Timelines in the display space are particularly variable, and with spending for new display fabs second only to the cost of semiconductor fab and in some cases higher, the risks associated with mistiming new capacity or expansion of existing lines can be a burden that companies must carry for many years, and recently, the closing or conversion to other display modalities has also become a new part of that timeline risk profile.  There have been a number of cases where display producers were willing to take the risk of anticipating the adoption of a new technology, such as Samsung’s push into small panel OLED in 2007 and LG Display’s push into large panel OLED in 2012, but as the display industry matures one would expect that capacity expansion would be a bit easier to predict.
From the standpoint that both LCD and more recently OLED have become mainstays of the display space such decisions should be easier than when speculating about whether a new technology would ever become large enough to justify anticipatory spending in the billions of dollars, but that is not the case.  There are many relatively new factors that make decisions about capacity timelines far more granular than they were years ago, and more aggressive technology development spending has added to the potential for capacity adjustment errors.  China has been a major factor in changing the capacity risk profile for panel producers in that government subsidies have allowed capacity decisions to be less reliant on profitability than is the case for public companies.  This has allowed the Chinese display industry to become the dominant player in the LCD display space and still drives what might be considered unbridled expansion even today.
While capacity expansion timelines are based on long-term demand (or should be), they are colored by short-term issues that can put such decisions in a more or less positive light and depending on the experience of the producer those short-term influences can become major selling points for capacity expansion or reduction.  Given that panel prices, particularly large panel prices, have been rising for the last year, less experienced panel producers can begin to feel that they can remain profitable continually, while others feel that such price increases are a possible warning sign and take a more conservative approach to expansion.  Underlying all of these decisions however is the question as to how long each display technology will be sustainable, and how will new technologies affect existing display capacity.
LCD was a disruptive technology to say the least, essentially ending the reign of the Cathode Ray Tube, but plasma displays, the first self-emitting display technology, were also thought to be a technology that would eventually replace LCD about 20 years ago.  However after peaking around 2010, plasma displays have all but disappeared, especially when Samsung, the leader in the TV market, pulled the plug on the technology back in 2014.
OLED has also been touted as an LCD ‘eliminator’, but while it has been the focus of a great deal of capacity spending OLED co-exists with LCD, with each having their pluses and minuses.  Quantum dots have been another technology that was also touted as a potential hazard to existing display technologies, particularly OLED, but has found its way into the LCD supply chain, giving the older technology an extended ability to compete with OLED, and could be a help to OLED technology if Samsung Display (pvt) is successful in developing its QD/OLED process. 
Micro-LED technology is currently a focus for display development teams, as it too has been touted as the display technology of the future, and spending toward its development has been increasing rapidly, but expectations that new technologies can be so disruptive as to almost immediately replace existing display technology is what marketing teams dream of at night and not particularly practical from a business or financial standpoint.  With the billions of dollars already spent on existing technologies, panel producers, while they might spend on development projects to see if a new technology will pane out, are going to favor spending on what they know and can sell, so when we look at timelines in the display space, we do so with a great deal of skepticism, especially having seen those timelines change more often than not over the years.
