makers to move there. Of course China, a WTO member, cannot raise the duty without considering the opinions of other members; for example, under pressure from the US and the EU, China reduced import duties on automobiles. However, any complaints from Korea, Japan, or Taiwan-which rely heavily on the China market-might be easily neglected by China. When you have a neighbor that is strong and getting stronger, you might choose to send gifts rather than fight with him.

Import duties are regional political issues, not just economic ones. Therefore, I believe this is just the beginning. As more panel makers announce plans to build in China, we will enter a new era for the TFT LCD industry in which, for the first time, the presence of a large end market compels localized production.