Investing in Chinese companies can be a harrowing experience, with listing requirements varying between exchanges and financial oversight a challenge for both investors and regulators who can find themselves up against corporate structures that make parsing financials a Columbo-like endeavor rather than a numbers oriented session.  But there is one aspect of investing in Chinese companies that opens up a new venue for investors that is not available in the US and that is the Q&A platforms sponsored by the exchanges that allow investors or potential investors to directly ask questions of company managements on a daily basis.  Based on the companies we follow on the Shenzhen and similar exchanges, company responses vary considerably in response time and depth, and many are just platitudes with little substance, but where face-to-face questions asked of managements might be indirect and circuitous, on-line questions tend to be quite direct, and while the answers can dance around a simple answer, the simple answer is usually obvious.
China’s BOE (200725.CH), the world’s largest LCD panel producer, is one of the more responsive companies on the Q&A platforms, and while they do the ‘dance’ like many others, they at least attempt to answer questions where others do not.  A recent very simple question prompted a rather lengthy response, which could have easily be summarized in a few words.  Here’s the question and answer, and our summary…
Question
“Hello, is the OLED screen company losing money?  Is it possible to increase the selling price to reduce losses?”
Answer
“Hello! At present, the company's three flexible AMOLED production lines are still in the climbing period, and the newly added depreciation is under pressure in the short term. In the long run, the flexible AMOLED business is one of the company's important growth points in the future. The company has given full play to its advantages in technology and production capacity, and has established extensive and close customer cooperation relationships, and has made important breakthroughs in the development of flexible AMOLED business. According to consulting agency data, in the first quarter of 2022, the company's flexible AMOLED product shipments increased by nearly 50% year-on-year. With the continuous increase in shipments, the operation of the flexible AMOLED business will continue to improve. In the field of smartphones, the company's flexible AMOLED products have basically completed the introduction of global mainstream brand customers in 2021. In the future, it will mainly focus on achieving more product series coverage for customers and continuously increasing the proportion of customers of the company's products. At the same time, continue to promote the application of flexible AMOLED in new fields such as IT and automotive, and enhance the value and performance contribution of flexible AMOLED products. Thanks!”
Summary
“No, not yet.  Not sure when”
In similar fashion, another Chinese panel producer Visionox (002387.CH) was recently queried in a similar fashion also about their OLED display business, although with a bit more detail as follows…
Question
“Thank you very much for the performance forecast.  The estimated loss in the first half of 2022 is about 1.1 billion.  After deducting more than 500 million depreciation from Gu’an in the first half of the year, the loss is basically the same as the same period last year.  Then, while the operating income has increased by about 20%, why has the loss reduction still not achieved except for the solidification.  At present, it is indeed as the majority of investors have said, the more you sell, the more you lose.  Please give a reasonable explanation for the increase in revenue but not profit after deduction of depreciation, thank you!”
Answer
“Thanks for attention.  At present, the AMOLED field is still in a period of rapid development dominated by technology. Due to the ramping production capacity, the continuous improvement of utilization rate, the continuous investment in research and development and the gradual expansion of market demand, the gross profit margin of OLED products is still in the stage of continuous improvement. In 2021, the company's OLED product gross profit margin will increase by 6.6 percentage points year-on-year. In the future, the increase in gross profit will come from economies of scale and industrial synergy. First, the yield rate and utilization rate will be further improved, especially if a relatively sustained high utilization rate can be achieved, the scale advantage of the production line will appear, and various costs and expenses will be Obtain a more reasonable and effective allocation; the second is to continue to build an industrial ecology and strengthen technical coordination. Relying on solid technology accumulation, the company provides a product verification platform, and actively promotes the localization and introduction of upstream supply chains to reduce costs and increase efficiency. Thanks!”
Summary
“No, not yet. Not sure when”
To point, we commend the Chinese exchanges for their push to open public communication between companies and investors, something far more guarded in the US, but we all know companies are going to try to paint the best possible picture, regardless of the actual answer.  While the dance is inevitable, at least there is a sort of a forum, which is a positive step, and on occasion there is some glimmer of useful information given or at least hinted at.  Of course disclosure rules differ from country to country and open Q&A platforms like these can be a minefield for legal counsel, but at least the average investor does not have to wait 90 days to ask a question, if they are able to find a way into the quarterly queue, and the answer, regardless of how obfuscated, is public record.
