Hoping
LCD panel pricing is a nearly a perfect casebook example of supply and demand. There are a finite number of LCD panel suppliers and in most cases fab output is a definable metric based on project development plans and updates, but the metrics get a bit more nuanced when factoring in utilization, essentially the rate at which the fab’s full capacity is being used. The current balance, excluding utilization, is oversupply and has been since mid-2021 as demand for large panel LCD displays began to wane. There have been some hints that LCD panel producers have lowered utilization rates, but there is a difference in what that means to various panel producers, particularly Chinese LCD panel producers.
Obviously LCD panel producers want to run display fabs at utilization rates in the low to mid 90’s at all times, but as prices for panels fall to cash cost levels it becomes a decision between the effect on margins of lowering utilization or producing a portion of total product at a loss. Keeping longer-term customers happy is a big part of that decision and absorbing the loss from money losing production is a part of ‘customer service’, albeit a painful one. The alternative of lowering utilization is also not a pleasant one, as idle capacity means equipment must still be maintained with no income offset and recalibration and restart yield issues will follow when the tools are returned to full production.
But there is another factor involved in those choices and that is ‘face’, and by face we mean not seeming like your company is no longer in the ‘growth mode’, which is how much of the Chinese display industry sees itself. With LCD capacity expansion projects still in place with a number of Chinese display producers (although some are quietly being pushed back), funding and operating subsidies from provincial or local governments is essential, and those funding sources must be maintained at any cost, with the company’s ‘status’ a big factor in maintaining those relationships. While producing for customers at a loss is certainly not an enviable position to be in, the Chinese manufacturing mindset is a bit different than in the US where most producers would walk away from money-losing business regardless of the circumstance. Chinese producers do not want to reduce staff (a distinct negative for government funding sources who answer to the Central government) and would likely find it easier to explain away losses that don’t involve raising the unemployment level than those a result of lowering utilization rates while building a new multi-billion dollar fab.
What this means is that Chinese panel producers are relatively slow to lower utilization rates and when they do it is done in relatively small increments. This is in contrast to South Korean suppliers who have made far more substantial cuts currently and in past cycles, in order to get closer to a supply/demand balance. This has kept overall LCD panel utilization rates high during the recent decline in LCD panel prices that began last June and is still a problem currently, and part of the reason that panel prices have declined from peak to cash costs in just over a half year. Overall utilization rates for Gen 8 LCD fabs fell by only 1.3%, including more substantial cuts made by LG Display, between March and April, with both Chinese brands and panel producers assuming that seasonal production increases in 3Q will be enough to balance supply and demand at current utilization rates. While it might be more effective to have cut utilization more drastically early this year, panel producers were using that same expectation for 2Q, which obviously was not the case. Yes, the global situation changed in 2Q, and that was hard to predict, but hoping that each progressive quarter will bail out the industry is just putting off accepting some of the more negative scenarios that should guide those decisions.
Obviously LCD panel producers want to run display fabs at utilization rates in the low to mid 90’s at all times, but as prices for panels fall to cash cost levels it becomes a decision between the effect on margins of lowering utilization or producing a portion of total product at a loss. Keeping longer-term customers happy is a big part of that decision and absorbing the loss from money losing production is a part of ‘customer service’, albeit a painful one. The alternative of lowering utilization is also not a pleasant one, as idle capacity means equipment must still be maintained with no income offset and recalibration and restart yield issues will follow when the tools are returned to full production.
But there is another factor involved in those choices and that is ‘face’, and by face we mean not seeming like your company is no longer in the ‘growth mode’, which is how much of the Chinese display industry sees itself. With LCD capacity expansion projects still in place with a number of Chinese display producers (although some are quietly being pushed back), funding and operating subsidies from provincial or local governments is essential, and those funding sources must be maintained at any cost, with the company’s ‘status’ a big factor in maintaining those relationships. While producing for customers at a loss is certainly not an enviable position to be in, the Chinese manufacturing mindset is a bit different than in the US where most producers would walk away from money-losing business regardless of the circumstance. Chinese producers do not want to reduce staff (a distinct negative for government funding sources who answer to the Central government) and would likely find it easier to explain away losses that don’t involve raising the unemployment level than those a result of lowering utilization rates while building a new multi-billion dollar fab.
What this means is that Chinese panel producers are relatively slow to lower utilization rates and when they do it is done in relatively small increments. This is in contrast to South Korean suppliers who have made far more substantial cuts currently and in past cycles, in order to get closer to a supply/demand balance. This has kept overall LCD panel utilization rates high during the recent decline in LCD panel prices that began last June and is still a problem currently, and part of the reason that panel prices have declined from peak to cash costs in just over a half year. Overall utilization rates for Gen 8 LCD fabs fell by only 1.3%, including more substantial cuts made by LG Display, between March and April, with both Chinese brands and panel producers assuming that seasonal production increases in 3Q will be enough to balance supply and demand at current utilization rates. While it might be more effective to have cut utilization more drastically early this year, panel producers were using that same expectation for 2Q, which obviously was not the case. Yes, the global situation changed in 2Q, and that was hard to predict, but hoping that each progressive quarter will bail out the industry is just putting off accepting some of the more negative scenarios that should guide those decisions.
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