Both companies continue to stress the importance of building LCD front-end fabs in China to be close to customers in the world’s largest TV market and to mitigate risks of future cell import tariff increases. If tariffs do increase, cells made in China for sale in China will have lower costs than those made in Korea for sale in China. If manufacturing locally in China is a must, the rationale for transferring recently-installed equipment is to enable more competitive utilization of tools that are now idling as a result of the current over-supply. At the same time, moving equipment—rather than buying new machines—will help alleviate the over-supply sooner and potentially help firm up module prices in 2012 and 2013.

Unfortunately, moving currently installed machines has a negative influence on the equipment market; it would be a lost opportunity for FPD equipment vendors who are already expected to suffer a severe downturn in 2012. But the main reason the “Move to China” strategy could be difficult to pursue is that it is possible that at the Korean panel makers have contracts in place with their Chinese partners that require them to buy new machines for their planned fabs in China.

The possibility that Samsung and LG Display might take a “Move to China” approach has been widely discussed in the supply chain, but we are not aware that any decisions have yet been made. Samsung has already denied plans for the move in the Korean press. Even so, in the current over-supply environment, why not move underutilized equipment? The benefits from the panel maker’s perspective seem to outweigh the negatives. If the “Move to China” strategies do come to fruition, it would be the first case in the industry of transferring almost new machines from a fab in one country to another because of rapidly shifting market conditions and future expectations.

One downside of these technologies is that they can have higher power consumption. Since, traditionally, desktop monitors are driven off of AC power and have power “bricks” or built-in power supplies, the issue of power-draw has been less relevant for desktop displays than for battery operated mobile PC displays. Recent green initiatives have tried to shed light on the power consumption for desktop displays, and the use of LED backlights has helped reduce power draw, but lower power consumption is hardly a selling proposition. 

A tangible benefit of lower power monitors, however, is the ability to “cut one cord” of a desktop display or future cloud monitor. Current monitors and all-in-one PCs require at least a video cable, a power cable (and/or power brick), and an Ethernet connection. LCD monitor players have offered several solutions to cut at least one of these cables:

• Power from USB 3.0
• Power from DisplayPort
• Power from Ethernet (still requires a separate video connection)

Asus showed a USB-powered monitor at Taipei COMPUTEX, but its brightness was only 200 nits (stated power draw was 6.5W). Many LCD monitor panel roadmaps show low power monitor panels allowing for an 8W total solution, but these are mostly for low brightness (200-250 nits) TN panels from Taiwanese or Chinese panel makers that might not have as much access to advanced technologies like IPS/PLS. 

So the near-term desire to push IPS/PLS technologies to the mainstream of desktop computing could have a side effect of hindering other monitor advancements, such as power over Ethernet, that are needed for the development of consumer cloud monitors.

High resolution enables some 3D technologies, allowing viewing of larger displays at the same distance and improving the viewing experience of smart TV. But most importantly, high resolution appeals to all FPD users because it provides smoother, higher quality images.

Two definitions may be used to describe FPD resolution:

• Number of pixels per inch (PPI), often referenced for small/medium applications, or
• Total number of pixels per display (X × Y) often referenced for large-area applications.

As shown in the table below, smaller FPDs tend to have higher pixel densities and smaller pixels, while larger FPDs have a greater number of total pixels.

Table 1. Low and High Resolution Examples for Various FPD Panel Sizes

 We can define FPDs with greater than 230 PPI or 8 million pixels as SHR displays. Super high resolution FPDs will account for about 20% of all small/medium displays in 2011 and are well on the way to becoming standard for smart phone applications. For large-area applications, super high resolution is still very much a niche market. But by developing a wide variety of new manufacturing technologies now, FPD makers hope to move SHR TVs into the future mainstream.

However, manufacturing such high resolution displays creates a variety of production challenges and tends to require unique manufacturing capabilities such as LTPS or metal oxide high mobility backplanes, fine resolution TFT and pixel pattering, low resistance copper bus lines, integrated gate drivers, and tighter process control throughout the entire production process.

DisplaySearch is currently analyzing the manufacturing technologies required for super high resolution. For each technology, we are identifying the benefits, challenges, process flows, status of each by panel maker, and forecast adoption rates. We will report this data in the soon to be released TFT LCD Process Roadmap Report.

• 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.

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.

However, this change is not completely based on strong demand from the end-market. Because of this, many believe that these price increases are not being built on solid ground, but rather on panel makers’ desires to stop prices from falling by limiting capacity utilization. Additionally, some panel makers are not being patient enough to wait for panel prices to increase by 1% or 2% per month, as is usual. Instead, they are ambitiously asking for higher price increases, like a $5 jump for 32” or a $10 jump for 40”/42”, which is a 4-5% increase per month. This attitude has created many arguments and complexities in price negotiations.

