China Company Speak 101
In a Q&A with investors, Chinese panel producer BOE (200725.CH) was posed the question below:
“The recent continuous decline in panel prices has fallen by more than 30%. What is the impact of the panel price reduction on the company? How does the company face the decline in panel prices?”
The answer is about as close to pure ‘company speak’ as is possible, with little direct information as to the impact of the panel price declines on the company’s financials. Most entertaining was “structural adjustments” as a euphemism for panel price reductions, and the phrase, “The company maintains its judgement on the weakening of the panel cycle…” which gives little indication as to any adjustments to production, product development, etc. that the company might be making, falling back on the typical platitudes of ‘good products, customer structure, etc.’ and emphasizing that the company “still maintains a good level of profitability.” In a follow-up question that phrase changes a bit to “believes that BOE can still maintain good profitability and strong elastic recovery even in a weak market.”
While BOE tends to be a bit more ‘talkative’ than most Chinese panel producers, when things get a bit more difficult, they rely on the same carefully worded corporate answer evasions that most companies fall into. Here is the company’s answer to the question above:
“Hello! After the semiconductor display has experienced a long period of prosperity, there have been some fluctuations in the current structure, which is mainly reflected in the TV field. Entering the third quarter, due to congestion in shipping and rising logistics costs, which affected the willingness of downstream customers to stock up, the prices of TV products have undergone structural adjustments; IT products have remained relatively stable thanks to better demand and supply concentration. The company maintains its judgement on the weakening of the panel cycle, relying on good products, customer structure, and leading technology and product capabilities, and still maintains a good level of profitability. Thanks!”
Our point here is that during the upcycle in the display business the virtues of Chinese display companies were constantly extolled with adjectives like ‘glorious’, ‘wondrous’, and ‘triumphant’, essentially taking credit for what was by any measure, a singular set of circumstances that bailed out a cyclical industry that was doing little to plan for the future other than domination of an industry that more experienced participants were looking to move away from. While the Chinese display industry might seem to have a coherent plan shaped by a government that is interested in promoting long-term growth and sustainability after spending many billions to grow capacity, in reality there is considerable competition between Chinese display producers, as well as provincial and local governments, with financial carrots held out to display producers who are looking for both a home for capacity and a reliable source of funding. With the motivation of growth, usually led by increasing capacity, the driver for the industry, we wonder if China’s display industry is able to respond to changing conditions as easily as it responded to an increase in demand last year.
Rumors that BOE has cut large panel LCD production have surfaced, with what we calculate as an 11.1% capacity reduction against maximum stated production capacity in October, and while the company will not confirm or deny such production changes, when queried about such production cuts, BOE’s response was as indicated below, which seems to be a tacit confirmation, or at the least an indication that some response to the decline in panel prices has been made.:
“With the increase in new technologies of the company’s production lines, investment in new product research and development, and product structure adjustments, it will lead to changes in the volume of production (to) enhance competitiveness to ensure that the company’s overall profitability is maximized.”
We admire Chinese panel producers for their drive and focus, but once the projects have been completed, factories built and local workers employed, there seems to be little planning as to how companies would deal with anything other than an ever increasing demand cycle, and only when things are near collapse does the state government step in with plans for absorbing weak entities into state monoliths. The constant push to be the biggest, produce the most units, and unseat whoever is the dominant player is a worthy goal if it is based on building a profitable business that can remain profitable in all or most parts of typical cycles, but we see little in the way of anticipating the possibility that demand might not always be growing and while we do not expect companies such as BOE to readily reveal how they might be dealing with a reduction in demand for a substantial portion of their business, we hope that somewhere there is a playbook for how the company (and others) will deal with the down-cycle.
“The recent continuous decline in panel prices has fallen by more than 30%. What is the impact of the panel price reduction on the company? How does the company face the decline in panel prices?”
The answer is about as close to pure ‘company speak’ as is possible, with little direct information as to the impact of the panel price declines on the company’s financials. Most entertaining was “structural adjustments” as a euphemism for panel price reductions, and the phrase, “The company maintains its judgement on the weakening of the panel cycle…” which gives little indication as to any adjustments to production, product development, etc. that the company might be making, falling back on the typical platitudes of ‘good products, customer structure, etc.’ and emphasizing that the company “still maintains a good level of profitability.” In a follow-up question that phrase changes a bit to “believes that BOE can still maintain good profitability and strong elastic recovery even in a weak market.”
While BOE tends to be a bit more ‘talkative’ than most Chinese panel producers, when things get a bit more difficult, they rely on the same carefully worded corporate answer evasions that most companies fall into. Here is the company’s answer to the question above:
“Hello! After the semiconductor display has experienced a long period of prosperity, there have been some fluctuations in the current structure, which is mainly reflected in the TV field. Entering the third quarter, due to congestion in shipping and rising logistics costs, which affected the willingness of downstream customers to stock up, the prices of TV products have undergone structural adjustments; IT products have remained relatively stable thanks to better demand and supply concentration. The company maintains its judgement on the weakening of the panel cycle, relying on good products, customer structure, and leading technology and product capabilities, and still maintains a good level of profitability. Thanks!”
Our point here is that during the upcycle in the display business the virtues of Chinese display companies were constantly extolled with adjectives like ‘glorious’, ‘wondrous’, and ‘triumphant’, essentially taking credit for what was by any measure, a singular set of circumstances that bailed out a cyclical industry that was doing little to plan for the future other than domination of an industry that more experienced participants were looking to move away from. While the Chinese display industry might seem to have a coherent plan shaped by a government that is interested in promoting long-term growth and sustainability after spending many billions to grow capacity, in reality there is considerable competition between Chinese display producers, as well as provincial and local governments, with financial carrots held out to display producers who are looking for both a home for capacity and a reliable source of funding. With the motivation of growth, usually led by increasing capacity, the driver for the industry, we wonder if China’s display industry is able to respond to changing conditions as easily as it responded to an increase in demand last year.
Rumors that BOE has cut large panel LCD production have surfaced, with what we calculate as an 11.1% capacity reduction against maximum stated production capacity in October, and while the company will not confirm or deny such production changes, when queried about such production cuts, BOE’s response was as indicated below, which seems to be a tacit confirmation, or at the least an indication that some response to the decline in panel prices has been made.:
“With the increase in new technologies of the company’s production lines, investment in new product research and development, and product structure adjustments, it will lead to changes in the volume of production (to) enhance competitiveness to ensure that the company’s overall profitability is maximized.”
We admire Chinese panel producers for their drive and focus, but once the projects have been completed, factories built and local workers employed, there seems to be little planning as to how companies would deal with anything other than an ever increasing demand cycle, and only when things are near collapse does the state government step in with plans for absorbing weak entities into state monoliths. The constant push to be the biggest, produce the most units, and unseat whoever is the dominant player is a worthy goal if it is based on building a profitable business that can remain profitable in all or most parts of typical cycles, but we see little in the way of anticipating the possibility that demand might not always be growing and while we do not expect companies such as BOE to readily reveal how they might be dealing with a reduction in demand for a substantial portion of their business, we hope that somewhere there is a playbook for how the company (and others) will deal with the down-cycle.
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