​On April 20 ‘Foxconn (2317.TT) Wisconsin Official Twitter (TWTR) Account’ announced that the Wisconsin Economic Development Corp (aka WEDC) had endorsed an amendment to the initial 2017 agreement, “…that will give Foxconn the flexibility to pursue business opportunities in response to changing global market conditions,” while also noting that “…original projections used during negotiations in 2017 have at this time changed due to unanticipated market fluctuations.”
The new agreement provides for:

• Up to $80m in performance based tax incentives to Foxconn based on the creation of 1,454 qualified workers earning an average wage of $53,875 and target capital expenditures of $672m by 2026.  The original agreement was for $2.85b in state tax credits and the hiring of ~13,000 workers over 10 years.  None of the original goals were met to date.
• Less product restrictions as to type of products or goods manufactured.  The original claims were for a Gen 10.5 LCD production fab, which changed a number of times, decreasing to plans for vending machine production at the facility.
• Preserves benefits of the EIT Manufacturing Zone, including market based energy rates and use tax exemptions.  The original agreement bypassed many environmental and water use restrictions.  No indication as to whether they have changed but not likely.

Foxconn sponsored a job fair on September 8 at the ‘Advanced Manufacturing Facility’ where they expected to hire 100 employees to fill a variety of manufacturing, information technology, and supply chain positions, despite the fact that it remains unclear what Foxconn currently expects to produce at the facility, although the company announced a partnership with Fisker Inc (FSR) to produce parts for electric vehicles including semiconductor products, along with ‘plans for electric vehicle manufacturing’.
That said, today Foxconn has disclosed plans to acquire a 6.2m ft2 assembly plant in Ohio, as part of a joint development agreement with Lordstown Motors (RIDE).  The agreement, which is non-binding until completion, includes:

• Purchase the Lordstown facility, excluding the motor assembly line, battery assets, and certain IP, for $230m based on Foxconn agreeing to manufacture Lordstown Motors Endurance full-size truck at the facility, along with employment agreements for Lordstown operational and manufacturing employees.
• Purchase $50m in Lordstown Motors stock @ $6.8983/share and the issuance of warrants covering 1.7m shares exercisable for three years at $10.50/share.

While the Wisconsin “Wonder of the World” project was never intended for automotive production, there were local hopes that the talks with Fisker might evolve into something relating to the upcoming Fisker Ocean electric SUVs due out in 4Q or 1Q 2022.  That possibility still exists to a degree, but the deal with Lordstown seems to have taken Foxconn’s focus away from Wisconsin, where little, if anything, has been produced, despite Foxconn’s insistence that they have spent ~$900m in Wisconsin, including the  almost 1m ft2 ‘Advanced Manufacturing Facility”, a ~300,000 ft2 ‘Smart Manufacturing Center’, a
120,000 ft2 ‘Multi-purpose Building, and a 100 ft tall “High Performance Computer Data Center Globe’. 
The company still touts their ‘3+3 corporate vision – electric vehicles, digital health, and robotics using AI, semiconductors, and 5G’ for the Wisconsin site, saying that that idea has “caught the attention of many businesses and investors from around the world who share their vision for the site, making the site and the region a new hub for next gen technological product design, jobs, investment, and smart manufacturing.”  The problem is that we go by results rather than ‘vision’, especially one that includes all of the key buzzwords that investors seem to like to hear.  The aerial images of the Foxconn site taken on 9/17/21 and 7/20/2021 don’t seem to indicate that anyone is ‘sharing the vision’, nor does the fact that little has been produced at the site other than construction jobs.  With the Lordstown deal in the works, it looks like Foxconn might not be focused on its vision for Wisconsin at the moment.

Large panel shipments (Fig. 4) were up 0.1% in August while large panel sales (Fig. 5) were down 3.8%, a result of the large drop in TV panel prices (-10.1%).  With July being the peak for TV panel prices and IT product panel pricing remaining stable in August (looks the same in September), but the effects of the steep TV panel price drop in August had a negative effect on LCD panel industry sales, with the price per unit of TV panels considerably greater than that of IT panels.   We show both Shipments & Share in Fig. 6. To illustrate how shipments have remained flat but large panel price increases have kept sales momentum intact.  Given the Significant drop in TV panel prices in August and again in September, we expect the September large panel sales results to see another drop.
TV panel share is a monthly variable that does not get reported by many panel producers (some do quarterly) but based on our data, we believe the shipment level for LCD TV panels declined by 4.3% in August, following a 1.5% increase in July, offset by a 2.8% increase in monitor shipments, flat notebook shipments, and a 4.8% increase in tablet shipments.  The shipment trends are noted in Fig. 7.  Panel producers have been decreasing their share of TV panel production in lieu of IT panel products, less in anticipation of the price drop seen in August but more due to the continued demand for notebooks and monitors.  While there is much talk over how this will lessen the effect on panel producer sales as TV panel prices decline, we have only seen one month of excessive TV panel price declines and therefore little cumulative negative momentum.  Given that September saw an even larger decline in LCD TV panel prices and little price offset from IT panel pricing, we expect that September industry large panel sales will be down in excess of 5%.