 

​As far back as April 2021 we noted our thoughts on a mindset change regarding CE component inventory in China.  “Over the last two years, we believe such trade restrictions have changed the way Chinese CE managements look at inventory.  When sourcing was unrestricted, many Chinese CE companies operated under JIT inventory rules, maintaining low inventory levels to keep costs low and avoid end-of-year write-offs.  Once it became apparent that the US trade restrictions would have a real effect on sourcing, Chinese buyers became more aggressive and began building inventory in components that were specified in the US restrictions.  After early January, when it became apparent that the new administration was in no rush to change the government’s stance on such restrictions, Chinese CE companies and OEM/ODMs stepped up ordering to build inventories further, unbalancing the supply chain even further than it already was.”
Later in 2021 we noted that certain components needed for display modules, such as drivers and TCONs (Timing controllers), that had been part of the aggressive inventory building mentioned above, still had not seen the effects of a slowdown in TV panel and set demand, as Chinese OEMs and assemblers were still stockpiling the parts as they assumed IT displays, such as monitors and notebooks would not be part of the slower demand seen for TVs, and prices for those components continued to rise against what was reduced demand. 
Early this year the weakening demand for CE products caught up to CE IT products and prices for IT panels began to fall, considerably faster than most had expected, and suddenly the aggressive inventory accumulation, which had helped OEMs last year during silicon shortages, seemed less necessary, although buyers were relatively slow to adjust purchases and inventories for driver ICs remained relatively high into 2Q.  Now that CE brands have made cuts in orders, pushing panel producers to curtail production, there is now an oversupply in the driver IC sector, with recent expectations of a 3Q price decline of between 8% and 10% and the potential for that to continue through 4Q.  Foundries who had allocated resources away from drivers toward higher margin products last year are now looking to fill potential utilization gaps by filling driver IC contracts while driver buyers are trying to renegotiate those contracts toward lower unit and price levels.
We see these cycles are part of the natural order of things in the CE space but the overstocking seen last year was more than we might have expected.  What was a reaction to the global COVID-19 pandemic in 2020 and the first half of 2021 was seem as the ‘new normal’ by many in the CE space, with a concomitant change in risk assessment, especially regarding inventory, and now, as the ‘new normal’ returns to the old normal, the question is whether the next demand stimulus, whatever it happens to be, will cause the same psychological blind spots across the CE space.  Will lessons be learned or will be bounce right back into another up cycle that will suddenly become an abyss of inventory that buyers were willing to pay anything for months before?  Perhaps the understanding that the politics of trade sanctions and tariffs don’t always work the way intended or have deleterious side effects might make some difference in the next cycle and that striving for market share is not always the way to go might have an impact, but more likely is the endorphin producing mantra that the new normal has finally arrived and the CE space can once again charge into the fray with a willingness to do or pay whatever it takes to squeeze out an extra 0.5% market share.
 

​Given the relatively small number of major display panel producers that supply the CE market, it seems surprising that the number of display glass suppliers that feed such businesses is even smaller, however the cost of building and maintaining the facilities needed to produce this high quality specialized glass is extremely high and limits those who have the financial strength to build and sustain those facilities, and to compete financially in that market.  Dominant players, such as Corning (GLW), AGC (5201.JP), and NEG (5214.JP) have built relationships with display producers, with some glass production lines built alongside display production fabs to facilitate the rapid transport of such large and fragile glass substrates without the need for the extensive packaging needed for long-distance shipments.  As the largest substrate (Gen 11) can run to over 11.5 m2 (118.6 ft2 or eight 65” TV panels) and can be less than a millimeter thick, they are extremely difficult to move and even more difficult to transport to other locations.
