If TVs get hit with a 10% tariff as part of the Trump administration’s next round of $200 billion of product affected, what would be the likely impact? Because of the steep declines in LCD TV panel prices in the last twelve months, a 10% tariff would merely slow down the price declines for TVs in the 2018 holiday season. The figure below shows the pattern of TV panel prices since 2015; overall prices are down nearly 40% Y/Y in July 2018.
TV Panel Prices 2015-current
The chart below shows the imports of TVs by category and country in 2017. More than ½ of the China TV imports are in the two middle size categories, 30-35” and 35”-44”. In the smaller of those categories (effectively representing 32” TV), the average price of a TV imported from China was $127. In the larger category (covering 40” and 43” TV) the average price was $208
Source: US ITC Database, DSCC Analysis
Now let’s consider 32” TV as an example, comparing a sale in 2018 with a 10% tariff with a sale in July 2017, 32” panel prices were $72. So with a TV price of $127, there was only $55 left for all the TV electronics, packaging and shipping (and profit, if there was any). In July 2018, 32” TV panel prices have fallen to $46. If we add back the $55 costs for TV electronics, packaging and shipping we get $101. Even with a 10% tariff, the cost only comes to $111, still 13% lower than last years’ price of $127.
The case of 40” shows an even more favorable scenario. The 40” panel price started declining in July 2017, but in June 2017 the price was $139. With an average TV price of $208, this leaves only $69 for TV electronics, packaging, and shipping. Current 40” panel prices are down to $73, so with $69 for the rest of the TV, and another $14 for the tariff, the full cost would be only $156, fully 25% lower than 2017.
All of this does not mean that a 10% tariff imposed on TVs would be painless or would not have an impact on the US TV market. Without the tariff, prices could be even lower on TVs this fall. The larger impact, though, would likely be on the competitive dynamics. Brands like Samsung that import from countries other than China will benefit from the lower panel prices and not have to pay the tariff penalty, and the tariff is likely to encourage major brands to shift production to Mexico.
TV imports from Vietnam totaled 1.7 million in 2017, with most or all of those coming from Samsung brand. Samsung imported 32” TVs in 2017 at an average price of $154. With the $26 reduction in 32” panel price, the cost of these imports could be reduced to $128. While the Samsung cost is still higher than that for China imports, the gap is only $17 or 13%, down from $27 or 18%. The impact is yet larger for 40”, which Samsung imported in 2017 at an average price of $231. With the $66 reduction in panel prices in the last year, these could be imported at a cost of $165, only $9 or 6% higher than the China imports.
This analysis oversimplifies the economics, as it misses many factors in the supply chain calculations. TV imports from China are already subject to a 3.9% tariff; the 10% tariff penalty threatened by President Trump would bring this to a total of 13.9%. In each product category, there are a range of brands and product features that would have prices higher and lower than the average.
Still, it should be clear that a 10% tariff imposed on China imports would benefit brands that import from Mexico or Vietnam. Wherever the imports come from, though, US TV prices in 2018 should be lower than last year.
After the ceremonial groundbreaking at Foxconn’s “Wisconn Valley” complex in Mount Pleasant, Wisconsin (see my last blog post), President Trump visited a nearby Foxconn pilot TV production site where, with leaders from the Wisconsin political scene and from Foxconn, Trump celebrated the launch of the first LCD manufacturing site in the USA (and the first outside of Asia).
The political presentation started with Wisconsin Governor Scott Walker, speaking in full campaign mode as he is running for re-election this fall. Walker highlighted the project as good for the people and the taxpayers in Wisconsin. In response to critics in his state who have said that the $3 billion in state subsidies (and $4.5 billion in total subsidies, including local government subsidies and infrastructure improvements) is too much, Walker claimed that the Foxconn plant would bring a total of more than $50 billion in business to the state in the coming years, eighteen times as much as the state subsidy, and that along with the 13,000 jobs promised by Foxconn, an additional 20-25,000 secondary jobs would be created.
Wisconsin Governor Scott Walker
Walker described the promise of the Foxconn complex as turning Wisconsin from a “brain drain to a brain gain”, a theme repeated by the next speaker in the line-up, US House Speaker Paul Ryan, in whose district the Foxconn site sits. Speaking about the long-term promise of the deal and the strong economy in his own state and the US as a whole, Ryan said that “Our best days are ahead of us because of projects like this.”
After Ryan, there was a short interlude where staffers put the presidential seal on the podium, leading the audience to expect the president, but instead followed Foxconn Chairman Terry Gou. Gou praised President Trump for his support of manufacturing, saying “If it were not for you, President Trump, I would not be here today.” Gou noted that over the last 18 months he has talked with the president several times, and “every time I see President Trump, he always says 3 things – jobs, jobs, and jobs”.
Foxconn Chairman Terry Gou at Wisconn Valley Groundbreaking Celebration
Gou noted that this plant would be “the first and only TFT LCD fab in the USA” and praised the people of Wisconsin for their warm spirit and hard work. He said that he was pleased to contribute to the economy in Wisconsin, because “a strong Wisconsin is good for the MidWest, a strong MidWest is good for the USA, and a strong USA is good for the world”.
Finally, President Trump arrived to take the scene, and marveled at the size and scope of the project, with the total manufacturing area exceeding 20 million square feet (2 million square meters). Then the president called to the stage the Japanese CEO of Softbank, Masayoshi Son, whose visit to then-President-elect Trump in Trump Tower in December 2016 formed the genesis of the Foxconn deal.
President Trump with Softbank CEO Masayoshi Son
According to Trump, at the initial meeting Trump thought that Son wanted to invest $50 million in the US, when his real plan was $50 billion. Son stated that he promised that Foxconn would make a big investment in the US without requiring any input from Foxconn CEO Terry Gou “because Terry is my best friend”, to which Trump asked “what about me, Masa?”
Son also praised the 45th president, saying that he “could not have decided for this investment before this president.” Trump praised Son in return, saying that Softbank’s investments exceeded the initial $50 billion and had now reached $72 billion, not including the Foxconn project. Trump also stumped for Governor Walker, praising his role in the project, and said that “America is open for business.”
