China’s Ministry of Finance has officially announced changes in import duties on certain products, among them LCD TV panels. As we discussed last December, discussions have been ongoing for some time about changing the LCD import dutycurrently 5% on all modules and 3% for 26” and larger TV open cells and cells (semi-finished modules). Effective April 1st, the duty on 32” and larger TV open cells and cells will be increased to 5%.
Why the focus on 32” and larger LCD TV open cells and cells, and why only 5%? What might the impact on the industry be? Some background will help.
Years ago, the Chinese government encouraged domestic LCD TV set manufacturers to adopt the BMS (backlight-module-system) model for more vertical integration capability. That’s one of the reasons why brands like TCL, Changhang, Konka, Hisense, Haier and Skyworth built module assembly facilities (some in joint ventures with panel makers) and purchase LCD open cells (which are panels without backlight or other module parts). This has encouraged panel makers like Chimei Innolux, AUO and Samsung to ship open cells to China instead of modules. The relatively low 3% import duty on open cells was meant to encourage this.
However, as Chinese panel manufacturers like BOE, ChinaStar and CEC-Panda have built Gen 6 and 8 LCD fabs, optimized for 32” and larger TV panels, focused on domestic markets, they have asserted the need for protection from Taiwanese, Korean and Japanese competition. Their campaign to increase the import duty has been going on for a long time, and some have asserted that it would be increased as high as 10%. In that sense, the new 5% rate is a kind of compromise.
Domestic TV makers have opposed increases in the duty, as they will face higher panel prices while the domestic supply matures. while the direct impact will be a small additional cost, the Chinese TV market is very competitive so every penny matters. China is the world’s largest LCD TV market, but there is very harsh competition between the domestic brands who account for more than 70% of the market, as consumer behavior and channel structures make it very difficult for international brands to expand their share.
The increase to 5% might not be enough to force Korean and Taiwanese panel makers to build fabs in China, according to our cost analysis. However, if domestic suppliers build more LCD TV panel fabs as planned, the import duty might be increased further. For political and business reasons, foreign panel makers are starting to seriously consider LCD fabs in China. However, as opposed to previous plans to “build”, it is now possible that they might “move” existing fabs, because overcapacity in the industry argues against building new capacity. Some think that Samsung is considering moving a Gen 8 fab from Korea to Suzhou, and that LG Display may also be considering such a move. Meanwhile, AUO’s Gen 8 construction in Kunshan is ongoing but AUO has not discussed specifics with equipment makers yet, which could be an indication that AUO might also be thinking about moving fabs to China.