IS China Really Cutting Production?
In order to stem the tide of falling panel prices panel producers typically reduce utilization and reduce inventory levels against the weaker demand. While painful for producers, especially after a period of high margins, it is a solution that typically begins to stabilize panel prices relatively quickly, at least that’s how things have progressed in the past. However, as the LCD industry leadership has moved from Japan to South Korea and Taiwan, and now to China, things have not worked quite the same as in the past.
While there have always been government support programs for the display industry that provided infrastructure or tax abatement, the Chinese government has been far more aggressive toward developing its display industry and provides those same perks, along with construction and operating subsidies, which can be a substantial benefit to Chinese panel producers. While Chinese LCD panel fabs are expected to produce positive financial results, the understanding that such subsidies will continue as the fab matures, leads to a different mindset that is less profit oriented and more focused on objectives that can satisfy the political goals of the funding sources. This is not to say that Chinese fab managers are lax in their ambitions toward sustained profitability, but they have the luxury of being able to make decisions that might be more difficult for those that face shareholder scrutiny that is oriented toward quarterly results.
We believe this has led to a less traditional reaction time to events in the display industry from Chinese panel producers and while it seems a moot point when panel prices are rising, as they did in much of 2020 and early 2021, when panel prices began to drop last year the rhetoric was that ‘things were different this time’ and production shifts to less volatile display products (IT) was considered the perfect solution. Unfortunately, when most of the major players in the industry make the same move at the same time, the intended safety net of the shift becomes its own worst enemy and competitive pricing is used to keep fabs running at high utilization rates. At the first sign of segment demand weakness, the competition becomes more desperate and panel prices fall faster.
During the pricing slide there is always the mantras of ‘it can’t go much lower as it is near cash cost’, but in this down cycle the hunger to keep fab utilization levels high seems to have kept panel producers, particularly Chinese panel producers form making any real utilization rate changes, other than token reductions. Now that a number of generic panel segments and sizes have fallen below cash costs, it is suddenly important to lower utilization rates to ‘preserve pricing.’ Of course, the real question is whether substantial utilization rate reductions are being made to ‘help stabilize the industry’ or to avoid running much of the fab at a loss (the answer is obvious), but the time for waiting seems to have passed, with rumors that some Chinese LCD panel producers are now making the utilization reductions that should have been made months ago.
Based on data from China, we believe that the major Chinese LCD panel producers have adjusted their yearly production targets down by ~8%, a modest reduction, but have recently implemented utilization rate reductions in excess of those numbers. In terms of Gen 8 and above fabs, those that would normally be used to produce TV displays and large monitors, we believe utilization reductions of 23% have been implemented, although not every producer has done so to the same degree and these metrics do not include smaller substrate fabs such as Gen 6 lines that are used for much IT and mobile device display production, so we see the impact primarily on TV panels and focused on only large producers.
While these reductions might move the needle a bit, with inventory levels above normal it could take some time to slow panel price declines along with other macroeconomic influences. While it is easy for use to arm-chair quarterback the industry, if history teaches us anything it is that the display industry is cyclical and will eventually respond as such, so keeping your foot on the accelerator as you begin to descend from the top of the mountain might make things look good for a quarter or so, but it won’t make stooping the decline easier, so we hope that the utilization reductions that we think are being implemented are more than just lip service to a short-term problem, but it is a bit too early to tell.
While there have always been government support programs for the display industry that provided infrastructure or tax abatement, the Chinese government has been far more aggressive toward developing its display industry and provides those same perks, along with construction and operating subsidies, which can be a substantial benefit to Chinese panel producers. While Chinese LCD panel fabs are expected to produce positive financial results, the understanding that such subsidies will continue as the fab matures, leads to a different mindset that is less profit oriented and more focused on objectives that can satisfy the political goals of the funding sources. This is not to say that Chinese fab managers are lax in their ambitions toward sustained profitability, but they have the luxury of being able to make decisions that might be more difficult for those that face shareholder scrutiny that is oriented toward quarterly results.
We believe this has led to a less traditional reaction time to events in the display industry from Chinese panel producers and while it seems a moot point when panel prices are rising, as they did in much of 2020 and early 2021, when panel prices began to drop last year the rhetoric was that ‘things were different this time’ and production shifts to less volatile display products (IT) was considered the perfect solution. Unfortunately, when most of the major players in the industry make the same move at the same time, the intended safety net of the shift becomes its own worst enemy and competitive pricing is used to keep fabs running at high utilization rates. At the first sign of segment demand weakness, the competition becomes more desperate and panel prices fall faster.
During the pricing slide there is always the mantras of ‘it can’t go much lower as it is near cash cost’, but in this down cycle the hunger to keep fab utilization levels high seems to have kept panel producers, particularly Chinese panel producers form making any real utilization rate changes, other than token reductions. Now that a number of generic panel segments and sizes have fallen below cash costs, it is suddenly important to lower utilization rates to ‘preserve pricing.’ Of course, the real question is whether substantial utilization rate reductions are being made to ‘help stabilize the industry’ or to avoid running much of the fab at a loss (the answer is obvious), but the time for waiting seems to have passed, with rumors that some Chinese LCD panel producers are now making the utilization reductions that should have been made months ago.
Based on data from China, we believe that the major Chinese LCD panel producers have adjusted their yearly production targets down by ~8%, a modest reduction, but have recently implemented utilization rate reductions in excess of those numbers. In terms of Gen 8 and above fabs, those that would normally be used to produce TV displays and large monitors, we believe utilization reductions of 23% have been implemented, although not every producer has done so to the same degree and these metrics do not include smaller substrate fabs such as Gen 6 lines that are used for much IT and mobile device display production, so we see the impact primarily on TV panels and focused on only large producers.
While these reductions might move the needle a bit, with inventory levels above normal it could take some time to slow panel price declines along with other macroeconomic influences. While it is easy for use to arm-chair quarterback the industry, if history teaches us anything it is that the display industry is cyclical and will eventually respond as such, so keeping your foot on the accelerator as you begin to descend from the top of the mountain might make things look good for a quarter or so, but it won’t make stooping the decline easier, so we hope that the utilization reductions that we think are being implemented are more than just lip service to a short-term problem, but it is a bit too early to tell.
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