Trump then turned to the subject of trade, stating that “we are demanding fair and reciprocal trade” and “I have a lot of respect for China, President Xi is a friend of mine, but we want to have a fair and balanced relations” and that the current trade deficit ($375 billion in 2017) must come down. Trump rambled through his justifications for other recent trade actions against Canada, Mexico, and the EU, saying about the euro zone: “If you don’t want our agricultural products, we don’t want your cars.”
After discussing several other political topics such as health care and the upcoming Supreme Court vacancy, Trump closed with a characteristic overstatement of the Foxconn project, calling it “the Eighth, really the Eighth Wonder of the World”. If Foxconn eventually follows through with building a Gen 10.5 LCD plant next to the currently-planned fallback Gen 6 facility, then it may end up being the eighth Gen 10.5 plant in the world, and we may wonder at how Foxconn will manage to compete with the first seven.
In a glitzy and gala ceremony today in Mount Pleasant, Wisconsin, Foxconn broke ground on the first large-scale TFT LCD fab outside of Asia, and the first in the USA, in a ceremony highlighted by the appearance of President Trump.
I had the good fortune, and apparently the right connections, to receive an invitation to the event, which was accompanied by an extensive demonstration of the technologies that Foxconn hopes to bring to the project, ranging from Artificial Intelligence to personal fitness, and from farming to brain surgery.
Invitees (I was given a “VIP” badge) were asked to park at a nearby mall, and were driven to a Foxconn site for a celebration ceremony. We did not observe the actual groundbreaking, which took no more than a few minutes, but saw it on a large-screen presentation:
(R-L: Paul Ryan, Terry Gou, Donald Trump, Scott Walker, Foxconn employee #1 C.P. Murdoch)
The building for the Groundbreaking celebration was a facility built recently by Foxconn for pilot production, training, and small-scale assembly of TVs. The facility was a 120,000 square foot (11,000 square meter) site a few minutes’ drive from the site of the future “Wisconn Valley Science and Technology Park” where the TFT LCD fab will be located. For the site of the celebration, Google Maps shows only a partially completed shell, but the site entrance is a shiny new building:
Site of Foxconn Wisconsin “Wisconn Valley” Groundbreaking Celebration per Google Maps
Entrance to Foxconn Wisconsin “Wisconn Valley” Groundbreaking Celebration
Inside the building we were treated to an impressive presentation of Foxconn technology, covering a wide gamut of subjects. The presentation included a 1:1000 scale model of the future vision of the Foxconn complex. I decided to place my car keys at the bottom of the scene to give an impression of the size of the model.
Scale Model of “Wisconn Valley” Science and Technology Park
The scale model seemed to me to be about the same size as a Gen 10.5 glass substrate (2940mm x 3370mm). I may have been the only one in attendance to understand the irony, though, as most of the attendees had little or no knowledge of TFT LCD manufacturing or Foxconn’s recent decision to shift to a much smaller Gen 6 fab (1500mm x 1850mm). The scale model, though, still represents Gen 10.5 manufacturing, because near the center of the picture I can see the model of the Corning glass plant, the long building taller than its neighbors. Since Corning’s fusion forming process is a vertical draw process, their glass melting buildings tend to be much taller than typical manufacturing sites.
With a closer view of what Foxconn labels Area 1b (1a is a commercial site), the Corning site is on the left in the picture, TFT LCD and color filter fabs are in the center, and assembly operations are on the right.
Scale Model of “Wisconn Valley” TFT LCD area
Across from the technology demonstration was a pilot assembly line for LCD TV. We had heard from prior discussions that Foxconn was training workers on a pilot assembly line, and the line was ready for all visitors to see.
LCD TV Assembly Line at Foxconn Site
The facility included a manufacturing “command center” with extensive information available for analysis of performance:
Command Center in Foxconn LCD TV Manufacturing Site
One of the banners in the Command Center area indicated that the daily production plan was for 380 70” TVs. Undoubtedly this was not the actual plan for Thursday June 28th (because of the groundbreaking celebration), but it’s a plausible figure for production at an early stage as Foxconn works to ramp up TV assembly. I spoke with one of the workers on the production line, who was responsible for quality audits. The man said that he greatly enjoyed his work; he started the work in November and expressed pride in building a new venture.
At the end of the production line were some boxed Sharp 70” Aquos TVs. It’s unclear what was the destination for this product, since Sharp does not have the rights to sell Sharp brand TVs in the USA (Sharp sold the rights to its brand for TVs in the USA to Hisense in 2015, and the Chinese company holds these rights until 2020). Perhaps the TVs are destined for Canada, but they are labeled as “Assembled in the USA”.
70” Sharp Aquos TVs Assembled at Foxconn Site
While the TVs on the production line were from Sharp brand, we did see a representation of another brand associated with Foxconn’s efforts in the USA: Flying Eagle. Whereas we had heard a rumor that Sharp would introduce Flying Eagle brand TV sets in the USA later this year, and I saw a Flying Eagle logo on one of the production robot arms used on the assembly line, the Flying Eagle portion of the technology demonstration featured the use of displays in a type of virtual reality set-up for a fitness exercise, with performance indicators on screens to the left and right
Flying Eagle Technology Demonstration at Foxconn Groundbreaking Celebration
The technology demo also included Innolux, highlighted as a Foxconn company. One banner labeled Innolux and Sharp as “Foxconn Group LCD”, and claimed that this group was #1 worldwide in commercial and military aircraft cockpit LCDs, with >95% market share. The Innolux section also included a demonstration of “mini LED”, actually a full array miniLED backlight with 1296 zones. The 65” display had impressive performance of 1,000,000:1 contrast, 8K resolution and a color gamut of 94% of BT-2020.
65” LCD with Full Array MiniLED Backlight
After viewing the technology demonstration, attendees were asked to sit for speeches by the visiting dignitaries. I will cover those presentations in my next blog.
By Bob O'Brien
I wrote this piece originally for our weekly newsletter, the Display Supply Chain Monitor, right after the 2016 election. Originally published on November 14th, 2016, it holds up pretty well and is likely interesting to DSCC blog readers.
The astonishing and unexpected election of Donald Trump for President of the United States brings the issue of free trade and protectionism to the front of the national agenda. Since the Flat Panel Display industry consists of a global supply chain that depends on free trade, a shift towards protectionism may have a profound impact on the industry in the coming years.
