Yesterday we noted the panel price changes that have been taking place across the display industry this year.  Today we look at both how those panel prices have affected sales and shipments and how that sets up possible scenarios for 2022.  Fig. 1 shows the relationship between large panel display industry sales and aggregate large panel prices[1], which track quite closely over the last few years, with the January/February period each year being the most out of sync, due to the Chinese New Year Holiday.  As large panel prices began to rise in 1Q 2020, sales increased rapidly, peaking in July of this year, and began to decline as aggregate large panel prices declined.
Fig. 2 shows the same relationship between large panel industry sales but substitutes TV panel process for an aggregated overall price.  Industry sales can be seen beginning to decline in July, but at a slower rate than the decline in TV panel prices.  Fig. 3, which shows the relationship between large panel industry sales and IT panel prices, explains why the decline in industry sales is not declining as quickly as TV panel prices, as the slower decline in IT panel prices is acting as a buffer, but as we noted yesterday, also increases the industry’s sensitivity to IT panel prices.  To confirm that conclusion, we show Figs. 4 – 6, which show the relationship between large panel industry sales and large panel shipments, TV panel shipments, and IT panel shipments respectively.  With both TV and IT shipments relatively stable, the increase and decrease seen in industry sales over the last two years comes from price increases rather than variability in unit demand, with industry sales now more dependent on stable IT panel prices.
 


[1] While we aggregate all four panel types, creating a combined dollar value, it is a reference number only.

​More directly, we can use the same panel price data to compare against individual panel producers to see how sensitive each are to TV and IT panel price changes.  We note that there are certain exceptions to the data, as capacity expansion at some of the Chinese producers has a significant influence on sales, above and beyond panel prices, while the opposite is the case for South Korean panel producers, particularly Samsung Display (pvt), who have been pointedly reducing their large panel capacity. We note that Fig. 7 – Fig 13 show large panel sales only; devices below 9” are not included in totals.
AU Optronics (2409.TT) and Innolux (3481.TT) are both Taiwan based panel producers with relatively stable and mature capacity, however AUO has been shifting capacity from TV panels to IT panels, particularly in 3Q of this year, when the share of AUO’s sales from TV panels declined from 26% to 22% and panel sizes between 10” and 20” increased from 37% to 42% of sales, and while AUO’s sales have been declining since July, they have been less affected by the steep decline in TV panel prices.  Innolux however saw a greater share of sales from TV panels (32%) in 3Q and saw a larger drop in overall sales as a result, pointing to a higher dependence on TV panel prices.
LG Display (LPL) and Samsung Display are both reducing large panel LCD capacity on an overall basis and therefore have a lessening dependence on both TV and IT panel pricing.  LG Display (Fig. 9) generated 32% of sales in 3Q from TV panel shipments but that also includes OLED TV panels, which carry a higher ASP than LCD panels and would offset declining LCD TV panel production and lower TV panel prices, leaving LG Display with stable LCD sales for the latter half of this year.  Samsung Display (Fig. 10) has been more aggressive in shuttering its large panel LCD production, maintaining only one large panel LCD fab at the request of parent Samsung Electronics (005930.KS) and shifting much of that idled capacity to small panel OLED production and its new QD/OLED line.  While LCD large panel sales are much lower than last year, the lack of exposure to large panel LCD price decreases has helped to maintain large panel sales at a stable level for 2H ’21, especially as they are producing almost only for a dedicated customer, Samsung Electronics.

