Will Korea Approve?

Key Thoughtz

• Chinese OEM and consumer demand for LCD TV panels is underserved by domestic AMLCD fabricators.
• Taiwanese fabricators have fallen behind Korean producers.
• China seeks technology transfer; Korea has the best production technology.
• Transfer of existing technology will sustain present trends and raise barriers to entry.

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Three Chinese companies have announced plans for 8th generation fabs. The news from China Electronics (CEC) and its affiliate Panda Electronics (Nanjing) that they would obtain 6th generation assets and 8th generation technology from Sharp of Japan is the most credible. The news from China Electronics (CEC) and its affiliate Panda Electronics (Nanjing) that they would obtain 6th generation assets and 8th generation technology from Sharp of Japan is the most credible. The announcement by LG Display that it intended to set-up an 8th generation fab in Guangzhou is less credible because that would require approval by Korean authorities. If approval is granted, Taiwanese authorities might feel compelled to end restrictions preventing its AMLCD producers from transferring technology to China. That would foster more technology transfers and the center of AMLCD fabrication would shift to China. The third announcement by BOE Technology is least credible because the source of technology is unspecified. The company raised equity recently, however.

Rivalry among merchant AMLCD producers has led to different financial conditions for Chi Mei Optoelectronics (CMO) than for AU Optronics (AUO) and LG Display (LGD). As shown in the following chart, CMO increased capex faster than it increased sales in recent years while competitors slowed their pace of investment relative to sales. That put CMO in a weaker position during the 2008 recession. CMO was forced to halt its 8th generation project but the company and its potential partners could benefit from technology transfer, nevertheless. Approval by Taiwanese authorities in response to approval by Korean authorities might provide CMO with a way forward.

Cumulative Capex to Sales Ratio for Three Leading AMLCD Producers, 2002–2008

Source: company disclosures and BizWitz analysis.

Ability to fabricate panels for 47” and larger LCD TV sets in China would change the balance of power at several points in the value chain. We believe that material suppliers will face more shocks, possibly as significant as the sudden decrease in demand felt in 2008. Chinese domestic operations will seek local sources. We assume that the pace of capex will continue declining outside China, which may allow domestic ODM or TV brands to improve their global position. As a result, TV retailers may increase their bargaining power as new or in-house brands seek shelf space. On the other hand, we believe that the pace of panel price reduction will be sustained. That suggests commoditization and diminishing returns to scale for suppliers but value consumption for consumers.