Given that the production of LCD TVs is based on glass substrates and that a relatively small (15,000 sheet/month) Gen 8 fab line can produce up to 120,000 65” TVs/month, there is a very significant need for fabs to have both substrate inventory and short-term access to supply as a shortage of glass mass production stops, which not only leads to missed display delivery deadlines but can require equipment resets and recalibration of tools remain idle for an extended period, adding to delays.  Therefore it is incumbent on panel producers to maintain strong relationships with the few glass producers that are able to produce the quality and quantity needed, with those relationships being based on contracts that can specify area, unit volume, or percentage of production requirements, which can create an imbalance in glass supply for smaller panel producers.
In addition to the above, the dominance of Chinese LCD panel producers has intensified the desire of the Chinese government to extricate itself as much as possible from the display supply chain, with a long-term focus on display glass given it underlying importance to the industry.  Over the years the Chinese government, along with provincial and city governments have financed and subsidized an number of projects to build a display glass infrastructure on the Mainland, however it has proven more difficult than expected, both from a technological and from a financial perspective.  Chinese display glass substrate companies have made headway over the years and supply smaller glass sizes to a number of Chinese LCD display fabs, but have note been able to reach the quality and quantity levels needed for larger panel sizes where margins are higher and demand is still growing.
Companies like IRICO (600707.CH) and Dongxu Optroelectronics (000413.CH) have either been funded by the government or partnered with foreign glass producers to develop their own more advanced display glass production facilities in China to less the country’s dependence on foreign glass imports, but not all of those projects have turned out to be as easy as expected, even when paired with Chinese panel producers.  Recently Dongxu Optoelectronics gave guidance of another loss for the 1st six months of this year, and while the loss range was slightly less than last year’s 6 month loss, the company has yet to show a profit after years in the business, indicating that even with tax incentives and operating subsidies, the profitable production of display glass requires much production experience and process knowhow.  Dongxu stated that the reason for the loss was the company’s investment in R&D for the development of display materials, production line costs, and the amortization of intangible and fixed assets during the early stage of expansion, but it also includes interest payments on bank loans and lower sales as the display business contracts.
Further, the company tried to diversify a few years back, expanding into LED based products and glass related automotive products and we believe is one of the automotive glass suppliers to LG Display (LPL), but the company side businesses generated even larger company losses and helped to produce quarterly losses for the company for the last three years.  In 2020 the company refocused on developing a glass product line for OLED displays and lessened its focus on non-glass products but this has done little to stem the losses. In fact Dongxu failed to repay principal and interest on bonds it issued in 2016, which amounts to a bit over $605m in the aggregate and while the company, as part of its expansion, created its own finance company, the company it limited in what it can withdraw from the financing unit.  Dongxu itself has a capital book balance of 9.4b yuan ($1.39b US) but 91.5% of that capital are restricted funds and the book balance of interest bearing liabilities is 24.87b yuan ($3.681b US) of which 8.1b yuan (~$1.2b US) remains unpaid, making it difficult to see how the company can extricate itself from its financial issues.
While the company’s parent Tunghsu Group (pvt) has agreed to buy ‘up to 1.5b yuan worth of shares within six months and the company is working toward extending its debt maturities despite the plan’s initial rejection by shareholders, this all goes to point that throwing money at an industry does not always guarantee dominance or even success, especially in an industry where some of the participants have been suppliers since the industry began  We expect Dongxu to survive in some form given the potential support of Tunghsu Group and potentially the local government given that the company has over 4,000 employees, but the desire for a localized supply chain in a global market is not always the answer to the natural or political conflicts that occur in the course of doing business on an international basis, and while China has been successful in a number of instances in the CE space, nothing is guaranteed.