Chinese panel producers are a different breed when it comes to large panel LCD production as they have been increasing large panel LCD capacity at a rate of over 30% this year.  This makes the charts a bit more difficult to read, but even BOE (200725.CH), the largest of the Chinese LCD panel producers, saw a moderate decrease in sales over the last few months, a result of its shift away from TV panel production, while Chinastar (pvt) was a bit more affected by the drop in TV panel prices, as they have been a primary source for parent TCL (000100.CH), who has been quite aggressive in developing its TV set business, especially in the US.   Chinese producer HKC (0248.HK) has been ramping capacity, which we believe obscures the effect of large panel price reductions, and Sharp (6753.JP), owned by Foxconn (2354.TT), saw a big jump in sales in September but a big drop the next month as TV panel prices continued to decline.
The data points to an increasing dependence on IT panel prices for many of the major LCD panel producers, and while TV panel prices continue to decline, we expect less pressure from those price declines and an increased sensitivity to IT panel prices.  With the influence of the Omicron variant of COVID-19, we expect some renewed interest in notebook demand, as student laptop programs that had been winding down now look to potentially extend into 2022, which would keep IT panel demand higher than expectations, but if the variant proves less contagious or limited by current vaccines, IT panel prices would continue to slowly decline.  We don’t expect a rapid drop off in IT panel prices, such as was seen with TV panels, but the increased dependence on IT panels makes even relatively small price declines more troubling.  The ideal scenario for panel producers would be for stable IT panel prices and slowly increasing TV panel demand, a result of lower TV panel prices passing through the ecosystem, but we expect that is a lot to hope for given the unusually large number of variables the display industry faces again in 2022.

November panel prices came in a bit worse than expected, continuing the downward trend seen over the last three months for most display types.  While some had expected a more stable November and December, based on the data, the rate of decline increased for monitors and notebooks, with TV panel pricing declining at a lesser rate than October, but still at an extremely high monthly rate (-6.7%).  Typical (5 year average) declines for TV panels in November have been -1.0% and +0.1% for December, with Monitors typically -1.0% and -0.7%, and Notebook typically +0.1% and +0.1% for the last two months of the year.

Most important for the TV space is where TV panel prices are relative to the highs and lows seen over the last two years, as many panel producers still have a large portion of their capacity allocated to such panels, representing a sizable chunk of sales dollars.  While Fig. 1 gives some indication as to the TV panel price declines seen over the last few months (the thin line below each plot represents the low point), the table, particularly the column indicating the percentage remaining between the current price and the lowest TV panel price point, is the most critical, as many panel producers were operating at or below cash costs for such panels when those lows were set.  Continued TV panel declines, even at a slower rate, would push TV panel production into the red for some producers.  Details on how panel pricing has affected specific panel producers tomorrow.
From the perspective of TV set producers, TV panel price decreases are a godsend, although lower TV panel prices will take some time to filter through TV panel and set inventory.  TV set demand should see a boost from lower set prices during the next few quarters but the specter of silicon component shortages still plays into volatility at that level.  Consumers will have quite an array of different types of TV sets to choose from in 2022 and set brands will do everything possible to keep that product differentiation producing premium prices.  With generic LCD, LCD with Quantum Dots, LCD with Mini-LEDs and Quantum Dots, OLED TV, and soon Quantum Dot/OLED sets, there will be considerable competition in the premium TV market.  As always TV brands are expecting a boost in sales due to the 2022 Olympics (2/4/2022) and FIFA World Cup (11/21/2022), but there are a lot of moving parts to the TV market next year and fears over the new COVID-19 variant go toward continued uncertainty, which leads us to expect little change toward Chinese New Year (2/1/2022).  

On the positive side, IT products (Monitors, Notebooks, and Tablets) still remain substantially above lows, with all three panel categories within 15% of their peak panel prices.  While TV panel prices are a sensitive point, the movement in IT panel prices is now the focus, given the dependence on those panel products as the major component of panel producer sales and profitability, and while the rate of change over the last three months has been moderate, Fig. 2 and Fig. 3 show the trend has turned negative for such panels.  While the monthly declines are small compared to the TV declines seen over the last few months, it is essential that panel producers are able to offset the declines in TV panel prices with IT panel stability, or they will be facing a 2022 scenario that returns some to an unprofitable status.