Translating those metrics to companies, we first look at the sales share of the top 5 large panel producers to gain insight into who might be affected most by declining large panel prices.  As noted, the concentration is quite high with 83.1% of the industry’s large panel LCD sales coming from the top 5 producers.  That said, given that August was the first month where TV panel prices dropped substantially, we look at the sequential change in sales for large panel producers between July and August to see who was affected most by the TV panel price drop.  We note that ideally we would like to see at least one additional month of data that included substantial panel price drops, but we take what we can get until next month’s data becomes available.  We note that we have added share in the second table to gain better understanding as to how much each panel producer influenced the total.

​We note that Samsung Display has sold or closed much of its large panel LCD capacity, so monthly results could reflect that limited capacity (hence the 1.4% share) and the impact of large panel price declines.  LG Display, to a lesser degree, has done the same.
All in, August looks to be the tip of the iceberg for large panel LCD producers in terms of the impact of decreasing TV panel prices.  If September and October are any indication of the severity of such panel price drops, the effects will be felt by almost all large panel producers, especially if there is little positive offset from IT panel pricing or shipments.  Given that it took only a short period for TV panel prices to trace back almost half of the gains made in the last year, it sets the stage for a weak 4th quarter for large panel producers.  As noted above, we expect IT panel pricing to remain reasonably stable for the remainder of the year, and would find it difficult to assume that TV panel prices continue to fall at such a precipitous rate for the rest of the year, but we did not expect to see an almost 20% drop in TV panel prices in September.  “Surprise, Surprise” – Gomer Pyle USMC (1964).

We had been expecting a continuation of weak TV panel prices and a leveling off of panel prices for IT products (monitors and notebooks) for September, and were a bit concerned that our expectation for TV panel pricing (-6.8% m/m) was a bit aggressive.  It turns out that we were correct in our assumptions for IT panels but it seems our estimate for TV panel prices was not aggressive enough.  In fact, the aggregate decline in TV panel prices in September (-19.10%) was the largest single month decline since we have been accumulating TV panel data, which is over 9 years.

The table below gives some perspective on the changes that we have already seen in panel prices, with the high and low prices for each type, the current (September) panel price, and the difference between the panel price peak and nadir vs. the current prices.  As can be seen, Monitors and Notebooks are at peak prices but all other panel types are between 19.7% and 53.7% from their high points since the beginning of 2019.  We note that until August of this year TV panel pricing had been positive m/m since June of last year and has declined from its high in only two months, tablets have seen flat or positive panel pricing since October 2019, while phones have been up and down for some time. The graphic below shows the data in a more visual mode.

With expectations of another very weak month for TV panel prices in October and what are essentially flat IT panel prices, we expect the industry will see another decline in panel revenue in October (see below).  While there have been few panel producers that have not been espousing the validity of their push toward IT panel production in lieu of TV panels, the question remains whether IT panels will follow the same fate as TV panels and when that might happen.  We do note that social effects of COVID-19 have had a far more profound effect on demand for notebooks and monitors, especially given country-wide programs to equip students with laptops during periods of lockdown, and while we expect overall demand for laptops, Chromebooks, and similar mobile devices to remain at a higher level that pre-pandemic, we also expect a decline in IT product demand as we enter 2022.
The only real mitigating factor in that equation is component shortages, which could extend the demand cycle further into 2022, but as some of the larger educational laptop programs wind down at the end of the year, some of those shortages could abate.  In the US, much will depend on the success of bringing students back to classrooms, and whether that scenario plays out without major COVID-19 outbreaks.  We expect an initial spike in COVID-19 among school aged children that might travel to the unvaccinated population, but we expect by early 2022 for that to have run its course to a large degree.  When those numbers start to decline, we expect demand for notebooks and tablets will decline.  That said, we do not expect to see the extreme panel price drop in IT products that has been the case with TV panels, as TV demand has been weakening for months, and while the tipping point was not reached until TV set producers realized that existing set sales targets were unrealistic.  We expect a more gradual weakening of IT panel prices through the 1st quarter of next year.