The political firestorm against free trade is not limited to Donald Trump; during the campaign both Trump and Hillary Clinton stated their opposition to the Trans-Pacific Partnership (TTP) trade deal, and in the primaries Clinton’s opponent Bernie Sanders drew tremendous crowds with a political program that (among other things) strongly opposed trade deals. The Belgian region of Wallonia recently held up an EU-Canada trade agreement (CETA), and a corresponding deal between the EU and the US, the Transatlantic Trade and Investment Partnership (TTIP) is now considered dead.
Far beyond blocking future trade deals, free trade opponents want to roll back existing trade agreements, and/or alter the terms of trade in profound ways. Trump has promised to renegotiate the North American Free Trade Association (NAFTA), and to impose up to 45% tariffs on goods imported from China. He has criticized US companies, like Apple in consumer electronics and Ford in automobiles, for building their products outside the US.
Before discussing the possible policy changes of a Trump administration, it’s worth looking at some of the history of the display industry and the impact of free trade deals on the structure of the industry.
The growth of the flat panel display industry was co-incident with an historic growth in world trade. After the end of the Cold War, EU expansion brought Central and Eastern Europe into a common trade bloc. NAFTA was signed in 1994 by President Clinton (a fact hyped by Trump during the campaign) and ratified by a Republican Senate. International merchandise trade grew much faster than GDP, as shown in Figure 1, but more recently this trend has slowed, and the WTO recently estimated that trade growth in 2016 will be less than GDP growth for the first time in decades.
Figure 1: World Merchandise Trade & GDP Growth
One of the most important factors driving trade growth in general, and the growth of the flat panel display industry in particular, was the Information Technology Agreement (ITA) signed in 1996. The ITA eliminated tariffs on a wide range of IT goods, not only computers but also computer monitors. Starting with 29 countries, it has since been expanded geographically to cover 82 countries, and the scope of products covered now includes such items as tablets and smartphones.
Because of the ITA and more generally the free trade environment in the 1990s and 2000s, most trade in flat panel display products, especially end-products, crossed borders without tariffs. This tariff-free system encouraged the development of a global supply chain in the FPD industry, first in notebook computers, then in computer monitors. FPD clusters formed, first in Japan, then in Korea and Taiwan, because FPD makers could build huge economies of scale and enhance learning effects to rapidly improve both cost and performance of LCDs. Once these global supply chains became entrenched for the IT industry, the LCD juggernaut overwhelmed the CRT and PDP industries to dominate the TV space.
During the time leading up to the global financial crisis of 2008, it was unchallenged economic orthodoxy that trade growth was an important driver of overall economic growth, but since that time the political underpinnings of free trade have been fraying all over the world. The election of Trump is just the latest in a series of signs that the trend towards freer trade may reverse.
Trump’s campaign rhetoric on trade resonated with many voters because it is undeniably true that manufacturing employment in the USA has declined dramatically since the turn of the century, as shown in Figure 2:
Figure 2: US Manufacturing Jobs 1980 – present
Although the display industry was only one small part of this trend, it was an important part, especially with respect to the 2016 election, because much of display industry manufacturing was in the “battleground” states. At the time that NAFTA was signed in 1994, there were 20 or more manufacturing plants in the US making CRT and CRT projection glass, tubes, and TVs, with many more feeder plants producing metal parts, components, etc. In Figure 3, I have placed many of these plants on a Map of the 2016 election. There was a significant concentration of the CRT TV industry in Ohio and Pennsylvania, two states whose combined 38 electoral votes are almost the entire margin of the Trump victory.
Figure 3: US-Based CRT & TV Industry Manufacturing Sites, circa 1995, on Map of 2016 Election
The areas where these plants were located, with a few exceptions, voted heavily in favor of the winner. In the table below you can see the city or town with the display industry plant, and the % vote for Trump in the surrounding county. Although there were a few plants located in major urban areas like Chicago and Memphis that went for Clinton, many of the plants were in more suburban or rural areas and went heavily for Trump.
While undoubtedly these specific plants would have shut down anyway (CRTs are no longer with us), the corresponding replacement product, LCD TV, has effectively zero manufacturing employment in these areas. While the display industry was only a part of this seismic shift (automobile manufacturing was a larger part), its role cannot be dismissed.
Now that we are on the way to a Trump presidency, what are the implications for display products? Trump’s proposals to withdraw from NAFTA and to impose a 45% tariff on goods from China would have an immediate and profound impact on the TV market in the US, because the US TV market is composed nearly entirely of imports from Mexico and China. In 2015, there were 43 million TVs imported into the US, 19.6 million or 45% were imported from China and 21.9 million of 50% were imported from Mexico.
TVs imported into the US from Mexico are, under NAFTA rules, duty-free. TVs imported from China are subject to a duty of 3.9% if they incorporate a recording device (5% without a recording device), and since a USB input is considered a recording device, nearly all TVs of any size sold in the US now have a USB input. So for a typical low-end TV imported from China, with a wholesale price of $200 the duty adds $8 to the cost, not a meaningful part of a retail price of $250. If Trump’s 45% duty were imposed, this would change $8 to $90, and likely shift the retail price from $250 to $350. Similarly, for a higher-end set assembled in Mexico with a retail price of $1000 and a 30% retail margin, today the tariff is zero, but Trump would replace NAFTA with a 35% tariff on Mexico imports, meaning a $245 tariff, and likely $300-400 added to the retail price.
Like many in the display industry or in many other businesses, my reaction to Trump’s anti-trade proposals is “that will never happen”, but that’s what most knowledgeable people said about a Trump presidency. The idea that these proposals will be implemented can no longer be dismissed.
So how would the display industry change if Trump’s anti-trade agenda was implemented? First, brands and OEMs would look to find alternate locations for TV assembly. Vietnam is already a significant manufacturing center for smart phones; manufacturers seeking to avoid China-specific tariffs would likely move there first. Second, the current configuration of TV assembly plants in Mexico would not be viable, and those imports would be replaced either by direct TV imports from Asia or by imports of LCD panels and assembly in the US. With respect to LCD panels, a China-specific tariff would make it untenable to source panels from the many LCD fabs rising in China, so TV panels bound for the US market would need to be sourced from Taiwan, Korea, or Japan.