We have noted China’s push toward expanding OLED capacity, particularly that of China’s largest panel producer BOE (200725.CH), who has now entered Apple’s (AAPL) flexible OLED supply chain.  Chinese small panel OLED producers added considerable capacity in 2020, up 23.4% y/y based on our fab survey database, but only added an additional 13.2% capacity this year.  While this seems a rather large reduction, it should be taken in context with expected small panel capacity expansion in 2022, as a number of this year’s expansion projects will not be completed this year.  This leads us to forecast a 23.4% increase in small panel OLED capacity in 2022 as these projects actually reach their targets. 
One issue that remains however, is the need for such capacity, and while each small panel OLED producer is focused on existing and potential customers and their ability to meet customer demands, the net increase in capacity is of a more direct concern to us as an observer of the industry, and the utilization rate of that capacity is key.  While ‘adding 16,000 sheets/month’ is what might be noted by a panel producer, 16,000 sheets do not usually come on line all at once.  OLED lines are based on both the TFT component, where circuitry that sits under each pixel is constructed, and the deposition of the OLED structures themselves, accomplished within a multi-chamber evaporative deposition tool (see Fig. 1), followed by an encapsulation process that is either part of the same tool or a separate process step. 
The Canon tool shown in Fig. 1 can process a substrate sheet (usually ½ sheet) in ~5 mins., which is over 90 6.5” smartphones.  Such a tool should be able to operate continuously for ~6 days, producing roughly 600,000 units/month including down time, particularly chamber cleaning and mask replacement and alignment.  Since each deposition tool processes ½ substrate, two such tools are needed to match the processing capabilities of the TFT structures in order for there to be no bottlenecks.  Equipment supplier backlog and build times for such tools are a consideration for OLED panel producers, so a line with 15,000 sheet stated capacity, might begin operation at half that rate until both deposition tools are operating at their target rate.  The equipment utilization rate, or the percent of a line’s equipment that is in operation, is different from the line’s yield, which is a bigger determinant as to actual production, and the above numbers assume 100% product yield, which is a theoretical number.
Product yield varies with each product and is initially low, especially with products that differ from previously produced displays.  Much fab equipment is dedicated to examining displays coming off the line, both optically and electrically, with the objective to trace back yield issues to the source, but such iterations can take time and are not always easy to correct given the complexity of the tools involved.  Product yield issues can keep an OLED fab from profitability for an extended period of time depending on the experience of the producers, and while the stated capacity of the fab might be 30,000 sheets/month, the yielded capacity can be far less.
The last contributor to fab output is customers.  The cost of producing OLED displays is high enough (the deposition tool mentioned above cost between $100m and $150m each) that small panel OLED producers tend to produce against customer orders and do not want to build unallocated inventory unless they see demand from distributors, or significant demand from parent or internal subsidiaries, but even the latter can leave the fab with excess inventory if parent demand changes, so again, while a fab might be able to produce 30,000 sheets/month, there are many reasons why that number tends to be more theoretical than actual.  More mature small panel OLED fabs, during periods of strong demand, can and do see high utilization and high product yield, but we have and continue to caution investors that stated capacity does not mean yielded capacity, and yielded capacity is what makes such fabs profitable. 
Based on our data, we believe the small panel OLED industry saw a utilization range between 29.6% and 49.5% over the last 8 quarters, and while that would be considered low in comparison to LCD production fabs, with the continuation of small panel OLED capacity expansion, relatively easy capital sourcing in China, and seasonal demand patterns, it is not surprising, but it does beg the question, “Does the industry need all of that new capacity?” 
There are a few other factors that play into such calculations, individual or otherwise, such as conversions of existing small panel OLED fabs from LTPS (Low Temperature Poly-Silicon) to LTPO (Low Temperature Poly-Crystalline Oxide), which affects the TFT portion of fab throughput, and LG Display’s (LPL) loss of its parent’s smartphone business, but even with expanding demand from OLED notebooks and similar new applications, the desire of some small panel OLED producers to gain share continues to push capacity expansion at a rate considerably higher than actual production, as noted in Fig. 2, leaving some suppliers facing losses in what has been a positive environment for small panel OLED displays. 
As we have seen in the LCD space, there is no way that individual small panel OLED producers will be convinced that continued expansion is not the best objective and the concept that growth will continue forever will remain the driving force for such expansion, that is until demand plateaus are reached or questions concerning the profitability of smaller producers become foremost in the minds of funding sources.  There is still demand expansion in the small panel OLED space with OLED displays now represent over 50% of all smartphone displays (see our note 11/22/21) but new markets develop slowly and any slowdown in small panel OLED area growth could puncture the expansion balloon, which, if rational behavior is not possible, could be a solution to the problem, albeit a less desirable one.