​AGC (5201.JP), aka Asahi Glass, a competitor to Corning (GLW) and NEG (5214.JP), has raised their 1H sales and operating profit guidance.  Sales, which were original forecasted to be ¥870b yen, have moved up by 11.5% to ¥970b and raised its 1H operating profit forecast by 21%.  The new sales forecast is 7.2% above last year’s 1H, while the new Op Profit forecast is up 20.8% over the same period last year.  The original forecast was made by the company on 2/8/22.  While we were hoping that the increase might have been associated with the company’s display glass business, Asahi indicated that the company’s caustic soda (Sodium Hydroxide – NaOH – aka lye) business was positively affected by price increases in the chemical, which is used in paper processing, soap manufacturing, and in the refining of aluminum, along with a number of food preparation processes.   The company also indicated that its PVC (polyvinyl chloride) business, among the top 3 synthetic polymer plastics produced globally, saw higher than expected prices in Southeast Asia during the 1st half.  The company was also able to pass on the higher cost of raw materials and fuel prices to customers in its architectural glass business in Europe.  No mention of the display glass business.  We will likely have to wait until the call next month.

AU Optronics (2409.TT) reported June Sales of NT$20.69b ($69453m US), ↓5.8% m/m and ↓39.0% y/y, putting the 2nd quarter sales at NT$62.881b ($2.111b US), ↓22.9% q/q and ↓34.3% y/y and 1st half results are ↓19.1% y/y.  Typically (5 year average) June is up 0.4% m/m and 2Q is up 7.0% q/q, so from any perspective June and 2Q were weak for AUO, although no surprising given the weakness seen across the CE space and the display space in particular, as overall display panel prices declined 12.0% during the 2nd quarter and panel orders from brands were reduced.  Area shipped was 1.59m m2, ↓9.7% m/m and we do note (see Figure 2) that AUO has been able to maintain fab efficiency (not utilization), meaning the sales value of each m2 of display produced, at a reasonable level since the beginning of the year, which points to the company’s focus on high value display products rather than generic displays.
While we wait for Innolux (3481.TT) and Hannstar (6116.TT) to report June sales and shipments to complete the Taiwan panel producer data, we expect July results for most panel producers will see further declines, more weighted toward order reductions than price declines, giving a messy start to 3Q.  With Samsung Electronics (005930.KS) reducing or eliminating TV panel orders from suppliers to reduce inventory, as we have previously noted,  it will be difficult for panel producers to maintain production at earlier levels, unless they are willing to offer larger discounts than in previous months, which will amplify panel price declines.  Our hope is that the order cuts will be enough to reduce inventory to more normal levels by mid-August, and that the panel price declines that have been evident for part of last year and the 1st half of 2022 will slow to more ‘normal’ levels as we enter September.  Brand targets have been reduced but consumers have yet to jump at discounts thus far, and the macro environment leaves a bit to be desired, so again we look at such prospects as possible but less probable than an extension of the current CE malaise into 4Q.  As of yet there are few signs pointing toward a better than expected outcome, but we keep looking.
 

​Way back in February 2020 we noted that Samsung Display (pvt) had been evaluating ink-jet printing equipment from a number of suppliers for use as part of the development of the company’s QD/OLED process, which has recently become available for TV and monitor panels.  The ink-jet process was expected to be used for depositing quantum dots that convert the blue/green OLED materials to a full RGB pixels, and, as is the case in other OLED manufacturing, to encapsulate the OLED materials to protect them from exposure to damaging air and water vapor.  As the encapsulation process is one where a large swath of raea is covered with organic and inorganic materials, the IJP technology used is less advanced than what is necessary for the more precise placement of quantum dots, which must be precisely registered with the emitting OLED materials and the TFT below.
SDC was evaluating IJP tools from Kateeva (pvt) the leader in encapsulation IJP but chose tools made by SEMES (pvt), a Samsung affiliate, despite what we believe was data that indicated that the Kateeva product was the superior choice.  While we speculated that SDC was helping to bail out SEMES, which was seeing its LCD tool business decline as SDC wound down its large panel LCD production business, at the time we could only cite 2nd hand data.  SDC’s choice caused significant disruptions to Kateeva, who had produced working tools with the hope of recovering pre-order costs from SDC, and the company had to reduce its staff by over 50%, and refocus its attention on potential Chinese customers for its encapsulation IJPs.
