Taiwan's Flat Panel Industry
500 Days to Survive
Chinese and South Korean display makers will soon launch eight production lines for large-size TV screens in China. How can Taiwan's leading makers of LCD TV panels survive this offensive? What are their counterstrategies?
500 Days to SurviveBy Yuan Chou
From CommonWealth Magazine (vol. 543 )
Taiwan's display industry has entered a 500-day battle for survival.
Two display makers from South Korea – Samsung and LG – and three from China – BOE, China Star and Panda – have launched eight new production lines in China using Gen 8.5 technology, all of them set to start mass production by the second half of 2015. This will flood the market with large-format TV screens and eat into the profitability of Taiwanese display manufacturers. It is as if eight large cannons were targeting Taiwan. Taiwan has just a little more than a year to come up with a counterstrategy.
Gen 8.5 technology allows for more efficient production of large panel sizes. A Gen 8.5 glass substrate, sized 2,160 x 2,460 mm, can be cut into 32-inch, 47-inch or 55-inch LCD TV panels.
Unfortunately, the Taiwanese display industry, which posted NT$1.7 trillion in revenue last year and falls under the government's "Two Trillion and Twin Star" development program, has little force left to strike back.
The display industry never recovered from the global financial crisis of 2008. Along with solar energy, DRAM and LED, display manufacturing was one of the most severely impacted industries. Popularly known as the "two tigers of flat panel display," Taiwan's industry leaders Innolux Corporation and AU Optronics Corp. (AUO) currently owe the banks NT$400 billion combined. Recently, the Finance Ministry pinpointed the display industry's moribund exports as one of the key reasons Taiwanese exports as a whole remained sluggish in 2013.
AUO Withdraws Troops after Seizing a Beachhead
Since 2009, the Chinese government has granted five construction permits for Gen 8.5 TFT-LCD production lines. The first four were obtained by Samsung Display, LG Display, BOE and China Star.
The Taiwanese government imposes certain restrictions on domestic companies from setting up advanced factories in China for fear of technology theft. But AUO was not ready to leave competition in the top league to others. Having secured the fifth construction license, the final entry ticket into the exclusive circle, the company began to set up its own Gen 8.5 plant in Kunshan in China's coastal Jiangsu Province.
Then it ran into financial problems so that the Kunshan site was left with little more than the outer shell of an immense 660,000 square meter factory building.
Under pressure from the Kunshan city government, AUO eventually made further investments. But instead of building a Gen 8.5 factory for large TV panels, the project was "downgraded" to a Gen 6 production line for handset displays. AUO effectively retreated, pulling out its troops after having seized a beachhead.
In contrast, Chinese makers are not shying away from spending big money. Display market observer NPD DisplaySearch points out that 70 percent of all investments in display equipment over the past two years occurred in China.
"Taiwan's opponent is China's entire business ecosystem. The symbiotic relationship based on shared interests includes officials, banks and real estate firms," notes David Hsieh, vice president of the Greater China Market at DisplaySearch.
Hsieh, who visits China once a month, has witnessed first-hand how local officials go to great lengths to please display manufacturers, for example, by building a subway line straight to the factory. Along the line apartment blocks and conference centers keep mushrooming.
Eager to boost the local economy, officials also help manufacturers obtain loans. As long as an enterprise can raise just one tenth of the NT$100 billion needed for a Gen 8.5 plant, it will be able to build one.
China presently levies a 5 percent tariff on Taiwanese display exports to China. Li Dongsheng, chairman and CEO of TCL Corporation, the mother company of China Star, has been urging the Chinese government to raise the tariff to between 8 percent and 10 percent. If depreciation expenses are too high or there is a shortage of qualified staff, China uses tariffs or headhunts Taiwanese experts to solve the problem.
The most prominent case is Chen Li-yi, a former executive of Chi Mei Optoelectronics Corp. who jumped ship in 2009 to become executive vice president of China Star. He will most likely not be the last industry executive to be poached by Chinese competitors. Hsieh is sure there will be another recruitment drive among Taiwanese industry experts once the eight production lines are finished.
Soaring Chinese Output Undermines Taiwanese Hopes
China devotes so much resources and energy because it regards displays as strategic goods.
Since 2007, China has aggressively stimulated domestic demand for consumer electronics with purchase subsidy campaigns. Beneficiaries include rural households buying electrical appliances, and consumers replacing older consumer electronics with new ones or buying energy-saving appliances. Consequently, the country's annual demand for LCD TV screens soared to more than 100 million sets, roughly half of the global output. Innolux and AUO regard China as a major export destination. Given that 30 percent of Innolux panels are sold to customers in China, the company is China's largest single supplier of display panels.
Now China wants to grab this large piece of the display market pie. NPD DisplaySearch forecasts that China's Gen 8.5 plants will boost the monthly output of substrates – the glass sheets from which the panels are cut – from 250,000 last year to 670,000 next year. This amounts to a 168 percent increase in output in two years, the fastest output growth ever recorded in the industry.
