In analyzing the potential for advanced-generation TFT LCD manufacturing in China, we recently highlighted the potential of the Chinese government to increase import duties for LCD TV cells. Such changes seem to be increasing in likelihood as domestic Gen 7 and Gen 8 fabs run by domestic players, like BOE and ChinaStar, as well as foreign panel makers, like Samsung and AUO, come on-line.

We recently learned that China customs and Ministry of Commerce of China (MOFCOM) have been collecting input from Chinese companies regarding raising import duties on LCD TV cells. The options could increase duties on 32” and larger LCD TV cells from 3% to 10%, and from 5% to 12% on less than 32”. Such increases would have a huge impact on the LCD TV value chain. According to our research, while Chinese TV companies like Changhong, Konka, TCL, Hisense, Haier, and Skyworth already use domestic panel suppliers for <32” TV panels, over 95% of 32” and larger panels come from panel suppliers in Taiwan, Korea, and Japan.

From the perspective of local panel suppliers, higher import duties are good since they will force TV panel makers to buy more panels from domestic suppliers. For foreign suppliers, particularly ones like LG Display and Chimei Innolux who do not have solid plans to build a fab in China, higher import duties will jeopardize their existing business in China. They will have to either force customers to absorb higher costs or sacrifice their own margins, possibly even losses.

For TV companies, an increase in domestic panel supply would be a good thing in terms of logistics and business relationships. However, what matters most is stable quality with mature technology. Domestic LCD makers are adopting state-of-the-art Gen 8 technology and will need time to ramp up and mature. Korean, Taiwanese, and Japanese panel makers are ahead in overall TFT LCD production, as well as production of advanced panels like large sizes, 3D, LED backlight, slim, and narrow bezel.

If import duties increase, buyers might not be able to get the panels they need domestically, and will then face cost increases if they purchase overseas. Manufacturing costs at Chinese fabs are higher than foreign fabs due to supply chain immaturity and low yields. In this scenario, the panel cost for TV set makers will increase either way. Finally, some of the domestic fabs are being built and supported by TV companies rather than being a true merchant supplier. This may make buyers think twice when choosing long-term supply partners.

So domestic Chinese panel makers will welcome an increase in import duties, but the situation is more complex for domestic TV makers. Whoever has the loudest lobbying voice and strongest economic influence is likely to impact the Chinese government’s decision. But domestic TV makers might have a hard time getting their voice heard over domestic TFT LCD makers who have absorbed enormous amounts of capital through loans from banks and local provincial governments.