By David Hsieh – Vice President, Greater China Market, DisplaySearch

“This over-supply is coming so fast and so hard,” said a senior sales manager at a TFT LCD company. Apparently, panel price reductions are more severe than anybody expected. Both the buy side (brands, ODMs and OEMs) and the sell side (panel makers) seem to be panicking about panel prices and losing confidence in market stability. Everyone is expecting panel prices to crash to panel makers’ cash cost very soon—maybe within two to three months—before we see a possibility for stability.

In August deals, prices are down 5-7% M/M from July for LCD monitor panels, 3-4% M/M for notebook panels and 4-5% M/M for LCD TV panels. Prices are dropping faster than the 3-4% M/M DisplaySearch predicted in the Monthly Large-Area LCD and PDP Pricing Report.

There are many factors triggering the over-supply this time: surplus inventories accumulated, the desire of brands to improve their margins, weak panel buying in China, full capacity utilization in 1H’10 due to over-optimism, Korean makers’ aggressive pricing tactics versus Taiwanese, and the brands’ need for lower panel prices so they can promote products for the 2010 end of year hot season.

In the history of the TFT LCD business, the longest downturn lasted 10 months. Although DisplaySearch forecasts that panel prices will continue to fall until Q1’11, the bottoming out of panel prices may come even earlier. And if prices hit bottom earlier, they will rebound earlier, especially when panel makers reduce utilization and stop producing because panel prices are approaching or falling below cash cost. The following is a possible scenario:

1. Inventory control and pushing panel prices down are the top two missions for panel buyers.
2. Panel makers panic about demand vanishing and prices crashing; panel buyers aggressively ask for rebates, price protection or market development funds.
3. Prices fall faster than anyone has forecast.
4. Capacity utilization drops faster than anyone has forecast because the whole supply chain is nervous.
5. Due to lowered panel prices, brands launch aggressive price cuts in the end market to stimulate demand; therefore end-market demand and sell-through are strong in Q4’10, which gives the supply chain more confidence.
6. Reduced panel supply + better sell-through = faster bottom out. This happens in Q4’10.
7. In early Q1’11, the market atmosphere improves, as utilization from Q4’10 remains low and panel prices are at historically low levels too. After two quarters of adjustment, brand inventories are finally healthy or even too low. Panels start to pile up downstream. At that point, the market will probably turn positive.

We are currently evaluating the possibility of this scenario, and will adjust our forecasts if it becomes more likely. Stay tuned.