That brings us to South Korea, where both Samsung and LG Display reside, and while Chinese panel producers such as BOE (200725.CH) and Chinastar (pvt) are the volume leaders in LCD, South Korean panel producers are trendsetters and their capacity decisions can influence the entire industry both positively and negatively.  Samsung Display’s exit from the large panel LCD space has been a positive influence on Chinese panel producers and has focused much of their attention on competition between themselves now that they see SDC’s exit from large panel LCD as a positive going forward.  Without Samsung to compete with in the space they seem to be expanding LCD capacity to become ‘China’s leader’ in the space, while South Korean producers are focusing more on OLED, which they believe will continue to grow more rapidly than LCD and will also generate premiums that are greater than what they believe can be generated in the more mature LCD space.
Samsung in particular has already begun the conversion of its L7-2 LCD fab to a Gen 6 OLED line, and is expected to begin equipment move in next month.  In this case, we expect the conversion will be rather quick, as some of the backplane equipment is being transferred from its A3 fab.  As both phases of the L7-2 conversion will be using LTPS equipment from A3, which was converted to LTPO, we expect the first phase to be completed by the end of this year and phase 2 by July of next year.  Samsung might be able to ramp these lines faster given their experience and the use of existing equipment, but we take a more conservative approach at least for the next few months.
SDC is also considering the addition of capacity for large OLED panels, meaning notebook and monitor sizes, and has been working with equipment suppliers to develop production equipment for that purpose, but they have yet to decide whether this capacity is necessary or where they might use existing capacity space.  SDC has another LCD line L8-2 and is currently offering for sale the equipment from that line, so they have the potential to replace that space with OLED capacity, or they can convert some existing small panel OLED capacity to the larger panel sizes, but we expect those decisions to be made later this year, and final decisions on whether to expand the company’s QD/OLED production project are also still to be made.
LG Display (LPL) is also evaluating whether to add OLED capacity for similar IT products as it plans for producing OLED panels for Apple’s (AAPL) iPad next year.  While Samsung has been expected to be the provider for the iPad next year, LGD will certainly be a contender for a 2nd spot and will likely need to dedicate new or converted capacity to Apple by 2023, although they currently operate two OLED lines E6-1 and E6-2 with a third line (E6-3) a possibility depending on Apple’s timeline. There has also been some speculation that LGD is considering building a new Gen 10.5 OLED fab, but we believe much of that speculation has been based on the rumors that Samsung Electronics is going to sign a multi-million unit deal with LGD for OLED displays.  Given the relatively low probability of that transaction, we have yet to put such a plan in our database.
The decisions for Samsung Display and LG Display as to whether to expand OLED capacity are primarily being driven by Apple’s adoption of the technology.  As the iPhone line is all OLED, Apple’s use of the technology in tablets, notebooks, and monitors is a catalyst for increasing OLED penetration, and while expansion of OLED penetration in the smartphone space continues, competition from Chinese OLED producers is also expanding.  OLED TV and the use of OLED displays in IT products is where incremental capacity is needed and LGD’s lock on the OLED TV space shifts the focus to small panel OLED.  There is no greater asset in that space than Apples potential adoption of the technology through the rest of its product line and we expect OLED capacity decisions will be predicated on Apple’s plans rather than the near-term issues that might affect panel pricing generally, and while we expect Apple to move more slowly than most, their focus on high quality technology leads us to conclude that there is little reason not to expect a continued migration toward OLED, at least until another technology comes along.