October results were down for all three panel producers in Taiwan, which gives some indication of results for those panel producers that are not seeing an offsetting increase in capacity.  While AU Optronics (AUOTY) no longer provides large/small monthly panel data, we expect they saw a reduction in both large and small panel sales in October.  AUO still has room to garner positive y/y sales in November, but a strong December last year will make that month a hard comparison, although we expect early 2022 monthly comparisons will return to the positive as sales in January/February of this year were weak.  Starting in March however we expect a more difficult time showing positive y/y sales results.
Innolux  (3481.TT) has less wiggle room on a y/y sales basis, but relatively consistent large panel shipments have helped to maintain positive y/y monthly sales, however small panel shipments dropped to a yearly low in October, which will impact profitability as small panels are the most profitable on a m2 basis.  Hannstar (6116.TT), which is focused on small panel production, saw a continuation of sales declines that began after a peak in small panel production back in March as smartphone demand continues to wane.  We would not expect much change until production for the next smartphone cycle resumes in March 2022.
 

According to recent comments from a number of analysts (primarily Chinese) the LCD industry is on the road to recovery based on a lessening of panel price reductions and the potential for panel price increases next year, with some even citing that panel price reductions in the 2nd half of October were less than those in the first half of the month.  While there are reasons to take both the positive and negative sides of this argument, citing a 15 day change in panel prices is a waste of time and effort as there are so many factors that can affect sort-term panel prices that such data is of little use.  The need for an optimistic view of an industry that China has and continues to dominate from a production and investment standpoint is a great motivating factor that can easily color one’s view and allow for such short-term data to appear game-changing, but there are other factors that are less obvious that also come into play when trying to understand the prospects for the display space over the next two years.
If one is citing a short-term panel price rate of change as a major factor, than one might also look at the absolute panel price changes that have already occurred.  After 14 months of consecutive LCD TV panel price increases (June ’20 to July ’21) prices fell precipitously in August (-10.1%) , followed by an even larger drop in September (-19.1%), the largest single month decline in our data, with October falling 11.1%, hardly something that could be considered a ‘recovery’.  While expectations for November are for a decline in the 6% to 7% range, again that is almost double the average monthly decline over the period between 1/2017 and 6/2021.  If one assumed that the rate of decline for the last three months were to continue at the same rate, by March of 2022 TV panel prices would be at the same depressed level as they were in late 2019 before the COVID-19 pandemic began.  While one could make such an assumption based on current trend lines, even the most pessimistic view would likely be less onerous, as it would assume that most panel producers would be operating at or below cash costs for their large panel production.
We have assumed that the rapid drop in TV panel prices seen during the last three months would abate somewhat as TV set inventory was worked down, but we see the potential for ‘a more stable pricing environment’ by December a bit of a stretch.  Looking at the demand side, TV panel order reductions were the were the breaking point for TV panel prices, and the continuing rise in panel prices over the last year eventually had to slow demand, along with a lessening of COVID-19 restrictions and government subsidies that were responsible for the strong demand seen in 2H 2020 and 1H 2021.  Panel producers have cut back utilization rates for large panel production to a degree which is likely the reason that declines of over 10% m/m are no longer necessary, but TV set producers are still working with high cost inventory, leaving little room to stimulate TV unit demand during the holidays.
The good news in the mid-term is that as TV panel prices decline, TV set brands have more room to offer discounts, but we see this as more of a 2Q ’22 event than a short-term move, and see little reason for a systemic increase in TV demand next year.  While Samsung is expected to shutter its existing LCD large panel capacity at the end of this year, which was originally expected in 2020, capacity increases at Chinese fabs will offset much of that, leaving large panel LCD capacity biased toward oversupply and demand relatively flat.  Other than on a seasonal basis, this would not set the tone for large panel price increases next year, and while monthly declines will be reduced, even smaller declines will move panel producers toward break-even in their large panel business.  This ups the competitive pressure for IT panel production, where most panel producers have migrated.  We would be watching IT panel demand and panel prices more closely than TV panel prices, as the risk to sales and margins if IT panel prices decline is higher than that of TV panels and considerably more than it was a year ago.