So as not to use the massively overused word ‘unprecedented’, we choose unparalleled to describe the rise in LCD panel prices over the last year.   Panel producers have been enjoying utilization rates in the mid to upper 90s and have been on the right side of negotiations with buyers for almost the entire period.  Given that China will represent 54.3% of LCD panel production this year, China’s LCD panel producers have a significant influence on the industry and their actions can set the tone for supply, and while they have been quite happy to continue to increase capacity and push utilization rates to their capacity limits we have been wondering when they might notice a bit of a change in demand. 
As we have noted previously, TV panel prices have started to decline, and while they are still far above lows set over the last 24 months, they declined by 10.1% in August and are expected to see another substantial drop (-7.7% est.) when September data is collected.  IT panel prices, meaning notebooks, monitors and tablets, have been a bit more positive, still rising in August, but at a slower rate than in the past, and are expected to see a bit of a decline this month, so one might say we have reached some sort of peak and can see a path toward more realistic panel pricing going forward.  Demand has obviously weakened a bit, with inventory levels at brands more closely reflecting what they believe they need to meet 4Q demand, and the panic that has filled panel buyer’s hearts for much of this year seems to have turned from “I’ll take it (at any price)” to “I’m good for now”.
Regardless of the circumstances surrounding the reasoning behind the current less frenetic demand profile, the bigger question is how Chinese LCD panel producers will respond.  They will be expected to generate the same high margin results in 2H as they did in 1H, which can only be accomplished if they are able to run their fabs at the same high utilization rates that they have in previous months.  However this level of production would continue to put pressure on panel prices and while TV panel prices have already begun to decline, overproducing IT panels would be a more serious issue.  Many panel producers have moved production from TV panels to IT panel production, with the IT products typically a bit more profitable on an m2 basis.  This emphasis on IT panel production has helped panel producers see a bit less of an impact from falling TV panel prices, but leaves them vulnerable to a more leveraged dependency on IT panel production.
If IT panel prices begin to weaken, we would hope that rather than continue to run fabs at high utilization rates and exert pressure on IT panel prices, Chinese producers would lower utilization rates, essentially reducing capacity.  They would have to deal with lower margins, but would not start a cycle of continuing pressure on panel prices.  It seems that such an event is actually occurring, as we are beginning to hear that Chinese LCD panel producers have lowered utilization rates a bit this month.  If this proves to be the case, and it is not just a minimal change, the industry could sidestep what would be a typical cyclical decline in panel prices and a similarly typical decline in panel producer profitability.  Hard utilization data is ephemeral at best, so we have to accept that panel pricing, albeit on a bit of a lag, is the ultimate arbiter of whether panel producers reacted correctly to weakening demand and stabilized panel prices in 4Q, but it is rare that the industry does not over or under step what would need to be done to keep things in harmonious balance.  “The best-laid plans of mice and men often go awry”

China is big on market share and in the LCD display space China continues to grow its share.  In some cases that growth is financed by the companies themselves, although that usually entails finding investors for a portion of the funding.  Other Chinese display producers have large holding company parents that can fund capacity growth through a variety of sources both public and private, while still others must rely on state or local funding.  In almost all cases however, some of the investor funding comes from state run organizations, and while they might be once removed from direct state oversight, they are still beholden to the government in a loose sense.  Most of the more direct funding is done through provincial or city governments who look at LCD production as a lucrative way to generate jobs, local publicity, tax dollars, and regional revenue, aside from political cache.   This system works quite well as long as two criteria are met.  First, the panel manufacturer has a talented enough staff to generate sufficient yield, and second, panel prices are above cash costs.
As the LCD production space is cyclical, one cannot always guarantee that either or both criteria can be met at all times, but when they are it sets the tone for the ‘gain share’ buzzer to go off, panel producers see themselves as the ‘leader’ in the space, and they start developing plans for further capacity expansion.   Local governments, looking at current profitability, seem to assume that this will continue both for all time and regardless of capacity and are happy to keep the local coffers open with just the suggestion that ‘the world has changed’ or ‘It’s not like last cycle’.  The problem is that nothing lasts forever in a cyclical world and the cost ($3b - $4b) to build a greenfield LCD fab is high.  Such construction, even in China, who is known for their ability to build fab structures quite quickly, takes at least 18 months from planning to initial production and during that period panel prices can and do fluctuate wildly.
China is still bent on gaining share and our updated LCD industry model cites a number of Chinese fab expansion projects that will continue through 2022 and beyond.  China will continue to gain share, particularly as South Korean producers back away from LCD panel production, but both demand and panel pricing must also stay at current levels or increase to keep capacity utilization high enough to maintain profitability, and that is a far more difficult question than ‘Should we finance a new fab in our city?’  Those decisions tend to be based on provincial competition and less on the effect it will have on the industry as a whole, but we doubt, even if the cyclicality of the industry were laid out in front of said decision makers, it would have much impact, as by the time the new fab is completed, local politicians would have moved on to more important state positions and the lack of profitability would become someone else’s problem.
It was easy for Chinese producers and financing sources to make decisions given the length of the up-cycle we have just seen, but even the short-term drops we have seen in TV panel prices should be a harbinger of what is likely to occur if unbridled capacity expansion continues.  Based on the projects underway, and those most likely to be added, we have charted the TV capacity share in Fig. 3.  China will certainly be the share leader going forward but the question really is, will that be the right place to be over the next few years?  It is easy to be optimistic when things are good, but it’s better to be realistic.  Bigger is not always better.