Such a Trump anti-trade policy would not appear without major reactions from the countries affected. While Mexico has little direct influence over the display industry, the reaction of China to Trump moves could be catastrophic to some players in the industry with significant sales in China, such as 3M, Corning, and Applied Materials.
In the free trade, low-tariff world of the last 25 years, the display industry and the wider electronics industry has formed a cost-effective global supply chain which has provided billions of innovative products that are increasingly powerful at ever-lower costs. If those benefits are not valuable enough for free trade to remain politically viable, as we have seen in the US election, then that global supply chain will be disrupted, and all of the participants in the industry will be affected.
by Bob O'Brien
The date for the Foxconn Groundbreaking Ceremony is again set for June 28th, and several changes in the schedule have occurred in order to accommodate the schedule of President Trump, according to this article from the Milwaukee Journal Sentinel.
Last week, I had been frustrated after receiving my invitation letter to the event. The original "Save the Date" email that I received on May 10th had indicated the event would be on June 28th. Then I received an updated note on June 1st indicating that the date had been changed to the afternoon of June 29th. Finally on June 15th I received the invitation to the event, on June 28th. Since I had just changed my hotel reservations on the 14th, I was annoyed at the change, but speculated that it might be because of the President, and it looks like that will be the case.
Also this week we've seen news that two Foxconn companies have purchased ownership stakes in US TV maker Vizio. Hon Hai Precision Industries will acquire a 3.1% stake in Vizio for $24.99 million, and Innolux will take a 4.14% stake in the company for $44.99 million. Foxconn had previously owned a 6.6% stake in Vizio, so with the new investments the Foxconn companies share has increased to 13.84%. These combined Foxconn purchases imply a market capitalization for Vizio of $956 million, less than half of what Vizio owners were supposed to receive from a disastrous acquisition deal from LeEco in 2016.
The Foxconn-Vizio deal signals that the TV sets coming out of their Wisconsin facility may be Vizio brand. Although Foxconn owns a controlling interest in Sharp Corporation, the rights to the Sharp brand for TVs in the USA belong to Hisense until 2020, in a deal made before the Foxconn acquisition. This may help Vizio avoid tariffs imposed on TVs imported from China. While the US Trade Representative removed TVs from its list of initial tariffs, President Trump's direction to add an additional $200 billion in Chinese imports to receive punitive tariffs means that TVs will almost certainly go back on the list. Therefore, Vizio needs to shift production away from China. With President Trump also threatening to pull out of NAFTA, producing TVs in the United States might be the best option for Vizio.
Finally, an article in the Milwaukee Business News (which quotes me) confirms a rumor of several weeks ago that the Foxconn plant will not be a Gen 10.5 plant as originally planned, but rather will be a much smaller Gen 6 plant. Gen 10.5 glass substrates are 2940mm x 3370mm (about 10 feet by 11 feet), while Gen 6 are 1500mm x 1850mm (about 5 feet by 6 feet). Foxconn had denied those rumors four weeks ago, but Foxconn's Louis Woo confirmed them to the BizNews. Apparently the investment required for a glass plant was a significant barrier to Gen 10.5, but glass investment will not be required for Gen 6, as Corning has the capability and capacity to make Gen 6 glass in its Harrodsburg, Kentucky plant.
I have my invitation to the groundbreaking next week, you can be sure I'll be posting about that after the event.
The Q2’18 issue of DSCC’s Quarterly OLED Shipment and Fab UtilizationReport shows that Samsung Display’s utilization has begun to improve significantly as the build has started for new smartphones from Apple, Samsung and other brands.
As shown in Figure 1, SDC’s rigid fab utilization is expected to exceed 80% in June, up from 76% in May. The rigid production primarily occurs in their A2 fab, which has monthly substrate input capacity of 175K substrates per month. A2 glass input bottomed in February and has increased every month since as the price gap between rigid OLEDs and LTPS LCDs has continued to narrow. 5.5”-6” rigid OLED prices are expected to fall to as low as $23 in Q3'18 in the case of lower specification panels with a price difference vs. LTPS LCD falling to around $5. Since OLED phones are typically priced quite a bit higher than LTPS LCD phones, rigid OLED phones offer greater profit potential for smartphone brands. Therefore, we expect rigid OLED fab utilization to remain high through the rest of the year.
In the near term, panel suppliers including Samsung likely wished they added more rigid instead of flexible OLED capacity. Flexible OLED fab utilization has also rebounded, but fell much further than rigid capacity at 31% in April. However, it improved to 37% in May as input started for 5.85” panels for the next iPhone. In June, utilization rose to 52% as input started for the new 6.46” iPhone X Plus. We expect utilization to continue to improve through the rest of the year for this fab as well. The improvement in utilization in both rigid and flexible fabs should boost returns for materials suppliers and laser suppliers such as UDC and Coherent.
An important question for Samsung’s flexible fabs is how much does utilization decline in Q1’19 after the initial build for the next iPhones and do they have to idle any capacity in 1H’19 as they did in Q1 and Q2 2018. A lower price gap with rigid OLEDs and LTPS LCDs and form factors that take advantage of their flexible capability such as curved, foldable or rollable will certainly help to boost demand and prevent future idling of capacity. OLED penetration into less seasonal markets will also help.
In terms of SDC’s Q2’18 revenues, we expect their revenues to bottom in Q2’18 as shown in Figure 2, falling 16% Q/Q while rising 2% Y/Y to $4.4B. It should be noted that it takes around 2 months from glass input at the fab to revenue recognition due to module assembly occurring in Vietnam. Thus, the surge in May and June won’t be reflected until Q3’18. In Q3’18, we expect SDC’s OLED revenues to jump 52% Q/Q and 35% Y/Y to $6.7B, the second best quarter in their history. In Q4’18, another 6% Q/Q growth is expected to $7.1B, but that will be down 11% vs. Q4’17 due to the higher prices for the flexible OLED phones shipped in that quarter. For 2018, we show SDC’s OLED revenues up 11% for the year to $23.4B, remarkable results given the challenges they have had to overcome at the start of the year.
For results and forecasts for other panel suppliers and applications, please see the latest issue of our Quarterly OLED Shipment and Fab Utilization Report.