Panel makers and buyers are viewing the market from fundamentally different perspectives. Panel makers point to the solid May labor holiday sell-through in China, interest in higher-priced LED and 3D models, reduced channel inventories, and disruptions to the supply chain from the earthquake in Japan. In rebuttal, some panel buyers cite the relatively weak demand in North American and European markets and resumed panel production (for example, Sharp has resumed production at its Gen 8 and Gen 10 fabs, Chimei Innolux is increasing its fab loading, and LG Display is starting to increase more panel output at its Gen 8 fabs).

Arguments from both the seller and buyer sides are true, but incomplete. It’s like using one cloud to describe the entire sky. We believe, based on our supply/demand, capacity utilization, and inventory management modeling, LCD TV panel prices will increase over the next few months. However, the slope of the price increase is still very uncertain. We will continue to monitor the situation and provide the latest insights and price forecasts in our Monthly Large-Area LCD and PDP Pricing Report and MarketWise- LCD Industry Dynamics.

In the second week after the Japan earthquake, some additional impacts to the FPD supply chain are beginning to emerge. In the near term, some panel makers need to work with new material suppliers to keep their lines running. Longer term, there are some indications that key equipment production may be delayed.

NF3 (Nitrogen Trifluoride) gas is used in cleaning CVD (Chemical Vapor Deposition) chambers in the production of TFT LCD, semiconductors, and amorphous silicon thin film solar cells. The supply of NF3 was tight before the earthquake, as low prices had discouraged gas makers from expanding capacity. At the same time, growth in the display market as well as amorphous silicon-based thin film solar cell production had increased demand.

While several companies supply NF3 gas, most of the supply is from OCI Materials, Air Products, and two Japanese companies: Kanto Denka Kogyo, and Mitsui Chemicals. The two Japanese companies, along with others like Central Gas, account for approximately 30% of world NF3 supply. Kanto Denka Kogyo has a plant in Shibukawa, in northeast Japan, which has been impacted by the earthquake and unstable electricity, potentially causing disruptions to NF3 production. Reports from some panel makers indicate that the supply of NF3 is tight due to the earthquake and the unstable electric power supply in Japan.

ITO (Indium Tin Oxide) is the main type of transparent conductor, and is widely used in TFT LCDs and touch screens. The raw material for ITO deposition is the ITO target. The leading ITO target makers are JX Nikko, Mitsui, and SCP, followed by ULVAC and Heesung Metal. The two Japanese firms have more than a 70% share of the market. JX Nikko’s factory is located 80 Km from the Fukushima nuclear power plant, and is currently shut down. Mitsui has not been impacted by the earthquake. Panel makers generally have a month of ITO target inventory on hand, so depending on the supplier, some panel makers could begin to experience constraints.

Pigments are used in color filters. DIC, a Japanese supplier of organic pigments, has indicated that its production has been impacted, which could have an effect on the supply of green pigments for color filters.

Connectors used for the power and graphics signals in LCD modules made by Hirose and JAE may be in short supply due to the earthquake.

In most of these cases, panel makers are holding at least a few weeks of inventory, giving them some time to locate alternative sources. However, one area that does not allow stockpiling is manufacturing equipment, needed to expand existing capacity or build new fabs.

Exposure equipment for Gen 4 and smaller fabs is typically the step-and-repeat type (steppers), which is dominated by Nikon. The company makes steppers in its Miyagi facility, which was damaged. A statement on the company website announced that the facility is closed with no indication of when it will resume operations. Nikon was at full production capacity before the disaster and had a great deal of work in process. Thus, it seems highly likely that shipments for AMOLED and LTPS LCD fabs will be delayed. If so, the current tight supply would continue longer than initially forecast. Gen 5 and larger fabs use projection lens scanning exposure equipment, which may also experience some delays as there are numerous sub-assemblies that must be produced and put together to make the complete machine.

Consider the following factors:

According to press reports, LG Display has decided to delay groundbreaking for a Gen 8 LCD plant in China, citing delays in approvals from the Chinese government. Originally, LG Display planned to ramp up a fab in Guangzhou in Q4’12, but reports indicated that it will be delayed for at least half a year.

At the same time, there are indications that Samsung, which also received approval from the Chinese government in December, might delay its TFT LCD fab in China as well. Originally, Samsung LCD planned to build a Gen 7 (1950×2250mm) line in Suzhou and to ramp up in 2H’12. But since the groundbreaking has not yet taken place, and there are indications that members of the Chinese fab taskforces may have moved back to Korea, it seems that the plan may have been postponed.