​Rainbow (600707.CH), aka Caihong Display Devices, aka Irico[1], has announced that its 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.  While the company is financing the entire project itself (including outside funding), the announcement gave considerable warning that full project funding has not been reached and might not be available when the project is to move into full scale construction, leading to possible delays.  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, which would slow the in-country share gains that are the goal of the investment.
Rainbow competes with the three major LCD glass producers, Corning (GLW), Asahi (5201.JP), and NEG (5214.JP) and a few small local producers, but is still dealing with improving the quality of its large format glass substrate products and remains a small supplier of Gen 10 LCD glass, especially when compared to Corning, who has a co-located glass plant next to BOE’s (200725.CH) Gen 10.5 glass plant in Hefei.  We believe that most of China’s demand for large (Gen 7+) glass is supplied by non-Chinese suppliers, while local producers have a higher share of Gen 6 and smaller glass sizes on the Mainland. 
This has been a sticking point for both the Chinese government and the Chinese display industry, who has been under pressure to develop local glass production, but as has been the case with a number of other display technologies, just throwing money at a technology does not mean success is guaranteed.  Quality and guaranteed supply are of greatest importance to panel producers when it comes to substrates, as unspotted defects can cause major problems further down the production line and can cause major yield issues, an ongoing problem for Chinese panel producers.  This seems to be the type of project that should have been instituted two or three years ago, as the Chinese large panel LCD industry was developing, but we note that China has made a few attempts to ‘dominate’ the local glass market in the past, none of which proved successful, so it might have taken a bit longer to convince the CEC that such a large project might work, and even then we won’t know until late in 2024.


[1] IRICO (Rainbow,etc.) is owned by IRICO Group, which is owned by China Electronics Corp, the state-run entity that manages Chinas electronics industry.

China is not the only country that spends to enhance the infrastructure around its key technology sectors, but while the government of Korea has many programs that support the country’s vast technology businesses, Samsung Electronics (005930.KS), the country’s largest technology company, has been making some infrastructure investments in Korea since last year.  At roughly $200b US in sales, Samsung would rank just below Greece and Peru if it were a country, so not only can it make significant investments, but it can also protect the country from the ravages of trade conflicts, while helping itself, of course.
To those ends, Samsung embarked on a plan to make investments, some large and some small, in 9 South Korean companies that strangely were or are now part of the Samsung supply chain.  In many cases these companies are developing or supplying products or components that Samsung was purchasing from suppliers outside of the country and found themselves part of the inevitable trade and/or political conflicts that entangle companies on a daily basis, but were also key, primary, or sole suppliers.  By making such investments in local companies, Samsung has been laying the path to either creating a competitive pricing environment for out of country sources or to eliminate those entirely.
Samsung’s investment in public local companies over the last 14 months has totaled $234.4m US, but the size of the investments is far less important than the fact that it further cements these companies relationship with Samsung, who is not only a customer, but a source of information and expertise in a wide range of technologies.  One obvious one that we have noted in the past is Soulbrain (036830.KS), a company that is a producer of Hydrogen Fluoride used to etch semiconductors.  As Japan is the source for much of the world’s hydrogen Fluoride, a conflict between Japan and South Korea of WWII reparations caused some shortages in the material last year, and while some stability has been achieved, Samsung does not seem to be convinced that all is back to normal.  We have also noted in the past the dominance of Japan in the production of FMM (Fine Metal Masks), with Dai Nippon Screen (7912.JP) essentially owning the market.  Given that Samsung affiliate Samsung Display (pvt) would essentially close it doors if that supply line was damaged, they have included Fine Semitech (036810.KS) in their more recent investments to make sure that they can protect themselves from any disruption in essential components and materials. 