It seems that HB Solutions (297890.KS) invested $13.5m in Kateeva earlier this year after it was thought that Samsung Display will be using Kateeva’s ink-jet printers for the potential expansion of its QD/OLED production line, after experiencing problems with the SEMES tools, with Kateeva collateralizing a number of its South Korean patents to secure the loan.    HB Solutions is also said to have purchased rights to additional Kateeva patents in the US, although those might be subject to the preferential rights of another purchaser.  HB Solutions would be the end supplier of the IJP tools to SDC, with Kateeva the actual source of the IJP tools.
As there have been a number of delays in the development of the QD/OLED process by SDC, with questions still remaining about how well the product is being accepted by consumers and parent Samsung Electronics’ (005930.KS) commitment to the QD/OLED product line, the pressure is on Kateeva to secure the hard orders for the equipment to maintain it ownership of its IP.  As we have noted yesterday, Samsun expanded its QD/OLED marketing footprint, and while we are want to take this as a positive sign toward the QD/OLED product line, the macro environment is such that a delay in stepping up production capacity at a 2nd QD/OLED fab could push what we originally though would be an end-of-2Q decision further down the road, putting even more pressure on Kateeva.  Hopefully the long-term picture for QD/OLED at Samsung Display will take precedence and a decision (including Kateeva’s IJP) will be forthcoming, but the heat is on once again at Kateeva. 

​Samsung Electronics (005930.KS) is said to have suspended orders for LCD TV panels from its suppliers for between 30 days and 45 days according to a number of sources in South Korea.  This comes after it was widely noted that Samsung had reduced its TV set shipment plans for the year a 2nd time, from an original 53m – 54m units to 45m units and then to the current 40m units, as inventories grew to  2x pre-pandemic levels while demand slowed.  The original estimations would have built in an increase over last year’s 50m units, which was 10% above the shipment rate in 2020.
While the impact will be different for each of Samsung’s suppliers, we expect Samsung’s monthly order rate to be between 3.3m and 3.75m panels, which would represent between 5.8% and 6.6% of monthly panel production based on most recent data, and with an average price of $76 (TV panel ASP) a value of between $250.5m and $285m, would represent between 5.0% and 5.6% of large panel sales on a monthly basis.  Given that the 5 suppliers most likely affected would represent ~69.2% of monthly large panel industry sales, we expect the impact to be significant for BOE (200725.CH), Chinastar (pvt), HKC (248.HK), AU Optronics (2409.TT) and Innolux (3481.TT), but again, specific impact by company would depend entirely on order concentration and the type and price of the panels ordered as we are using an average price across all panel sizes.  Those with orders for 65” and larger panels, which carry a price considerably above the average would see a greater impact.  We expect BOE and Chinastar, both of whom have Gen 10.5 LCD panel fabs which specialize in large panel production would see the biggest impact.
As we have noted previously, much will depend on how quickly TV panel and set inventory can be reduced to more normal levels, which would entail a period of watching demand in a steady state environment (June) and then gauging how much discounting is necessary to bring those levels in line.  As raw material and component prices have risen, offsetting some of the declines in panel prices, TV set brands will likely tread softly when it comes to discounting, at least at the onset, but we suspect if normal levels have not been reached by the end of July, we will see even more aggressive discounting and the potential for Samsung’s cuts to extend into the first two weeks of August, exacerbating the potential impact to LCD large panel producers.  That said, we expect at least a modicum of stability by September but worry that at the first sign of even modest demand improvement at the set level, panel producers will increase utilization to bail out what is shaping up to be a weak 3Q.

​months is dependent on reducing panel inventory across the industry.  This is accomplished through utilization reductions at panel producers, who must take a hit to margins from the lower utilization rate or continue to over-produce and worsen the panel inventory overload, pushing panel prices lower.  This has always been a difficult choice for panel producers, especially after such a strong boom cycle last year, and resistance to such cuts is always high, but there are few alternatives, especially when many raw material and component prices are rising.
While each panel producer must make utilization cuts based on orders, estimates, and targets from customers, the temptation is to err on the low side and maintain production at the highest levels possible, and that has a tendency to extend the period during which utilization cuts are necessary, so we try to gain insight into how deep panel producers are making the cuts as an indication of how long it will take to work down inventory, and how much panel producer performance will be affected by the cuts themselves.