Additionally, sources in Taiwan indicate that AUO has also been reconsidering its plans to build a Gen 7 fab in Kunshan, China. The Taiwanese government recently announced that the so-called n-1 rule (panel makers must build an “nth” generation factory in Taiwan before they are allowed to build an nth-1 generation plant in China) has been eliminated. This was assumed to be the trigger for AUO and others to invest in China, but apparently there are additional considerations for AUO.

Finally, there are indications that Sharp has cancelled its plan to build a Gen 8 fab in Nanjing, as a joint venture with CEC-Panda and the Nanjing government.

We believe there are several reasons behind these shifts:

The oversupply that started in Q2’10 is ongoing, meaning that most panel makers have excess capacity. In Q4’10, LGD, Samsung, and Sharp barely made an operational profit, and all others lost money. This is pushing panel makers’ expansion plans out.

The Chinese market still has great potential as LCD TV demand continues to grow. However, the growth rate is not as high as it was several years ago, which is causing panel makers to rethink their production strategy in China. Meanwhile, Chinese TFT LCD companies, such as BOE, ChinaStar, CEC-Panda, and even Tianma, are expanding capacity. This is likely to result in saturation in the future.

In their efforts to obtain licenses and approvals from the Chinese government, foreign TFT LCD makers made certain promises, for example, to shift other technology-oriented businesses or production to China, or to transfer technical know-now to China. However, panel makers and their group companies might be re-considering the timing of these agreements.

The TV panel and set business is adopting two new models: the cell business, in which panel makers ship semi-finished cells to their joint venture companies or customers instead of a full LCD module; and the BMS model, in which system integrators make the backlight, module, and system all under one roof to gain the benefits of improved efficiency and reduced components.

As the cell and BMS models grow, and with the cell import duty at 3%, panel makers are analyzing the return on investment to build a fab in China compared to the economic benefits of clustering in Korea, Taiwan, or Japan, especially considering that China’s LCD supply chain is not mature.

Companies like Samsung, LG Display, AUO, and even Chimei Innolux might place a higher priority on expansions or revamping of existing fabs in their home country. With limited engineering resources, they have to consider the return on different projects, and they may conclude that domestic investments are better.

Certainly, these delays do not necessarily mean cancellation. China is definitely a promising land with great opportunities and growth potential, and of course, many risks. It remains likely that foreign panel makers will eventually build fabs in China. It is a matter of time, and with the market in oversupply and panel makers struggling for profitability, they are focusing on improving profitability before building overseas.

However, on the demand side, there are still concerns about brand inventories. In our new report MarketWise-LCD Industry Dynamics, DisplaySearch finds that TV, monitor, and notebook PC brands are holding medium (4-5 weeks) to high (more than 6 weeks) levels of supply chain inventories. This explains these brands’ restrained production plans in Q1’11. Brands are now cautious about buying more panels given the insecure outlook for 2011. The weak macroeconomic picture in many regions of the world makes these brands even more careful, and they are avoiding any inventory buildup. Brands are likely to wait for these medium to high inventories to be digested through sell-in and sell-through of finished goods.

Many people have questioned our forecast in the Monthly Large Area TFT LCD Pricing Report that market prices will stop falling and rebound in Q2’11. It is natural to be pessimistic during bad times, and during transitions between good and bad times, there are many contradictory signs. Here are some of these inconsistencies:

• Panel maker inventories are low, but pipeline inventories are still at mid to high levels.
• Panel makers feel they can raise prices soon, but the downstream is resisting.
• Slate PC panel demand continues to soar, but panel maker production capabilities and yields cannot keep up. Panel supply is tight, encouraging panel makers to add capacity.
• Panel makers are now adjusting their capacity utilization on a monthly basis.
• China market demand is still good, and it continues to be a shining star in the global LCD TV market. And though China TV makers are still fighting to gain share, they are being unusually conservative with panel purchases prior to the Chinese New Year.
• LCD TV brands still have high targets for 2011, and have given panel makers aggressive plans to secure panel allocations.
• Many panel prices have reached cash cost, causing losses by panel makers. However, they are maintaining capacity utilization.
• LCD monitor panel prices began to rebound in October 2010 due to supply constraints. However, prices fell again slightly in January.
• Over the past decade of TFT LCD supply/demand cycles, the longest oversupply was nine months. The current cycle has passed nine months.

With so much contradictory information, it is hard to make the right forecast. The TFT LCD industry is becoming an industry in which over-capacity and unmet needs co-exist. This means that capacity utilization and inventory adjustments might be more important for panel prices than panel capacity and end-market demand.

Based on this realization, we have developed MarketWise-LCD Industry Dynamics to monitor supply chain dynamics on a monthly basis. We expect a rebound in panel prices in Q2’11 because inventory is being gradually reduced. Therefore, brands will eventually increase orders. Also, panel makers appear to be managing fab utilization well, and in some cases, there is even tightness in the panel supply.