Figure 1: SDC’s OLED Fab Utilization
Source: DSCC’s Quarterly OLED Shipment and Fab Utilization Report
Figure 1: SDC’s OLED Revenue Forecast
Source: DSCC’s Quarterly OLED Shipment and Fab Utilization Report
We've been waiting for this for a few months, and now we know we've got another seven weeks to wait but not longer. I received today a "Save the Date" e-mail announcing the date of the Groundbreaking Ceremony of the Wisconn Valley Science & Technology Park. The Ceremony will be held on June 28th, 2018 at the Foxconn site in Racine County, Wisconsin.
Just as interesting as the contents of the email was its source: not Foxconn, but Sharp. The email came from Sherry Chapman, Sr. Director of Brand Management for Sharp Consumer Display. Of course we know that Foxconn owns a controlling interest in Sharp, and the Gen 10 technology to be built in the Wisconsin complex derives from Sharp's Gen 10 fab in Sakai City, Japan. So it makes sense that Sharp is involved in the event, but it's clear that this is a Foxconn event, not a Sharp one.
The Save the Date note asks that I plan "to celebrate this historic moment with us as we create 13,000 high-paying jobs with our $10 billion investment in Wisconsin', and that I can expect a formal invitation within a couple weeks. From a personal standpoint as someone who saw the demise of display manufacturing in the USA in the CRT era, it will be a great pleasure to see its revival near the shores of Lake Michigan. I'm planning to be there - see you there!
Last week we saw 6 different display suppliers release their earnings results. In general, we saw Chinese suppliers outperform Taiwan and Korean suppliers helped by government subsidies, lower labor and fab costs and the exclusion of interest payments in odd quarters. We saw flexible OLED smartphone panel shipments drop rapidly and LTPS LCDs take share from OLEDs. Smartphone panel volumes were weak, especially at the high end, which boosted blended unit ASPs and reduced area ASPs as smartphone panels carry higher prices on an area basis. While OLED volumes fell faster than LTPS volumes, OLED margins continued to outperform LCD margins. Panel makers are optimistic about TV volumes in the rest of 2018 despite experiencing above average channel inventories in Q1’18. We did see LG reporting OLED TVs in shortage and reveal they may convert even more LCD capacity to OLED TV capacity. Let’s start with some comparisons.
As shown in Figure 1, Tianma had the highest revenue growth at 75%. This was due to the company acquiring one of its subsidiaries in the quarter, Xiamen Tianma, with its 5.5G and 6G LTPS LCD fabs. This resulted in significant revenue growth, despite shipments declining Q/Q for the Tianma group overall as Xiamen’s results were not in their Q4’17 results. Every other supplier experienced sequential revenue declines ranging from -5% for AUO whose unit shipments were down just 1% with area shipments down just 2% to Samsung Display’s OLED business, which fell 35% on a 34% decline in flexible OLED shipments. AUO experienced full loading in its fabs and experienced significant area growth Y/Y in small/medium displays up 26% as it added and ramped significant LTPS LCD capacity last year. AUO is also seeing strong growth in gaming monitors and has a larger commercial/industrial position than most suppliers, which has less seasonality. BOE, which saw double-digit Q/Q declines in both large-area and small/medium shipments, indicated that a driver IC shortage in Q1’18 worsened their small/medium panel business. Due to gains at larger panel sizes, BOE did experience gains in unit ASPs and declines in area ASPs. Conversely, Samsung saw the worst performance in its OLED panels after experiencing the best performance a quarter earlier. This can of course be attributed to weakness in its flexible OLED shipments for the iPhone X. SDC’s shipments to Apple which were down 58% Q/Q to 15M, more than offsetting a 10% increase in SDC’s shipments to the Galaxy brand. While Samsung’s OLED shipments were down 17% Q/Q, flexible OLED smartphone shipments were down 34% with rigid OLED smartphone shipments down just 1% Q/Q. OLEDs fell from 80% of SDC’s Q4’17 revenues to 74% of its Q1’18 revenues. Samsung guided to continued weakness in flexible OLED smartphones and we do expect another sequential decline in Q2’18. On the other hand, based on improvements in rigid OLED fab utilization in April, we will likely see sequential growth for rigid OLEDs in Q2’18, but it won’t likely be enough to offset the continued weakness in flexible OLEDs. However, they should come back in Q3’18 and Q4’18 for iPhone and other new product launches.
Figure 1: Panel Supplier Sequential Revenue Growth
Source: DSCC’s Quarterly Display Supply Chain Financial Health Report
Gross margins are compared in Figure 2. BOE maintained the highest margins of these companies for the 6th consecutive quarter at 21%. Tianma Micro., also a Chinese supplier, had the second highest gross margins at 16% with LG Display the lowest at 10%. LG Display experienced a 35% sequential decline in mobile revenues which significantly impacted the quarter and weighed on their blended ASPs, which fell 11% Q/Q. Mobile displays have higher ASPs per square meter, so a drop like we saw in Q1’18 impacts their blended ASPs. Area shipments were down 9% for LG with capacity down 5% as they took capacity down for maintenance and R&D. LG expects capacity to rebound by a similar percentage in Q2’18 and also indicated it expected ASPs to stabilize in Q2. TV panel prices are not going to stabilize in Q2 relative to Q1, but could stabilize in July relative to June if demand picks up to erase existing channel inventories in TVs which are currently at above market averages.