Next year, China's output of display panels at plants of Gen 5 and higher will reach a global share of 26 percent, almost on par with Taiwan's 28 percent share. China's self-sufficiency in panels will jump from 30 percent now to 80 percent, which effectively means that Taiwanese manufacturers will lose a major market.
Bai Weimin, vice chairperson of the China Video Industry Association (CVIA), used to procure panels worth NT$135 billion per year in Taiwan. Known in Taiwan as the display queen, Bai has already sounded a warning that her shopping sprees will become more modest.
Counterstrategy 1: Fight Cannons with Rifles
"The special character of Taiwan is that necessity sparks change and change sparks development," says Pei-Fen Hsieh, senior industry analyst for display and optical at the Market Intelligence Center of the Institute for Information Industry. While Hsieh is highly concerned about the future of Taiwan's TFT-LCD display industry, she is positive about the industry's dogged determination to "fight cannons with rifles."
Hsieh points out that improved production processes can reduce waste during the substrate cutting stage, thus raising the glass utilization rate. Effectively, this would mean that Taiwanese manufacturers could make slightly larger panels at a comparable price, providing a better deal to customers. Then it would not make sense to customers to desert their Taiwanese suppliers. Innolux has been a pioneer in offering a broad selection of panel sizes, closely followed by AUO.
Counterstrategy 2: Satisfy the Sweet Tooth for Luxury
TV sets are a quite mature market. Instead of luring consumers with low prices, demand can be created by offering large-size TVs with new functions and trendy, novel features.
The currently hottest topic is 4K2K television technology, which uses 3640 x 2160 pixel images that are four times the resolution of current high definition TVs. Such ultra-high definition TVs are twice as expensive as HD TV sets. Innolux is a pioneer in developing ultra-high definition screens.
After the industry merger of the century between Innolux Display Corp., Chi Mei Optoelectronics and TPO Display Corp. in 2010, the resulting Innolux Corporation focused its efforts on company restructuring. Lagging behind South Korean manufacturers in OLED technology, Innolux concentrated on developing TFT-LCD technologies with new functions, thus creating 4K2K ultra-high television technology.
In contrast to 3D televisions, which caused a temporary buzz but failed to penetrate the market, ultra-high definition television satisfies consumer demand for ever-better resolution and has therefore won wide acclaim.
China, Innolux's major target market, boasts a high number of newly rich and upwardly mobile who like to indulge in ostentatious consumption. They are ready to spend big on the newest, coolest luxury goods. The efforts of the "two tigers" were not in vain. Last year, they held a 77 percent market share of the 4K2K ultra-high definition television market.
NPD DisplaySearch forecasts that ultra-high definition TV shipments will soar from more than 1 million last year to more than 10 million this year. Market penetration has risen from 1 percent last year to 6 percent this year and is expected to rise further to 13 percent next year.
Of course, their rivals will not just watch from the sidelines. After suffering major setbacks with the development of organic light emitting diodes (OLED), South Korean makers had already turned their attention to ultra-high definition TV by the second half of last year. Chinese makers are expected to follow in their footsteps this year. The profit margins of Taiwanese makers are bound to come down when new 4K2K ultra-high definition products flood the market.
Counterstrategy 3: Attack Niche Markets
Given that the TV screen market has become a killing field, some industry insiders remain pessimistic about the prospects of Taiwanese manufacturers, even if they aggressively diversify their product range and move up the technology ladder.
"The rules of the game in the display industry are that you will lose if you don't attack," reveals an industry veteran who wishes to remain anonymous. "The Taiwanese manufacturers missed the window of opportunity in 2008. Back then, they should have gone to China to secure their positions to discourage the South Korean and Chinese enterprises from massively expanding production. Now it's too late," he asserts.
Harrison Po, industry analyst with Topology Research Institute, believes that product diversification is Taiwan's only road to survival.
This means finding new fields of application for display panels outside consumer electronics. Such niche markets, which require long-term cooperation and usually generate high returns, will enable Taiwanese manufacturers to retain their industry clout, because it takes more than the Chinese competitors' deep pockets to conquer such niches.
AUO president and CEO Paul Peng says that this year his company will focus on high-threshold "blue ocean" markets for large-scale, high-resolution displays. So-called "high-threshold" markets include general display products (also known as industrial and commercial display products), which include displays for public use, automobiles and medical applications. Presently such displays account for just around 10 percent of revenue, but are growing at an annual rate of 30 percent to 50 percent.
"Instead of waiting for the big picture to change, we had better develop diversified products and create value. That's how we can make profits regardless of economic ups and downs," remarks Michael Tsai, senior vice president and general manager of AUO's Video Solutions Business Group.
Can Taiwan win this decisive campaign in the 500 days before all Gen 8.5 plants in China kick off mass production? Only if its display makers can leapfrog to breakthrough innovations in process technology, TV functions or niche markets.
Translated from the Chinese by Susanne Ganz