Along with most of the industry, we have underestimated large panel price increases in both the 2020 2nd half and the first half of this year, with price increases far above the norm and panel prices far above historic levels.  Panel producers continue to be optimistic about most segments of the large panel space, with some seeing orders out to the end of the year.  That said, with a few exceptions, we get the feeling that large panel prices, in particular TV panels, might be seeing less momentum going forward.  We expect that weak TV sales in China and a slowing of TV demand in the US will take some steam out of the TV panel market and temper TV panel price increases as we head into the 2nd half, and higher cost panel inventory will take their toll on TV set sales, limiting TV brands ability to discount into the holiday season.
This leads us to reduce our expectations for TV panel prices in June from an increase of 5.2% to an increase of 3.6%, with smaller panels seeing less of an increase than larger panels. There is the continuing specter of component shortages that can continue to put upward pressure on large panel prices, but from a demand standpoint we expect it will be more difficult for panel producers to continue to raise prices as aggressively as they have in the past few quarters..  We will follow up with more data  as to where we expect large panel prices to wind up over the next few months next week, but in the interim we feel we needed to bring down large panel price increase expectations a bit.

www.auo.com/en-globalJapan’s Panasonic (6752.JP) has announced that it will be withdrawing from the LCD panel production business and would be taking bids on a wide variety of equipment and instruments that are part of its remaining Gen 8.5 production line, color filter line, and assembly lines.  The Gen 8.5 fab in Himeji, Japan has been focused on producing medical displays for the last few years, with a stated capacity of 50,000 sheets/month, but we expect the lines have been producing at much lower rates.  Panasonic has indicated it was to be exiting the LCD production business previously, although we believe there is little chance they can survive in the current highly competitive environment, particularly against Chinese producers.
Last year Panasonic’s LCD panel business generated between 17m and 20m per month, a pittance compared to Taiwan’s AU Optronics (AUOTY) $600 to $800m monthly rate or BOE’s (200725.CH) 1b to 1.7b, so it will have little or no impact on global LCD production capacity, with Panasonic having been a purchaser of LCD TV panels from China’s TCL (000100.CH) and others for its TV set business, and with the ‘based on fierce competition and changes in the environment’, Panasonic’s stated reasoning for the closure, they are also expected to close assembly plants in India and Vietnam later this year.  Given the availability of OEM services associated with or attached to other panel producers, it seems they have no reason to assemble product themselves.
While Japan has moved far from the leading position in LCD panel production that it had years ago, with only Sharp (6753.JP), which is owned by Taiwan’s Foxconn (2354.TT), and Japan Display (6740.JP) that is owned by private equity, the LCD panel production business has left Japan.  That said, as we have noted in the past, Japan is still a dominant player in the upstream display business, owning 90% of polyimide production (flexible substrates and plastic cover films), photoresist, and Hydrogen Fluoride etchant, all key materials used in display and semiconductor production, and a recent study of components in the popular Huawei (pvt) P30 Pro smartphone, indicated that 869 (53%) of the 1,631 parts in the phone were produced in Japan.  As we noted last year, Japan’s revisions to its trade policies with South Korea over a WWII dispute almost caused semiconductor production to grind to a halt when they limited some of those materials and while both South Korea and China have set themselves on a path to reduce their dependence on Japan for such strategic materials, that path is one that will take many years to develop.  Panasonic might be out, but Japan still has a bit of a hold on the global panel business despite its more reserved image.

Quick Note: As far as indicators go in the CE space, LCD/OLED panel production metrics are among the best.  There are few CE items that do not have at least some form of display attached, and the main categories for panel production, large panel (10” and above), and small panel (smartphones, AR/VR, etc.) cover just about every device that has a display.  Smartphones alone shipped ~1.4b units last year and adding feature phones, the total comes to over 2b, and along with large panel displays, the industry generated over $150b in panel sales last year.  As we collect data from a myriad of sources, we are able to generate a picture of panel production and pricing, which tends to be a precursor, in a broad sense, for the CE space, given that displays tend to be the most costly item in CE product’s BOM. 
That said, panel production and pricing is not a perfect indicator but more incremental data in our quest for understanding the current and future state of the CE space.  On a long-term basis, panel production is far better at predicting or anticipating CE trends, but many of us have the pressure of making shorter term judgements, and so we present both short and long-term data whenever possible.  Panel producers in Taiwan have an exceptional characteristic in that they are required to report monthly sales, which helps to spot trends that can be muted when reporting sales on a quarterly basis, which is why we present such data.
All three Taiwanese panel producers saw a m/m increase in panel sales, and given the weakness seen across much of the CE space in 1H last year, all three were up substantially on a y/y basis, as they have been for since roughly a year ago.  AU Optronics (AUOTY) saw the largest m/m increase of 8.5%, followed by Innolux (3481.TT), up 3.4%, and Hannstar (6116.TT), which is really a small panel producer, up 2.4%.  With large panel prices up between 3.5% and 5.8% in May, one could draw the conclusion that much of those sales increases were driven by panel price increases, but more likely they were driven by mix shifts and available capacity, which have a greater influence on monthly sales than panel prices, given that short-term production contracts tend to lock in a price throughout the production run.
We do note that, while AUO no longer gives small panel and large panel shipment data, both Innolux and Hannstar saw a decline in small panel shipments, which was likely affected also by the flat small panel pricing seen in May.  The panel pricing trend for small panels has been far less volatile this year than large panel prices, up only 5% YTD, so it reflects a more accurate picture of demand for that segment, and we note that for Hannstar, whose primary business is small panel production, small panel shipments are down 4.4% YTD on a y/y basis, singling out the difference between stronger performance for large panel products and weak performance for small panel products.
Again, this is short-term data and limited to Taiwan based panel producers, but the performance of small panel production and pricing is far more normal and becoming predictable once again, while large panel shipments, pricing, and sales are still reflecting the changes to consumer habits as a result of the COVID-19 pandemic.  While large and small panel categories have different characteristics, those who say that the current trends in large panel shipments, pricing, and sales are the new ‘normal’, should look to small panel metrics as to what they might look like once the global effects of the pandemic are assuaged. 