There is a certain amount of granularity here also, with vastly different utilization rates at LCD fabs vs. OLED fabs, and even more granularity across fab substrate generations, as fabs Gen 6 and below tend to be used for IT and mobile device displays, and fabs above Gen 6 being used for TV displays, although with gaming monitor sizes reaching TV size, those lines are blurring somewhat, and utilization rates ay ultra-large (Gen 10/11) LCD fabs, which are for TV displays 65” and larger, provides even more granularity.
Panel producers tend to keep this data to themselves given the competitive nature of the business, but occasionally enough data becomes available to make such calculations with some sort of accuracy, although there are many assumptions that have to be made and doddering opinions on those assumptions, but to us the important point is how much utilization rates change during periods of panel price declines and periods of excess inventory vs. orders and shipments.  As Chinese LCD producers now represent ~66.1% of Gen 7+ capacity, they hold sway over how their production rates will affect large panel prices, and consequently we pay close attention to whatever data we can derive concerning changes to their utilization rates.
According to our most recent data, we estimate that the utilization rate across all Chinese LCD fabs was ~84.9% in May, down ~3.5% from April and down 8.1% relative to January.  A relatively small m/m drop in May. With small panel LCD fabs seeing a 3.2% decline in May (m/m) and ultra-large format LCD fabs seeing only a 2% drop m/m.  With the largest producers such as BOE (200725.CH), Chinastar (pvt), and HKC (248.HK) seeing m/m declines between 3.1% and 6.1%, it would seem smaller producers have made only small adjustments to utilization rates on the Mainland.  We calculate that the cuts in May would reduce inventory production by ~600,000 m2 of capacity, or the equivalent of ~515,000 65” TVs out of ~15m that could be produced monthly.
It the industry, particularly Chinese LCD producers, expect to work down inventories the reductions seen in May would likely not be enough to stem the tide of panel price declines and inventory glut, but there is a reason why the cuts tended not to be deep in May, and that is that panel fabs tend to operate a breakeven at a utilization rate of ~85%, and while this is a generalization across a wide variety of producers and fab operations, cutting utilization below this point across the industry tends to lead to a general lack of profitability for producers.  The problem is that with inventory levels still high and demand low, along with raw material and component costs that are not absorbed by customers, further utilization cuts are necessary to shorten the time it takes to reduce inventory levels before the holidays.
We expect that further utilization cuts were made at Chinese LCD fabs this month, likely bringing the average LCD utilization rate to between 78.5% and 79.0%, which will hopefully be sustained in July, which we believe would be enough to al least bring down inventory levels to more reasonable levels based on current demand.  Whether that happens will depend on how much of the ‘bullet’ Chinese panel producers are willing to bite

Since July of last year the revenue generated by large panel display producers has been on the decline, tracking closely to the decline in large panel display prices, however the spread between the two, which we plot as an arbitrary value in Figure 2, shows that the spread between the two has yet to reach pre-pandemic levels (avg. 2019 spread = 233), which would seemingly forecast a contraction in the spread going forward.  Taking it one step further, we plot three key large panel display metrics for the same period, Price, Shipments, and sales, adjusting vales to a common starting point, and projecting out three months to see the result, which is shown in Figure 3, which indicates that by the end of August shipments will decline but sales will decline more rapidly as prices continue to decline, which would follow the utilization cuts at major LCD large panel suppliers that have been rumored in the trade press.
Making the scenario a bit more difficult is the fact that panel producers waited until June to make such utilization cuts, and the data for shipments in June will not be available for a few weeks, and with Chinese producers representing ~50% of industry large panel sales, the utilization reductions at BOE (200725.CH), Chinastar (pvt) and HKC (248.HK), who together represent 45.4% of total industry large panel display sales, and May large panel industry sales were down 5.4% m/m and 32.8% y/y, shipments were down less at -3.9% m/m and -11.5% y/y.  Some producers have done better than others during this year, as shown in the table below, which shows only those producers that are primarily large panel suppliers.  We note that Samsung Display (pvt) has been winding down its remaining LCD large panel production which accounts for the large swings shown below.