​According to an announcement by the Shenzhen government, TCL (000100.CH) owned Chinastar (pvt) aka Huaxing Optoelectronics, has petitioned to acquire land adjacent to its T6/T7 production fab in order to scale production.  The overall project is expected to increase T6/T7 combined capacity by 60,000 sheets/month.  The project includes an operations center and R&D center for TCL’s TV products and commercial display business, the additional production capacity, and housing for company employees. 
Chinastar currently operates two Gen 8.5 and two Gen 10.5/11 fabs in Shenzhen, with the larger capacity fabs currently totaling 180,000 sheets/month maximum capacity.  While some of that capacity is shared with OLED production, Chinastar/TCl has barely begun to produce OLED displays and we have seen no indication that they have solved OLED production issues for large panel production on Gen 10.5/11 lines..  That said, part of the new construction project, aside from the increase in LCD capacity, is to go toward “a production base for semiconductor display materials, devices, equipment and downstream applications” which would likely indicate a module line, and “…high-performance vapor-deposited organic light emitting display tube localization project, printed OLED display localization material project…” which sounds like it would be either an OLED pilot line or similar type project.
While the ultra-large LCD panel market remains the most lucrative in terms of LCD TV panel production and as a source for TCL’s growing TV business internally sourced production is ideal, we wonder whether consideration has been given to the longer-term prospects for large panel display production.  There are certainly efficiencies to be had by using Gen 10.5/11 fabs to produce 77” and 88” TV panels, but at ~14% of the TV market currently, those sizes will be somewhat limited to a subset of consumers despite an increase of 4.4% share over 2020 

​In our 9/17/21 note, we indicated that Rainbow (600707.CH), aka Caihong Display Devices, aka IRICO had announced that the board has approved the construction of a large Gen 8.5+ LCD glass production facility in Xianyang.  The project, which is to cost $1.41b US will consist of 8 hot lines and 4 cold lines, ~4 times the size of the company’s existing two Gen 8.5 glass lines in Hefei.  At the time financing for the project had not been reached and caveats that the project might be delayed if full funding is not completed.  It seems that while financing has not been confirmed, the company has decided to begin construction on the new project, which is to complement the company’s existing Gen 8.5 substrate line.
Rainbow indicated that based on the feasibility study and the stable operation of the existing G8.5 glass line, the project would begin construction.  The first line was said to have operated at 100% capacity in 3Q and the cost structure was better than planned, achieving profitability in 3Q.   The given timeframe for the construction is 36 months, so the earliest completion date would be 4Q 2024.  As a new site, we believe the company will build the shell and necessary infrastructure for the facility and then add kilns and processing lines individually based on profitability prospects at the time. 
As we noted previously, while Chinese glass producers are expanding capacity, they are not competing directly with Corning (GLW), Asahi (5201.JP), and NEG (5214.JP), who are supplying Gen 10.5 glass to China’s ultra-large panel fabs.  While there is certainly a market for Gen 8.5 substrate glass in China (China hold >58% of Gen 8.5 LCD production capacity), much of the growth in the industry has been related to ultra-large TV panel production.  China controls over 70% of that capacity but has been unable to supply quality substrate glass to its own producers, a sore spot with the Chinese government.  While Rainbow is moving to expand its Gen 8.5 capacity to help its LCD producer’s source locally, they have yet to build out Gen 10.5 capacity.

​Mini-LEDs are a display improvement that will help to sustain LCD technology during the next few years as it is buffeted by competition from OLED technology.  But a number of firms have lowered their expectations for Mini-LED unit volumes this year, even as Apple (AAPL) seems to be adopting the technology more deeply.  There is a reason and it is really quite obvious in that the price of LCD panels has increased throughout most of the 2020 and 2021 years while OLED displays have not seen comparable price increases.  As Mini-LEDs are relatively new from a production standpoint, they are expensive and when coupled with increased panel price costs, have slowed their adoption among consumers.  The combined higher LCD panel cost and the high price of the Mini-LED backlight have given OLED more ground in which to compete and estimates for Mini-LED notebooks are now expected to fall below those of OLED notebooks.
But is this a sustainable issue?  Not in our view, as the price for large panel LCD displays has begun to fall and the Mini-LED supply chain is expanding rapidly.  As we have previously noted, we expect real progress from Mini-LED backlighting to begin in earnest in 2022 as competition increases and costs decrease.  Coupled with TV panel price reductions, this should make Mini-LED TVs more competitive and better able to compete with OLED TVs, although OLED TV production costs have also seen reductions as LG Display expanded capacity at its Guangzhou large panel OLED fab.  Mini-OLED usage in notebooks will be a more difficult challenge as panel prices in the IT space have not declined, but the promise of more Apple mobile devices using Mini-LEDs will expand momentum next year. 
Given that Samsung (005730.KS) is a big proponent of OLED notebooks, the battle between display technologies in that space will be a more complex one, but in the TV space we expect to see a number of new brands entering the Mini-LED TV market in 2022, especially as Chinese panel producer BOE (200725.CH) is trying to build a business as a source of Mini-LED backlight units to local panel producers  As long as we don’t see excessive large panel price increases in 2022, we expect overall Mini-LED adoption to expand and become meaningful in the premium TV category during the 2022 holiday season.