Predicting panel pricing has been a fools game for the last year as the number of extraneous events and influences has increased to the point where typical metrics and basic logic do not seem to hold.  Everything from the COVID-19 pandemic to the Trump administration trade restrictions and now a lack of semiconductor capacity, power outages, and an unprecedented number of fires and similar issues at various fab, have all contributed to what has become the most volatile period for panel pricing that we can remember.  There have been volatile times before, but they tended to fit the mold of what would be called normal cyclicality, so in order to illustrate the unusual period that we are currently in, we put together three charts that show month over month aggregate panel price changes for the three main large panel categories.
Monitor and notebook (considered IT products) have generally been the least volatile panels, while TV panel prices are more so, and the overall trend for monitors during the last 3 and a half years has been for relatively small negative incremental changes in m/m pricing until last year.  Using the same data the yearly metrics look like this:

The last 17 months, and particularly the last 5 months have been so far out of the averages as to make them questionable, but the data is what it is.  That said, given the increasing number of variables that go into building estimates for monthly panel pricing, we will fall back on an old tried and true method of using averages for a month or so to see if results are more accurate.  Based on what has occurred this year, monitor pricing should increase by 5.7% in June, and while our gut tells us this is probably too high, our gut has been wrong a fair number of times over the last 17 months.  Following the same metric, Notebook pricing should see an increase of 3.7% in June, which seems a bit more reasonable, and TV panel pricing should see a 5.2% increase.  While these projections are based on averages which gives them a close proximity to trend lines, when things change, which they eventually will, averages will become worthless for a period until there is enough new data to reduce the influence of what has been the norm for the last few months.  We do expect that a return to ‘normality’ will occur, but are less sure of the rate of change than when it might occur.  We fear a steep curve, but hope for a more gradual one as we head into the 2nd half.
One quick note – Aggregating panel data has an inherent problem in that panel sizes and characteristics change over time, and when new models are added and old models are removed from data sources, it can change averages at odd times and skew the data.  In the charts below, we took current panel models and prices and ran them back to the beginning of 2018.  If there was no data for some models we took the first available price point and filled in earlier blanks using that price.  While this might reduce the volatility a bit, it gives a more accurate account of how the category pricing actually moved over the period.

In a filing today, Chinese display leader BOE (200725.CH) has indicated it will be selling shares in a non-public offering to raise capital for a number of projects.  Under the plan, BOE will buy a 24% stake in the company’s B17 mixed use Gen 10 fab, additional capital for the company’s B12 Chongqing Gen 6 OLED fab (under construction), capital for the company’s micro-LED project, additional financing for the BOE Hospital, capital to repay loans provided by the city of Fuzhou (likely for the B10 LCD fab), and for ‘supplemental capital’.  We note that BOE has recently agreed to purchase stakes in two LCD lines from Panda for $1.1b US, so some of that ‘supplemental’ capital could be related to that purchase.
According to the preliminary filing, the total amount to be raised is ~$31b US, some of which has already been allocated to a number of Chinese investment funds and includes an 18 month lockup.  The deal pricing will be 80% of the 20 day average stock price previous to the closing, with the capital (if completed) to be allocated as follows:

• 24.06% Equity in Wuhan BOE Opto                                          $10b     
• Capital Increase to Chongqing BOE and Gen 6 OLED fab    $10b     
• Silicon Micro-LED Project                                                           $1.54b
• Increased Capital for Chengdu Hospitals                                 $.75b
  • Loan repayment                                                                  $4.63b
• Supplemental Liquidity                                                                $4.63b

 
This is obviously a very large capital project for BOE, who has been expanding at a rapid pace over the last few years and a key piece of the financing puzzle for what BOE is able to accomplish going forward.  We believe some of the funding is to give the company better control over how the fabs are being run by lessening local government representation, while significant amounts will be for construction projects that the BOE BOD has already approved, such as the new fabs and the micro-LED project.  That said, the total investment BOE has committed to for the projects above is over $105b US, so this financing will likely not be the last. More details to follow.

Back in 2018 Jiangxi Infinitech Optoelectronics (pvt), a small Chinese firm, was looking to enter the display space and had plans to build an 80,000 sheet/month Gen 6 LCD/OLED fab in Jiangxi province with a budget of $3.52b US.  The company let a number of purchase orders to South Korean equipment suppliers as construction began, with an initial completion date of 1Q 2019, but contractual deadlines kept being pushed out as the construction progress slowed.  Top Engineering (065130.KS), YEST (122640.KS), DMS (068790.KS), and Vessel (177350.KS) were among those that renegotiated deadlines set to expire in late 2018 a number of times, only to see little or no payment.   Contract extensions as far as December 30, 2020 still remained until the companies involved started voiding the contracts, with dwindling contact with Infintech.
A number of the companies accumulated materials necessary for the production of the items under contract and generated expenses against delivery, although it seems little equipment was actually produced.  The amount still owed under the contracts, some of which run into 2021, comes to over $90m US.  It seems that the construction of the factory has been halted for some time and the CEO and top executives of Infintech have departed, although the project is still considered ‘active’ and has not declared bankruptcy (yet).  The South Korean equipment suppliers, along with the Korean Display Industry Association filed a complaint in July with the Chinese ambassador and have contacted Chinese law firms, the Jiangxi government, and the display association of China to check Infinitech’s status, but found that the Chinese construction company that had been hired to build the LCD fab has also filed a lawsuit against Infinitech halting all construction, with the court’s ruling that the company owes $29.7m in remaining construction costs and liquidating damages, although where that money will be coming from is yet unknown .
As we have previously noted China has been very aggressive over the last few years in building out its display infrastructure.  That said, a number of projects we have seen announced either were absorbed by existing panel manufacturers or became mired in funding issues, some of which had to be taken over by local governments who are protecting their initial stakes in the projects.  Infinitech’s project, while still in limbo, does not seem to be going anywhere and the prospects for those equipment suppliers who made and extended contracts with the company seem to be diminishing.  While planning and raising initial capital for display capacity look very attractive to local governments and investors, the necessity for skilled management and investors who understand realistic timelines are most important. 
China has been to a large degree successful in its push to dominate the display space, and seems to be heading in a similar direction in semiconductors, but the path to their display success is littered with a number of projects that seem to have disappeared or are in a ‘state of flux’ to put it gently.  We have noted a few similarities in the semi space recently, where we expect the expertise and patience needed is even greater than in the display space.  Sometimes money isn’t the only thing needed.

March display panel pricing saw mixed results.  Monitors (-0.2%), tablets (-0.8%), and smartphone (-0.9%) declined, while notebooks remained flat, while TV panel prices rose 0.7%.  While most categories are seeing seasonal declines, the TV panel space is still a seller’s market.  Chinese buyers have cut back TV panel orders in order to work down inventory levels, but are still willing to pay higher prices, fearing shortages might continue into 2H, with brands now facing prospects of very low or no profitability for the year.  Price increases at the set level continue, as TV brands try to offset the continuing component cost increases, but the early results, seen during the Chinese New Year holiday reflect disappointing sales as consumers see little incentive to pay up for current TVs.

