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).

​Taiwan based LCD panel producer Innolux (3481.TT) indicated that while the ongoing chip shortage and a tightening of substrate glass supply would cause the industry to see reduced panel production, they remain cautiously optimistic about the 2nd half.  Innolux management indicated that a glass substrate supplier would be cutting its utilization by 15% to 20% in order to do annual maintenance, tightening what has already been a tight glass market, and would lead to the reduction in panels being produced during the 3rd quarter.  Their take on the 3Q panel squeeze was that the reduction in panel production would reduce supply and avoid a glut, although the company had not mentioned that an oversupply situation was a possibility in the past.  Singling out IT products as the area where there was an imbalance between supply and demand, they indicated that the reduction should ease those concerns.
As we have noted a number of times in the past, LCD panel producers have been shifting production away from large panels (TV), where demand has weakened, and moved to IT products, meaning monitors, notebooks, and tablets.  While logic holds that panel producers would follow those areas with the highest profit potential, capacity has increased relatively quickly while demand has stayed relatively flat, especially if one accounts for the potential component shortages that have limited deliveries or pushed out dates.  This has caused buyers to ‘enhance’ ordering a bit by increasing numbers to encourage allocations and meet quotas despite possible shortages.  As brand inventories get closer to real quotas, those orders become more realistic and panel producers are left with excess capacity, a situation they have not faced in over a year. 
The TV panel space is already seeing some panel price weakness, however the IT space, where the capacity shift has been the greatest, has seen only less aggressive panel price increases and has yet to see real panel price declines.  While the annual maintenance period during August is not unusual for glass producers, given the tight market and the high level of production at all of the glass producers that maintenance cannot be avoided and some shortages above the recent norm might be seen, but we have a hard time seeing this scenario as a glass half full one, rather than one indicating the potential for change., But then we are not sitting on billions of dollars’ worth of capital equipment that needs to be running at or near full capacity to produce profits.  Just a difference in perspective.

Innolux (3481.TT) announced that it had signed a long-term supply deal with Sakai Display Products (pvt), the company that owns the formerly Sharp (6753.JP) Gen 10.5 LCD fab in Japan.  Innolux will pre-pay in installments, the $618m price of the 12 year deal through its subsidiary Foshan Optoelectronics (pvt).  Behind the concept of the deal is eliminating the cost of building a greenfield Gen 10.5 fab, which would likely cost between $1.9b and $3.3b for each 30,000 sheet/month line, of which there would likely be two.  Innolux currently runs one Gen 7.5 and two Gen 8 LCD fabs, with the Gen 7.5 fab most efficient at producing panels in the 42” to 46” range, and the Gen 8 fabs most efficient producing 55” panels, with TV panels representing 38% of Innolux’s 2Q sales.  However, as consumers look toward larger size TVs, the Innolux fabs become far less efficient at sizes of 65” and larger.  This has pushed Innolux to decide whether it would be more cost effective to build its own Gen 10.5 fab or sign a deal with Sakai Display, who runs a Gen 10.5 fab that has been in operation since 2009.
The decision is made a bit more obvious due to the fact that Sakai Display Products is owned by Terry Gou, the Chairman of Hon Hai (2317.TT aka Foxconn (2354.TT)), with the company owning a controlling stake in both Sharp and Innolux, so the deal is sort of an ‘all-in-the-family’ one that benefits all parties to some degree and Terry Gou in quite a few of them.  Sakai is expected to increase its capacity from 90,000 sheets/month to 120,000 and eventually to 150,000, but no timetable has been given and Foxconn has a long history of making promises and not fulfilling them, so we maintain our model at current capacity until we get confirmation that new lines have been added and are operating.  If such an expansion does become a reality will Mr. Gou provide the financing or will the capital be drawn from some other related entity?