Whenever we hear comments like this from panel producers, we get very nervous.  We don’t have full details, but we understand the “Whistle by the graveyard attitude” given how much panel prices have risen over the last year.  What we are speaking about is a quick clip from Taiwan’s AU Optronics (AUOTY) that fell under the headline “Taiwan Makers Increasingly Immune to Sharp TV Panel Price Falls” and while there was little other detail in the Digitimes article (unless you pay for a yearly subscription), part of the ‘premium content’ that we were allowed to see read as follows:
“Chances are slim for LCD TV panel prices to plunge to the cash cost level and Taiwan panel makers are now much more immune to the ongoing round of price falls amid changing industrial structures and their increasingly robust financial strength, according...”, and we assume more details are given as to why this cannot happen again, despite the fact that it happens regularly.  Based on estimates for TV panel prices in September, TV panel prices are down 16.7% from their peak in July of this year, but to put that into better perspective, looking at the low point for aggregate TV panel prices back in 2019, TV panel prices had risen 117% as of July.  By the end of September, if estimates are correct, that gain will have been cut to 80.2% and if the same rate of decline were used (8.9%) through year end, the gain from the 2019 low would be 36.3%.
Don’t get us wrong, that is still a very strong gain for TV panel prices over that period, but is there really anything that will protect panel producers from a continuing decline in TV panel prices?  In some instances, panel producers have lowered their exposure to TV panel production in lieu of more lucrative IT product production, but much of the demand for IT products has come from the lifestyle changes brought on by COVID-19, and while that seems to be a much more persistent problem than thought back just a few months ago, it will become diminished over time, leading to more normalized demand for notebooks, monitors, and tablets, while TV demand remains relatively weak.  With both major demand lines weakening, there is really little to prevent panel prices to decline back to cash costs and history proves that out.
We certainly do not rule out any of a number of panel pricing scenarios, but whenever folks in the industry say something cannot happen it makes the hair on the back of our neck’s stand up.  It is easy to be feel comfortable when profitability has filled a company’s coffers but it has no bearing on whether the next cycle will be a winning one for panel producers or a losing one.
 

August was a bit of a difficult month for Taiwan based panels producers, and while particularly regional, is likely to be the tone for other panel producers that do not report monthly data.  While AU Optronics (AUOTY) no longer reports large and small panel shipment data, sales declined 1.9% m/m in August, a month that is typically up 7.6% sequentially.  Based on Fig. 1, it seems that sales this year peaked in June and have been declining, albeit at a modest pace.  The decrease in sales (m/m) comes despite a 3.33% increase in total panel area shipped.   Innolux (3481.TT) (Fig. 2) looks similar, with its peak in July and a slightly larger m/m decline in August, while Hannstar (6116.TT) saw its peak (Fig. 3) in March and has also been trending downward.  We note that while Hannstar is growing their large panel display business, the bulk of Hannstar’s sales is based on small panel product, which sets them apart from AUO and Innolux.

As we have previously noted, large panel prices have begun to decline, putting some pressure on overall sales, and component shortages have limited some IT panel production, however if large panel prices (TV mostly) continue to decline, even with the shift toward IT products many panel producers have made over the last few months, the effects will become a bit more visible, especially if IT panel pricing increases moderate.  AUO generated 26% of sales from TV panels in 2Q and Innolux 38%, so there is still quite a bit of leverage toward large panel pricing which could prove detrimental this month and into 4Q.

​The art of estimating panel prices is not an easy one.  Data can come from a wide variety of places including panel producers themselves, distributors, and a variety of sources that profess to have access to such hard data, but in most cases there is quite a bit of variation between the data and therefore averages are the best solution.  Some of the discrepancies come from the almost infinite variations in panels, particularly monitor and notebook panels, which makes direct price comparisons quite difficult.  There is less variation in TV panels however and TV panel pricing, while not a perfect science by any means, is a bit easier to sort through, and given that TV panel production still represents a significant portion of LCD display capacity and even more of revenue, price movements in TV panels are significant indicators.
We have already noted the weakness in TV panel prices twice this month (8/6/21, 8/23/21) and have indicated our belief that TV panel prices were destined to correct in previous months, so we continue to monitor data on TV panel prices to see if the drop in September will be greater, the same, or lesser than in August.  Again with the disclaimer that variations in panels can have an effect on price comparisons, it seems that smaller TV panels (32”/43”) are under more price pressure now than they were earlier in the month, which will put more price pressure on Chinese panel producers who are the largest suppliers of such panels to the TV set industry.  With IT panel pricing expected to be flat, panel producers will see additional margin erosion in September, particularly those that supply emerging markets where smaller size TVs are more common.  We expect BOE and LG Display to be the most affected considering external inventory levels for smaller TV panels.