The opening comes with stringent provisions. Interested foreign parties must invest $100 million or more, open stores in towns with populations of at least 1 million, adhere to local legislation, and invest in development of back-end, which should amount to at least 50% of the total investment.

This move should open up markets for TVs, mobile PCs, mobile phones, and other devices. Players like Walmart have a strong supply chain for these products and strong relationships with brands. Indian mega-stores like Future Group, Reliance retail, and Croma already have a strong presence in consumer products, durable goods, and IT devices. This change is expected to boost the share of chain stores in the country. Consumers should see increased choices in electronics retail, at least in large towns, leading to increased competition. Global brands that take advantage of this government decision could see strong growth in India.

It’s hard to understand how a flat panel fab could be operated in such a remote location, without any supply chain or plentiful water supply. It may be that BOE’s intent is to secure financial support from the local government and to prevent its stock ticker being tagged with “ST,” which stands for Special Treatment (in China, companies can be delisted from the stock market after three consecutive years of losses, and the ST tag indicates a company that is operating below market expectations). BOE posted net profits in 2007 and 2009, but lost money in 2008, 2010, and Q1’11.

On the other hand, the Ordos local government has recently been seeking high-tech investments to balance its industrial structure. It may utilize tax breaks, subsidies or loans to attract high-tech industries. Ordos is very rich in natural resources and is known by the Chinese characters for wool, coal, rare earth metals, and natural gas (羊煤土气), which have the same pronunciation as the phrase “hold one’s head high” (扬眉吐气). Although its total population is only about 1.5 million, according to government data, Ordos has the highest per capita GDP in China, higher even than Hong Kong. However, it has no development related to the FPD industry and its supply chain.

In addition to the lack of a supply chain in Ordos, the ability to handle advanced FPD manufacturing and AMOLED technology is an additional challenge for BOE. Moreover, there have been no indications of detailed discussions of this fab with equipment makers. So this project is highly uncertain, but definitely bears watching.

HP announced today that it is “exploring strategic alternatives” for its Personal Systems Group and exiting the market for webOS devices, which includes its TouchPad tablet. For years, critics have been agitating for HP to exit the PC business. With the board and executive leadership changes over the past year or so, this criticism died down somewhat. However, with the success of the iPad and failure of the TouchPad, the pressure has intensified again.

According to the DisplaySearch Quarterly Mobile PC Shipment and Forecast Report, HP shipped less than a million tablets through Q1’11. Meanwhile, HP’s Q1 notebook shipments fell Y/Y, reaching the lowest level since Q2’09. As DisplaySearch reported on Thursday, preliminary estimates indicate that Apple vaulted past HP in mobile PCs in Q2.

Figure 1. Market Shares for Mobile PC Shipments (Notebooks, Mini-Notes, and Tablets)

Source: DisplaySearch Quarterly Mobile PC Shipment and Forecast Report

HP is not the only PC company that has struggled with this new consumer computing device, the tablet PC. Earlier this year, Acer parted ways with its CEO, reportedly over differences in opinion about the relationship between tablets and more conventional consumer mobile PCs, notebooks, and netbooks. Most PC companies note that their mobile/notebook PC sales are down for consumers, acknowledging that the tablet effect is real, as did HP’s Leo Apotheker in the earnings call today. However, almost all PC companies are reluctant to state that tablets are consumer PCs and that consumers are buying iPads instead of another notebook (or even a first notebook).

It is hard to imagine that a PC company could move forward without a consumer PC strategy, or that one could have a consumer PC strategy without a tablet option. HP’s PC business may indeed go on under its own power or under the direction of a new company, but with this failure in the consumer OS space, it seems clear that the HP brand is not synonymous with consumer computing.

However, despite this, the use of capacity expansion as a competitive tool continues:

• In May, Samsung broke ground for its Gen 7 fab in Suzhou, China, targeting ramp up in Q4’12.
• BOE declared that they plan to ramp up the newly built Gen 8 in Beijing in September, as originally planned.
• On August 8, ChinaStar held a kick-off ceremony for its new Gen 8 fab in Shenzhen, and it announced that the fab will ramp up from Q4’11.
• Press reports indicate that LG Display—after a long internal process—decided to build a Gen 8 fab in Guangzhou, China. The groundbreaking ceremony is planned for the end of August, with panel production expected in 2013.
• On August 10, the Chinese government approved a Gen 8 fab in Kunshan, a joint venture between AUO and the government. Mass production is expected in 2013.

In other words, there will be five new fabs in China that will start production in 2012 and 2013. New fab investments seem very questionable for panel makers who are cutting back on existing capacity utilization. Why is this happening?