Figure 2: Panel Supplier Gross Margin Comparisons
Source: DSCC’s Quarterly Display Supply Chain Financial Health Report
Operating margins are compared in Figure 3. As indicated, operating margins ranged from -2% to LG Display to +9% for BOE. We believe China’s local and national government subsidies are reflected on BOE’s income statement in 3 ways – Other Income, Asset Allowance and R&D Allowance. While Other Income is not reflected in Operating Income, it is likely that R&D Allowance is included. In any case, BOE had the highest operating margins in Q1’18. Its significant scale, subsidized fabs and lower cost labor boosted its financial performance relative to its competition. BOE did indicate that their small/medium business was somewhat limited by a driver IC shortage. SDC’s OLED operating margins fell to 7% on the weakness in flexible OLEDs, its lowest OLED operating margin since Q2’15. With flexible OLED fab utilization down significantly, revenues fell and costs rose. Its OLED operating income was down 72% Q/Q to $342M. LCD operating income of just $38M was the lowest since Q2’16. As a result, OLED’s contribution to its operating income fell from a 96% share in Q4’17 to a 90% share in Q1’18. LGD experienced its first operating loss in over 5 years. It pointed to growing price competition from Chinese suppliers in large-area markets, weakness in mobile markets and continued losses in OLED TV panels due to their limited scale. It pledged to reduce its costs and reduce its capex target for 2018. LG intends to implement a flexible capex strategy to be more responsive to market demand and technical readiness, which translates to flexible OLED fab delays and uncertainty regarding its 10.5G plans which we believe involve OLEDs only with its current implementation of WOLEDs, at least for its first phase. LG wisely intends to remain conservative regarding flexible OLED capex due to the high capital intensity along with demand volatility as we have seen this year with Apple and Samsung. However, it acknowledges that growth in flexible OLED supply and demand is inevitable due to both the smartphone and automotive markets moving towards OLEDs as well as demand for foldable displays from its customers.
Looking at net margins as shown in Figure 4, we see the benefits of being a Chinese manufacturer. BOE’s net profit was above its operating profit as it enjoyed $77M in Other Income in Q1’18. It also recognized Asset Allowance and R&D Allowance of $115M. Another benefit is that it only recognizes Interest Expenses 2X per year, so it avoided around a $195M expense in Q1’18.
Speaking of debt, how large is BOE’s debt? Amazingly, it has grown to $16B as shown in Figure 5 with its debt/equity over 100% for the 3rd straight quarter at 118%. However, with significant government support, customers and suppliers do not seem concerned with BOE’s liquidity.
In terms of capex, based on the 6 suppliers reporting so far, capex is down 20% Q/Q for Q1’18 with BOE holding a slight edge over LG Display. The largest spender of 2017, Samsung, saw its capex fall 61% Q/Q and 80% Y/Y to $746M in Q1’18, the lowest value since Q1’15. Samsung’s capex has declined for 3 consecutive quarters and will likely continue to fall throughout 2018.
For more details on company specific performance and comparisons with all data in an easy to manipulate pivot table, please see our Quarterly Display Supply Chain Financial Health Report. Also, leading panel suppliers BOE, Tianma and Visionox will be presenting at the upcoming SID/DSCC Business Conference on May 21st in Los Angeles. To register, please visit http://www.displayweek.org/2018/Attendee/Registration.aspx.
Figure 3: Panel Supplier Operating Margin Comparisons
Source: DSCC’s Quarterly Display Supply Chain Financial Health Report
Figure 4: Panel Supplier Net Margin Comparisons
Source: DSCC’s Quarterly Display Supply Chain Financial Health Report
Figure 5: BOE’s Quarterly Debt, Debt Issued and Debt/Equity
Source: DSCC’s Quarterly Display Supply Chain Financial Health Report
Last week, I gave an outline of the possible impact that Trump administration actions on US-China trade could have on the display industry, and on Tuesday, April 3rd, the Trump administration released the list of products subject to a new 25% tariff. Of the 1,333 different product categories included in the trade action, the single largest category by value is TVs. The new tariffs on TVs will have companies on both sides of the Pacific scrambling to redirect the display supply chain.
After the US issued a list of products totaling $50 billion in imports from China, China retaliated with its own list of products, including soybeans and airplanes, which seemed targeted at states that supported President Trump in the 2016 election. In response to the China retaliation, President Trump raised the stakes yet again, saying that the US would impose tariffs on an additional $100 billion in China imports, to which the Chinese Commerce Ministry answered “China is fully prepared to hit back forcefully”.
At this point, we have no idea exactly where this will end, and we don’t know what kind of products would comprise the additional $100 billion, but we have very specific and detailed information on the first volley in this trade war, the notice by the US Trade Representative initiating the public comment period on its plan to impose an additional duty of 25% on a list of products from China.
The timeline for public comment on the new tariffs, as outlined in the USTR document, specifies that written comments must be submitted by May 11th, and that a public hearing will be held on May 15th at the US International Trade Commission in Washington, DC. The public comment period closes on May 22nd when the final post-hearing rebuttal comments are due.
The justification described in the USTR document includes four main elements:
The document then describes the new tariffs as applying under Section 301 of the US Trade Act of 1974, which allows the US administration to take action in retaliation for unreasonable trade activities by other countries.
The list of products affected by the proposed new tariffs was collected from “several US Government agencies” which “identified products that benefit from Chinese industrial policies, including Made in China 2025”. The list was adjusted “by removing specific products … likely to cause disruptions to the US economy”, then “ranked according to the impact on US consumers, based on available trade data involving alternative country sources”, and finally “selecting products from the ranked list with lowest consumer impact”.
The list of 1,333 product categories in the USTR documents runs 44 pages long, of which 16 pages are items in chapter 84 of the Harmonized Tariff Schedule (HTS), machinery and mechanical appliances, and another eight pages are items in chapter 85, electrical machinery and equipment. These two areas have the highest value of imports from China. Some notable items that are not on the list:
The list includes many, many items that seem far out of date and irrelevant; many with a reference to CRT, such as:
Our readers will likely not be surprised to learn that there were $0 of imports from China for this type of product in 2017.
Out of the 1,333 product categories, the single item accounting for the largest value of imports is HTS 85287264: “Color television reception apparatus w/flat panel screen, video display diagonal over 34.29 cm, incorporating a VCR or player”. This single product category accounted for $3.9 billion in imports from China in 2017, and 18.8 million units, but unlike the categories mentioned above that were not included on the tariff list, Flat Panel TV imports are not dominated by China, as shown in Figure #. At the detailed product level (HTS 10), flat panel TVs are specified in four different screen size groups, with the largest group being over 45”.
Figure 1: US Imports of Flat Panel TVs in 2017
Source: US ITC
As can be seen in Figure 2, Mexico accounts for the largest value of this flat panel TV category, with 59% of the dollar amount of imports to China’s 35%, but China accounts for the largest unit volume, with 51% of the units compared to 39% for Mexico. Also, most flat panel TVs imported from Mexico are over 45”, while most TVs under 45” come from China.