The OLED production equipment space is one that is dominated by a number of companies that produce a number of tolls that are the core of the OLED display production process.  The key tools are those that deposit OLED materials onto various substrate types.  With Chinese panel producers pushing hard to gain traction in the OLED space, they are willing to spend as much as is needed to challenge South Korea’s OLED dominance, but when it comes to deposition equipment, money is a secondary consideration.  The leader in the space is Canon-Tokki (7751.JP), who produces such deposition tools for Samsung Display, LG Display and a number of other OLED producers.  The problem is that these tools are extremely complex and take a considerable time to build, which means orders have to be placed far in advance of delivery schedules, and orders from principal customers, meaning Samsung Display, usually get both priority and considerable attention given SDC’s substantial OLED capacity.
 
Aside from the delivery times, which can range from 6 months to over a year, the cost of such machines for volume panel production runs between $100m and $150m each, so such commitments are not made lightly.  Even LG Display, the only supplier of OLED TV displays and a producer of small panel RGB OLED displays, has found itself unable to work its way into the queue for such tools at times, and has had to buy deposition systems from less popular suppliers.  Note also that most fab managers will try to keep tools common across a fab in order to keep maintenance costs low, so if a fab has already installed a Canon tool on a line, it will want to remain with the same supplier as it expands capacity.
 
Chinese OLED producers have access to considerable capital, particularly at the current stage of OLED development, but are just beginning to develop the volumes needed to compete with South Korean producers.  Government subsidies have allowed them to develop OLED fabs at a rapid rate, but even with the easy access to capital, they still have to deal with the production schedules for deposition tool producers, and given the well-known Chinese gift for bringing in construction ahead of schedule, this can lead to bottlenecks in OLED fab start-ups.
 
The obvious solution, and one that China has been working toward in a number of related fields is that of deposition tool self-development, a task that is formidable even for those that currently produce other tools for the OLED production process.  South Korean equipment companies have had some success in the deposition space, with Sunic Systems (171090.KS) having placed a number of tools over the last few years.  That said, most of the deposition tools developed by equipment manufacturers are for R&D or pilot line systems, and are not able to scale to the multi-chamber deposition systems that are necessary for cost efficient OLED display production.  Chinese tool vendors have produced some of these smaller systems but until recently have been unable to overcome the challenges of developing a multi-chamber deposition tool that can handle high volume production.
 
We say recently because a Chinese tool vendor, Hefei Xinihua (603656.CH) has developed what it says is the first Mainland developed OLED Evaporation tool for mass production.  The company itself has divisions that produce OLED and LCD materials, other display production equipment, and a recently released a high speed “Large Panel Mini-LED Transfer Tool” (Die Bonder) that it has provided to a number of BLU developers on the Mainland, but information is scarce, other than a few pictures shown below, most of which are R&D systems
 
If a Chinese company were able to enter the mass production OLED deposition tool, it would give Chinese OLED panel producers an alternative to the Korean dominated deposition tool queue, and given China’s desire to develop its own supply chain, would provide easier access to scarce production tools.  That said, a few pictures and a press release are a far cry from creating a product that can compete with established production tools on a realistic basis.  We would expect that the tools are being tested by OLED panel producers, although we have heard little other than a shipment to a Chinese OLD lighting manufacturer.  While we don’t have high hopes that such a tool will gain real traction, one can always be surprised.