It is important to understand the background for these investments. As we have previously discussed, China—especially local governments—has offered many stimuli to encourage foreign panel makers to build fabs and transfer technology. And the potential for increased import duties for LCD panels is always a big concern for panel makers, as China has used this tool to accelerate industry shifts before. The current LCD panel import duty is 5%; however, some in the industry feel that China government will raise it to 8-10% to support BOE, ChinaStar and other domestic players.

On the demand side, with slow growth in European and North American TV markets and little hope for a return to high growth, China—the largest TV market in the world—is the greatest opportunity for panel makers’ future. Although China’s TV market growth rate is not as strong as before, it remains the most important opportunity.

Furthermore, in addition to the attraction of market growth for panel makers, China is also an important place for new product development. Recently we reported that panel makers are developing new sizes such as 39”, 43”, 48”, and 50”, and low-cost direct-type LED backlight models with the China market in mind. With Chinese panel makers like BOE and ChinaStar emerging, foreign panel makers are sensing the need to build a presence in China for competitive purposes.

Meanwhile, with the cyclical characteristic of the TFT LCD industry, demand elasticity always triggers another wave of the tightness following over-supply. When the next big demand wave comes, it’s possible that it will be from China, as there are still hundreds of millions of old CRT TV waiting to be replaced. So why not invest in China?

Of course, continuous capacity expansions, even in China, will possibly make the cycle worse and the over-supply more serious. This may be a headache tomorrow, but not now at least.

• Sharp and Chimei Innolux will jointly procure glass substrates, color filters and other components for greater economies of scale.
• Sharp will provide technical support to Chimei Innolux, especially for high transmittance liquid crystal technology like optical alignment.
• LCD TV panel trading: Chimei Innolux will provide 20-40” class panels to Sharp, who will utilize its Gen 10 fab to produce large sizes like 60”+.
• Sharp will give LCD TV OEM orders to Foxconn, who will act as an outsourced OEM for Sharp with panels consigned from Sharp.

This relationship is broad and complicated, involving many technologies, businesses, panels and sets. However, there is fierce competition among LCD TV panel and set OEM manufacturers, especially in the current slow-moving circumstance, and this alliance could be beneficial to both Sharp and the Foxconn group.

From the panel side, Sharp has been transitioning its Gen 8 fab to high-end panels for mobile devices, but the company needs a better way to utilize its Gen 10, as well as to take care of its panel needs for smaller sizes. Chimei Innolux has a huge amount of Gen 6/7 capacity, which can support Sharp. Chimei Innolux also needs to find a faster way to upgrade its TV panel technology.

According to our research, Sharp and Chimei Innolux had a combined Q1’11 LCD TV panel unit market share of 29.3%, which is greater than Samsung and LG Display. This means that the joint venture will be a major player in LCD TV panels.

One thing that might cause difficulty is Sharp’s panel procurement contract with CEC-Panda in China, to whom Sharp sold its Gen 6 fab. CEC-Panda is now trying to ramp up its Gen 6 fab, but now it seems Sharp will also buy Gen 6 panels from Chimei Innolux.

From the LCD TV set perspective, Foxconn is the biggest LCD TV OEM for Sony. The company bought Sony’s assembly lines last year and is also looking to expand its customer base. Within the leading TV brands, Korean makers like Samsung and LG Electronics have a clear strategy for in-house production, so Sharp is the most promising customer for Foxconn. In the meantime, the exchange rate and business environment are putting pressure on Sharp to maintain in-house production, and Samsung and LG Electronics are aggressively expanding their global market shares. TPV, the largest LCD monitor and LCD TV subcontract manufacturer is also competing aggressively with Foxconn.

In the late 1990s, Taiwanese TFT LCD manufacturers acquired key LCD technologies from Japan. Over the next decade, Taiwanese panel makers passed Japan in capacity, and entered direct competition with Korean panel makers. During periods of oversupply, Taiwanese makers became more vulnerable than Samsung and LG—each with strong brands—because Taiwanese panel makers do not have captive demand. At the same time, Japanese TV brands saw Samsung and LG take the top position in LCD TV.

The Sharp-Foxconn alliance can be viewed as another new relationship between Taiwan and Japan. This time, it involves not only panels, but also TV sets, not just technology, but also business, and it may not be just a handshake, but more of a strategic move against their Korean rivals.

According to the Quarterly Small/Medium Shipment and Forecast Report, if the three companies merged, the resulting entity would be the largest small/medium TFT LCD maker, with a (2010) revenue share of 21.5%.

If this were to occur, the merger would create not only a manufacturing powerhouse, but also a technology leader. Toshiba is a leader in LTPS (low temperature polysilicon) TFT LCD, the technology viewed as the leading choice for the high resolution and low power consumption performance required by smart phones. Toshiba also possesses other technologies like OCB (optically compensated bend) and autostereoscopic 3D for handheld devices.