While the product category 85287264 accounts for a great majority of TV imports to the US, it doesn’t account for all of them, and that has to do with the specification of “incorporating a VCR or player”. If this language about VCR seems strange, it’s because of a quirk in the existing US tariff schedule, dating back to the CRT era. During the 1990s, TV products combined with a VCR or DVD player (“combos”) were given a lower duty rate of 3.9%, compared to the standard TV duty of 5%, to adjust for the added value of the recording player which was not subject to tariff. While the VCR has long since been extinct, the US ITC has determined that any TV with a USB port, which can connect to a USB recording device like a Google Chrome stick or the like, qualifies as a TV with a “player” and therefore receives the lower 3.9% duty. In the cutthroat, low-margin TV business, saving 1.1% on the duty can be the difference between having a profitable product and one that loses money.
In addition to the 37 million TVs imported to the US under the product category HTS 85287264, there were 4.3 million TVs imported under product category HTS 85287272, with a different country mix, as shown in Figure 2. HTS 85287272 is defined as “Color television reception apparatus w/flat panel screen, video display diagonal over 34.29 cm, not incorporating a VCR or player” (emphasis added).
Figure 2: US Imports of Flat Panel TVs in 2017, no recording device
Source: US ITC
Whereas in 2017 there were 18.8 million TVs imported from China with a recording device and subject to the 3.9% duty, there were only 548,000 TVs without a recording device imported from China and subject to the 5% duty on TVs. TVs imported to the US from Mexico are not subject to duty whether they have a recording device or not, so most of these TVs imported as HTS 85287272 are from Mexico. Still, even though there is no difference in duty, 80% of the 18.2 million TVs imported from Mexico in 2017 had a recording device.
As a side note, the green wedge in the charts above allows a window into OLED TV. The category 85287272 includes five subcategories, the first four of which are different screen size groups of the product “LCD-type (direct view)”, and the last of which is “Other, including plasma-type”. This “Other” group, 8528727290, stands out because of the much higher average prices. Whereas LCD TVs with >45” screens imported from Mexico have an average price of $452, and the same size TVs imported from China have an average price of $291, TVs in this “Other” group have an average price of $1348. As these will be wholesale prices, this represents an average retail price of $1800 with a 25% retail margin, and only OLED TV has those high prices.
In order to get a first-hand look at the potential impact of a 25% tariff on TVs imported from China, I took a trip to the local Best Buy to take a look at the TVs for sale and look at their origins. Any TV (or any other product) in its box includes a label saying “Made in Mexico” or “Made in China”. At this time of the year, TVs are not a hot-selling product, so relatively few of the larger size TVs were in boxes on the retail floor, but there were several Samsung and Sony 65” LCD TVs on sale at the front of the store, all made in Mexico. Back in the shopping aisles, I found the following:
First, Samsung brand is not importing any TVs from China, but rather they are importing smaller size TVs from Vietnam, and the larger sizes from Mexico. Per the US ITC data, there were 1.7 million TVs imported from Vietnam in 2017 at a total value of $275 million, for an average price of $161 (these would be subject to the import duty of 3.9%, so would pay an average duty of $161*3.9% = $6.31). This is a plausible estimate of the sales of Samsung TVs up to 32”.
Another item of interest: looking back at the US ITC data for 2016, there were zero imports of TVs from Vietnam. Therefore, it’s clear that Samsung changed their sourcing for smaller size TVs after President Trump was elected, a move that makes them immune to these coming tariffs, whereas their competitors will be subject to them.
Sony also seems to be in a favorable position, if for a slightly different reason. All the Sony TVs I saw were imported from Mexico, but Sony did not have any models smaller than 40”.
The origins of the Sharp and Hisense TVs surprised me. Sharp TVs sold in the US these days are not made by Sharp Corporation; Sharp sold the license to their brand name for the US market to Hisense in 2015, when the company was in severe financial distress prior to its acquisition by Foxconn. So it seems fair to surmise that the Sharp 43” TV on sale is made by Hisense in China, but I was surprised to see the 50” Hisense TV was made in Mexico, until I remembered that Hisense also acquired Sharp’s manufacturing site in Rosarita, Baja California.
Based on all this data, what are the likely implications of this tariff on the US TV market and the wider display industry? Here are a few takeaways:
Aside from the brands currently in the market, we expect one new entrant to the US TV market later this year. As the initial stage of its massive project to build a Gen 10.5 LCD manufacturing complex in Wisconsin, Foxconn is expected to start production of TVs in that state this summer, to be sold under the InFocus brand and a new “Flying Eagle” brand. Given the potential of a larger trade war and continuing threats by President Trump to scrap NAFTA, the Foxconn plan for full production of displays and TVs for the US market in the US may be the strongest position in the industry.
For companies that rely on TV imports from China, there remains one possible path to avert the tariffs, at least based on the current list of products subject to the new tariff. For whatever reason, TVs without a recording device, imported under HTS 85287272, are not included in the USTR’s list of products subject to the tariff. Therefore, a company that makes a small change in their product, to remove the USB port, can have their product imported under 85287272. While the standard duty of these products will now be 5.0% instead of 3.9%, they will not be subject to the additional 25% duty from the section 301 action. Such a strategy carries risks, though, as the USTR could potentially close that loophole with a change in its list, or alternately these products might be included on the next list of $100 billion in imports subject to penalties by the Trump administration.
Responding to this issue on Monday, April 9th, TCL issued a statement saying that the USTR List “has a limited impact on it and TCL Group will take all effective measures to safeguard corporate interests”. Among the actions mentioned in the note, TCL “has started planning to increase the production capacity of the Mexican factory and to take other measures to reduce the impact on the Company’s operation in the USA”.
In the latest round of an emerging trade conflict between the world’s two largest economies, China initiated tariffs on specific US goods, in retaliation to the US imposing tariffs on steel and aluminum products from China. While these moves have not yet affected display products, the potential impact of a trade dispute could be a huge disruption in the display industry value chain and has caused the Consumer Technology Association (CTA) to mobilize its members to lobby the US government to try to avert a trade war.
Although the US metal tariffs were not specifically directed at China, the US has subsequently exempted most other countries from the tariffs. China’s retaliation this week was directed at US exports from states that supported President Trump in the 2016 election, including pork products, fruit, and other commodities.