While orders from customers can make a substantial difference to m/m data for individual producers, we expect much of the negative growth for large panel LCD producers seen this year is a function of declining large panel prices, however in June we expect both large panel prices to decline and to also see the effects of utilization cut backs that have been rumored across much of the industry.  If the cuts are substantial enough, they will have some effect on high inventory levels over the next two months, but if they are less than expected, and seasonal builds begin in August, we expect panel producers will face a very rocky 3rd and possibly 4th quarter this year.  If that turns out to be the case, we would expect January/February ’23 to be especially week, as many fabs will essentially shut down for the latter part of January during the Chinese New Year holiday, which occurs on January 22

​In order to stem the tide of falling panel prices panel producers typically reduce utilization and reduce inventory levels against the weaker demand.  While painful for producers, especially after a period of high margins, it is a solution that typically begins to stabilize panel prices relatively quickly, at least that’s how things have progressed in the past.  However, as the LCD industry leadership has moved from Japan to South Korea and Taiwan, and now to China, things have not worked quite the same as in the past.
While there have always been government support programs for the display industry that provided infrastructure or tax abatement, the Chinese government has been far more aggressive toward developing its display industry and provides those same perks, along with construction and operating subsidies, which can be a substantial benefit to Chinese panel producers.  While Chinese LCD panel fabs are expected to produce positive financial results, the understanding that such subsidies will continue as the fab matures, leads to a different mindset that is less profit oriented and more focused on objectives that can satisfy the political goals of the funding sources.  This is not to say that Chinese fab managers are lax in their ambitions toward sustained profitability, but they have the luxury of being able to make decisions that might be more difficult for those that face shareholder scrutiny that is oriented toward quarterly results.
We believe this has led to a less traditional reaction time to events in the display industry from Chinese panel producers and while it seems a moot point when panel prices are rising, as they did in much of 2020 and early 2021, when panel prices began to drop last year the rhetoric was that ‘things were different this time’ and production shifts to less volatile display products (IT) was considered the perfect solution.  Unfortunately, when most of the major players in the industry make the same move at the same time, the intended safety net of the shift becomes its own worst enemy and competitive pricing is used to keep fabs running at high utilization rates.  At the first sign of segment demand weakness, the competition becomes more desperate and panel prices fall faster.
During the pricing slide there is always the mantras of ‘it can’t go much lower as it is near cash cost’, but in this down cycle the hunger to keep fab utilization levels high seems to have kept panel producers, particularly Chinese panel producers form making any real utilization rate changes, other than token reductions.  Now that a number of generic panel segments and sizes have fallen below cash costs, it is suddenly important to lower utilization rates to ‘preserve pricing.’  Of course, the real question is whether substantial utilization rate reductions are being made to ‘help stabilize the industry’ or to avoid running much of the fab at a loss (the answer is obvious), but the time for waiting seems to have passed, with rumors that some Chinese LCD panel producers are now making the utilization reductions that should have been made months ago.
Based on data from China, we believe that the major Chinese LCD panel producers have adjusted their yearly production targets down by ~8%, a modest reduction, but have recently implemented utilization rate reductions in excess of those numbers.  In terms of Gen 8 and above fabs, those that would normally be used to produce TV displays and large monitors, we believe utilization reductions of 23% have been implemented, although not every producer has done so to the same degree and these metrics do not include smaller substrate fabs such as Gen 6 lines that are used for much IT and mobile device display production, so we see the impact primarily on TV panels and focused on only large producers.
While these reductions might move the needle a bit, with inventory levels above normal it could take some time to slow panel price declines along with other macroeconomic influences.  While it is easy for use to arm-chair quarterback the industry, if history teaches us anything it is that the display industry is cyclical and will eventually respond as such, so keeping your foot on the accelerator as you begin to descend from the top of the mountain might make things look good for a quarter or so, but it won’t make stooping the decline easier, so we hope that the utilization reductions that we think are being implemented are more than just lip service to a short-term problem, but it is a bit too early to tell.