Hitachi Displays is the inventor of IPS (in-plane switching) technology, which is the leading wide-viewing angle technology, required for tablet PCs and high-end smart phone displays. Hitachi is also a leader in ultra-high resolution panels, and has a partnership with Pixtronix to produce MEMS-shutter displays. Sony has IPS technologies as well as high resolution LTPS, and has a great deal of AMOLED know-how.

There is also speculation that the merger or joint venture deal would involve a Gen 6 fab, originally built by IPS-Alpha in 2006 in Mobara, Japan. IPS-Alpha was an earlier joint venture between Hitachi, Panasonic, and Toshiba, which restructured and became Panasonic LCD last year. The fab has been producing IPS TV panels and could possibly be retrofitted to produce tablet PC or handheld displays.

This new company would be created in the context of a very active small/medium FPD market. Japanese panel makers focusing on the small/medium market have been facing competition from Korean and Taiwanese panel makers, who have started to use their higher generation fabs (such as Gen 6) to produce 9” and smaller displays. Korean makers have been investing in both TFT LCD and AMOLED, and the Taiwanese makers are agile fast-followers. Both groups of companies have been focusing on IPS for handheld and LTPS for high resolution. Even Chinese panel makers like Tianma are building Gen 5.5 LTPS and AMOLED fabs to enter the small/medium panel business.

Until now, the FPD industry has been dominated by manufacturing large-area panels for TVs, but momentum has been shifting to mobile devices. The fast growing smart phone and tablet PC markets provide the Japanese companies a good chance to grow by utilizing their cutting-edge IPS and LTPS know-how.

Small/medium displays are not a minor business. Soon after the news of the potential merger, there were other indications of investment in this market. AUO reportedly will build a Gen 6 LTPS TFT LCD fab in Taiwan, and Chimei Innolux is planning to convert its Gen 5 fab in China, code-named Century, to a full scale IPS and LTPS line. Competition in FPD has now escalated into a new field, and the regional competition continues.

Retail has been an overlooked challenge for many tablet players but is key to the success of tablets and potential new emerging mobile device categories going forward. Retailers are still working out the kinks of properly differentiating tablets from notebooks and smart phones while also educating consumers on how to shop for a tablet. Tablets are much more about the computing experience, with apps and services being the key characteristics of the device. This is different from the speeds and feeds that consumers typically use to judge the value of a product.

Apple has had a distinct advantage when it comes to selling a tablet or any new device for that matter. Through its own retail environment, Apple is able to explain the iPad to consumers through dedicated sales people. This provides a handholding that consumers will likely need as mobile devices become less and less about hardware and more and more about software and services.

Increasingly, we are seeing tech companies become more active in the marketing of emerging device categories to consumers in hopes of helping them to better understand new usage models. Google recently announced that it would allow Virgin America travelers to test out their Chromebook mobile devices at airport departure gates and inflight along with a free WiFi session. Recognizing that emerging device categories emphasizing software and services is something new to consumers, tech companies are called upon to be more a part of the sales process.

Along those lines, as part of its TouchPad launch Friday, HP has started an initiative called “Top Gun” in which it has stationed HP employees at special kiosks dedicated to the TouchPad inside 100 Best Buy locations. The HP staffers are trained to market the TouchPad. The effort will last until the end of the year. This will certainly help HP to differentiate its TouchPad from the other tablets sold in Best Buy stores and help consumers to better understand what the TouchPad offers compared to notebooks and smart phones.

Retailers, such as Best Buy, have been making efforts to help differentiate tablets from notebooks and smart phones, but tablet brands are still faced with the challenge of having to differentiate their tablets from each other. And as more brands with incompatible operating systems and apps enter the market, things could potentially get more confusing for consumers.

We continue to believe Apple has the advantage in the retail environment because of its dedicated sales channel. Apple is able to capture more profit than competitors who have to share margins with retail partners. This makes it tougher for rivals to compete on price. However, efforts such as HP’s “Top Gun” will help to educate consumers and ease the takeoff of this new emerging product category, which has recently been stalling.

As we indicated in May, panel buyers said that, despite the good sales in China, they did not see strong enough sell-through to support continuous panel price increases. There are several reasons that panel prices are losing upside momentum:

• Major TV brands are reducing their 2011 sales targets.
• PC set makers are facing inventory pressure.
• Consumer markets in Europe and North America are soft, driven by macroeconomic conditions.

Without pull from the end markets, a supply-driven panel price increase is not sustainable.

Panel makers now intend to sustain panel prices at current levels (there is no room for prices to fall further as they are below costs in many cases), and then wait for the market to tighten in late Q3’11 when downstream customers will need to build inventories for the holidays. However, there is also a sense that if panel prices do not increase, then they will fall. Several people in the industry, especially from the panel buying side, have suggested that panel makers will face pressure to either reduce capacity utilization or reduce prices in order to maintain their shipments. In our latest panel price forecast, DisplaySearch adopted the former position. We do not foresee a situation in which panel prices will crash again, so we are forecasting that prices will stay flat for a couple of months and then increase from late Q3’11.