According to a report in the Wall St. Journal, the Chinese Finance Ministry, in announcing the tariffs, said that they were introduced “to protect our country’s interests and balance the damage created by the US 232 measures”, referring to the US law under which the steel tariffs were imposed. The article reported that the Chinese government’s response was limited and designed not to escalate tensions.
Looming over these actions is the next step threatened by the Trump administration, to impose new tariffs and trade restrictions on China on up to $60 billion of imports, because of what the administration says are “Chinese efforts to obtain US technology through intimidation, state-financed acquisition and subterfuge”, according to the WSJ. These new actions would be taken under section 301 of the Trade Act of 1974, which gives the president authority to take action against foreign trade practices that are unjustified or unreasonable. The president has cited Chinese theft of intellectual property as a main driver behind the threatened action.
Affected Chinese imports would be subject to a 25% tariff, according to the WSJ report, and would target as many as 1200 product categories with a value of $50-$60 billion, about 10% of the more than $500 billion in imports from China in 2017. President Trump has said that he wants the Chinese government to present a plan to decrease the merchandise trade deficit, which was $385 billion in 2016, by $100 billion.
Global trade figures are organized by categories in the Harmonized Tariff Schedule, which breaks all products into 100 chapters of main categories and thousands of individual product categories in 10-digit codes. Chapter 85 of the HTS, electrical machinery, covers almost all products relevant to the display industry, and this category of goods represents the largest group of imports to the US from China, $129 billion in 2016, according to the US Trade Representative web site, and increasing to $146 billion in 2017.
The US International Trade Commission (ITC) provides an online database of information on imports, classified by Harmonized Tariff Code, allowing the user to identify key figures on US imports of many products. I’ve taken the opportunity to dig into the ITC database to come up with some figures on US imports from China and other countries of products relevant to the display industry.
As stated above, US imports from China of goods in “electrical machinery” were $146 billion in 2017, nearly 30% of all imports from China, and China represented 42% of all imports of these goods in HTS Chapter 85, by far the leading country, with Mexico in 2nd place with $62 billion, followed by Malaysia, Japan, Korea, Taiwan, Vietnam, and Thailand. The combined imports of these five Asian countries comes to $88 billion, a bit more than half of the Chinese total.
At the next level down, among the imports of electrical machinery the largest group of imports from China are in HTS 8517, Telephone Sets and other telecommunications equipment, representing $72 billion or about half of the total, and within that group the largest individual item is HTS 8517120050, or “Radio telephones designed for the public cellular radiotelecommunication service, excluding for motor vehicles”, in other words, cell phones or smartphones. The US imported $44 billion of smartphones in 2017 from China, or about 80% of the $55 billion in smartphone imports from all countries, with Korea and Vietnam representing most of the remaining 20%.
Could the Trump tariffs be targeted at smartphones? Perhaps so, but it would be inconsistent with the approach of looking at 1200 product categories since you can get almost $50 billion from a single product category.
The next largest HTS-4 group after telephones is 8528, TV receivers including video monitors and projectors. The breakdown of 8528 imports by country is shown in Figure 1. China represented 47% of all imports in this category, with the largest other group represented by Mexico with 40%.
Figure 1: US Imports of TV Receivers and Video Monitors
Source: US ITC
Taking a more detailed look at this product category 8528, at the individual product level (HTS 10) two products make up more than 50% of imports. HTS 852872 is named formally as “TV reception apps, color, with a flat panel screen, incorporating video recording or reproducing apparatus”, in other words flat panel TVs, and represented $11.1 billion in US imports in 2017. HTS 852852: “Monitors, of a kind solely or principally used in an automatic data processing systems of heading 8471, nesoi” (NESOI means Not Elsewhere Specified or Indicated”), or as we would say desktop monitors, represented $5.2 billion.
US TV imports in 2017 are shown in Figure 2. The US imported $4.0 billion of TVs from China in 2017, about 30% of the total value, but at a unit level China was the largest importer, with 19.4 million units or 47% of the total imports of 41.5 million. In the case of both volume and units, the combination of Mexico and China represent more than 90% of all imports
Figure 2: US Imports of TVs in 2017
As compared to 2016, Mexico imports declined in both units and value, while China imports grew, from $3.3 billion to $4.0 billion, and from 17.4 million units to 19.4 million.
Mexico imports represented mostly the larger screen sizes which are higher priced. The average price of a TV imported from Mexico was $459, while the average price from China was only $206. The main reason for this can be seen by digging down to the last level of the HTS, the 10-digit code indicating the individual product category. TVs are sorted into four different size categories: under 75cm (30”), 75-88cm (up to 35”), 88-113cm (up to 45”) and above 113cm (45”). In the largest screen size category, over 45”, Mexico represented 60% of the units but 72% of the value, with $5.5 billion at an average price of $558, while China represented 35% of the units but only 25% of the value at an average price of $332.
In monitors, China dominates US imports, as shown in Figure 3, with 94% of the unit volume and 85% of the value of imports.
Figure 3: US Imports of Monitors in 2017
Unlike TVs, monitors are not made in large quantities in Mexico for export to the US, because there are no advantages from tariffs for building monitors in NAFTA. TVs can be imported from Mexico duty-free by NAFTA rules, but are subject to 3.9% tariffs if imported from China or other countries. Monitors, on the other hand, are imported duty free from all countries.
Could the Trump administration sanctions apply to TVs and Monitors? Perhaps so, which would directly benefit any company that makes TVs in the US, as Foxconn plans to do this year.
With an eye on fending off the effect of a trade war with China, the Consumer Technology Association (CTA) is gathering information from its members (DSCC is a CTA member) about China imports. We received a survey from the CTA asking for information on imports, including the following questions:
The CTA survey responses are due on Friday, April 6th, in time to lobby the White House to avoid the impact. The Trump administration indicated on March 23rd that it would publish a formal list of proposed tariffs in 15 days, so we can expect it by the end of the week. Then a 30-day period would follow where US industry could comment on which products should be selected.
While the first moves of a possible trade war with China don’t directly affect the display industry, the Trump administration seems determined to continue to push these efforts, as the recent changes in Trump’s cabinet and staff have strengthened proponents of tough trade action. If an all-out trade war happens, it would profoundly change the display industry.