The risk of a continuing inventory build in the TV space continues to increase, and if demand proves weaker than expected as the year develops, panel producers will lose their ability to raise prices or even maintain prices, as brands lower expectations.  There will remain some TV panel sizes that are in short supply due to Samsung LCD plant conversions to small panel OLED and other factors, but the massive TV panel price increases that were seen late last year have subsided, and the effect on TV brands is becoming more obvious, along with the retail malaise. 

There are two possible scenarios for TV panel pricing (for panel producers) this year.  One where overall panel prices remain flat or move up slightly.  In that scenario brands will continue to suffer and consumers will react poorly to any set level price increases, which has the potential to negatively impact holiday 2017 sales.  Alternatively, If brands react earlier to slower demand, there is the chance that TV panel prices will decline, allowing brands to at least make some profit or lower set prices to stimulate sales.  While panel producers will lose a bit of margin, this scenario would be beneficial to the industry, allowing both panel producers and brands to profit somewhat and for consumers to step up purchases.  Of course, there is some middle ground or variation in these two scenarios, but if the general trend continues, it looks like panel producers will have a good year and brands and consumers will not.  This tends to set the stage for the following year (2018), which will likely see a more severe reduction in panel demand from brands, and a more aggressive decline in TV panel prices.  Hopefully the second scenario, or something close to it, will play out this year, and the reaction in 2018 will be more positive, but it is still a bit early to tell.  Right now we would weight the chances about 60% for the first scenario and 40% for the second.

Apple starting to roundup suppliers for OLED

While Apple (AAPL) has little choice but to choose Samsung Display (pvt) as the supplier for a potential OLED iPhone given SDs capacity and expertise in small panel OLED production, the supply chain for such a product remains an open field, with many vying for the opportunity to gain entrance to that select list.  Companies are already announcing expansion plans in order to garner Apple’s attention, as the supplier list is expected to be completed by year-end with component delivery starting in May 2017.  Indications are that Samsung display modules will be assembled in Vietnam, and a number of South Korean companies have slated enlargement of their facilities in that region to build out such an ecosystem.

The Korean press has focused on local supplier Interflex (051370.KS) as a strong contender to become a supplier of flexible PCBs[1] with the company issuing ~$60m of new stock to finance its facility expansion in Viet Nam, rather than in South Korea, and we note that Samsung Display, while it produces raw displays in South Korea, assembles display modules in Bac Ninh Province, Vietnam.  Apple is also expected to choose OLED material suppliers by the end of September, with competitions between suppliers already underway, with Samsung SDI (006400.KS), Duksan Neolux (077360.KS), Idemitsu Kosan (5019.JP), SFC (112240.KS) and Dow (DOW) whispered to be in contention.  We note that Apple has no say in the choice of phosphorescent OLED emitter materials, as Samsung Display’s license and material supply contract with Universal Display (OLED) precludes them from using any other phosphorescent organometallic OLED emitter supplier, but while Samsung Display engineers will likely have a very significant say in the other OLED stack materials, Apple’s potential buying power will certainly be part of the negotiations.

While the idea that Apple will use OLED displays, other than in the Apple Watch, in 2017 are valid, the product type and physicality of the device are what is really in contention.  From a physical standpoint, a standard fixed OLED smartphone would be a substantial, but manageable task for production at Samsung Display given their current capacity and expansion plans, even for a high volume product like the iPhone.  That said, should Apple decide to step up to a conformed or “flexible” OLED display, there are considerable issues that would have to be resolved, particularly relating to capacity availability.  Recent statements by South Korean research firm UBI indicating that they believe Apple will be producing more flexible devices than Samsung by 2020, which we find a stretch, lead us to run a few scenarios as to how the realities of Apple’s potential large-scale entry into the OLED world might look, which we will discuss at a later date, but if Apple is serious about a move toward scaling their OLED product production, they will be making such product and supply chain decisions soon, which have already had an effect on the OLED supply chain.



[1] PCB – Printed Circuit Board