While end-market demand is not showing strong growth at this moment, LCD capacity utilization has been managed on a rational level across most panel makers. For the next few months, we expect that controlled capacity utilization will continue. On the demand side, we are seeing good growth in emerging markets; meanwhile, many brands have initiated street price cuts and promotions in order to accomplish their 2011 plan, leading to some reason for optimism about 2H’11 end-market demand. While “if it’s not increasing, it will fall” is a possible scenario, there are many conditions that will serve to keep panel prices flat. Based on experience, panel prices can stay flat for a couple of months.

On the other hand, the principles of panel pricing appear to be changing. In the past, we compared capacity and demand numbers to forecast panel prices. However, this approach might not work in a situation where capacity and demand growth is very soft. The more meaningful panel price factors are capacity utilization of panel makers and inventory adjustments by set makers, which DisplaySearch is tracking in MarketWise – LCD Industry Dynamics.

The prospect of power shortages is influencing manufacturing plans and supply chains for many consumer electronics products. System integrators, and EMS and OEM/ODM companies of all sizes are concerned, and they are working to secure an adequate power supply for assembly operations, including asking the government to give to priority to high-tech industries. At the same time, manufacturers are worried about their suppliers maintaining production of components.

In addition to the power shortage, the growth in power consumption exceeds the expansion of power supplies, and there are structural problems in generating power. According to government statistics, power consumption in Q1’11 grew 15% Y/Y, higher than the average during 2006-2010. Coal accounts for 77% of power generation in China; hydroelectric accounts for 20%, and nuclear and renewables make up the rest. China is trying to adjust the balance, but power shortages will be a factor for some time.

This power shortage will impact the consumer electronics and energy industries in many ways:

• Consumer electronics relies on a supply chain of component makers, system integrators, EMS/OEM/ODMs, and brands. When there are electricity shortages, large companies will have priority access, for their own needs as well as for their suppliers. Smaller companies without strong connections to major companies might not be able to sustain their business. The allocation of electricity is a political and economic issue in China, and shortages may result in a “survival of the biggest and strongest” game.
• Despite controversy, China is planning to increase the share of nuclear power. Currently there are more than 12 nuclear power plants under construction and 25 in planning. As a country injured by the pollution from coal generation, and short of hydro resources, China does not have many choices in generating power. Many in China have been advocating solar power. China is the world’s biggest solar cell manufacturer but generates only a little solar power domestically, and instead exports a large fraction to Europe.
• Green concepts will become more and more prominent and even mandatory. China has applied a series of power consumption regulations for consumer electronics products including PCs and TVs. The power shortage will push the administration to tighten rules further. Consumers will be more willing to buy green products if they face more limited power consumption. In the electronics field, this means opportunities for advanced technologies in power efficiency.
• Flat panel display and semiconductor makers will have to pay more attention to the capacity utilizations of downstream manufacturers, rather than focusing on the demand from brands. For example, we have been observing the big gap between tablet PC panel shipments and tablet PC set production; when there is ample supply of components and demand is strong, it might be the capacity of assemblers that limits the overall supply chain capacity.

For brands, China is no longer a place with unlimited manufacturing resources. Supply chain management will have to involve more than the lowest assembly cost, including who can secure the most stable electricity supply for running production lines!

The site is of particular interest since it is used in the production of Apple iPad 2 tablets. As of now, it is difficult to tell whether the availability of the iPad 2 will be affected by this unfortunate event. Foxconn has stated that the main iPad 2 production base is in Shenzhen, while the Chengdu plant is in the pilot stage. Reportedly, Foxconn started to ship iPads from Chengdu in Q1’11.

Foxconn had planned to move more iPad assembly to the Chengdu factory. It is believed that Apple approved a shift in production from Shenzhen to Chengdu earlier this year, with 60% of the iPad production ultimately to take place in Chengdu, and the remaining 40% in Shenzhen. It is believed that Foxconn’s plan is to build on the order of 50 iPad assembly lines in Chengdu, each with a manufacturing capacity of one million units per year.

Chengdu, in Western China, is a fast-growing region with high-tech manufacturing activity. Foxconn has been clearly shifting most of its EMS activities from the coastal areas to the west, particularly Chengdu, where it plans to invest $2.1 billion to build an electronics components supply chain, including LCD module, LCD TV, digital frame, backlight unit, display components, and mobile PC assemblies. Moving production to western China is generally done to utilize low labor costs, but it is also challenging, as the components supply chain is not very mature in that area.