Those readers who saw my last article on UDC may have been prepared to be disappointed at their earning release on Thursday, February 23rd. In fact, it looked like the market in general was prepared to be disappointed, as the stock dropped more than 5% during Thursday’s trading. But unlike their Q3 earnings release, their Q4 earnings release and conference call pleased investors, and the stock jumped as much as 22% in Friday’s trading, peaking at an all-time mid-day high of $82.50 before settling to end the day up 20% at $81.00.
In addition to the earnings release, UDC announced its first-ever dividend of 3 cents per share, and indicated that they intend to issue quarterly dividends going forward. Although undoubtedly a positive sign, the value of the dividend (a yield of 0.15% at a stock price of $80) is trivial compared to the signal it sends that UDC intends to continue to grow profits and return cash to shareholders.
The bigger news, of course, was the earnings release, and clearly UDC had a strong Q4 with earnings of $26 million or 55 cents per share, compared with street expectations of 44 cents. Revenues came in at $75 million, leading to full-year revenues of $199 million, near the top of UDC’s guidance range of $190-200 million.
The figure below shows the main income statement highlights for UDC for the last two years. The see-saw pattern in revenues and earnings stems from the Samsung royalty deal, which pays out in Q2 and Q4 of each year, and amounted to $60 million in 2015 and $75 million in 2016.
UDC Quarterly Income Statement Highlights, 2015-2016
It should surprise no one with knowledge of the display industry that UDC saw 94% of its Q4 revenues come from South Korea, with the two biggest customers being Samsung Display and LG Display. Perhaps the surprise comes in the other direction, that they managed to pull 6% of revenues from sources outside of South Korea. Material sales and royalty revenue from China came in at $1.8 million for Q4 and $7.2 million for the full year, growing 122% year-over-year as panel manufacturers BOE and Tianma are accelerating their efforts to bring OLED displays toward volume production. Revenue in the US was $1.9 million, mostly technology development and support revenue resulting from UDC’s acquisition of Adesis in July. Adesis continues to bring in contract revenue, and UDC CEO Steve Abramson indicated that while it was not likely to grow, it was likely to continue at a pace similar to that in the 2nd half of 2016, which would amount to $6-7 million per year.
While UDC does not disclose details of its transactions by customer, they do show the percentage of revenues from top customers, allowing us to construct the picture below of major revenue streams by customer:
UDC Quarterly Royalty & Material Revenue by Customer, 2015-2016
It would appear that the material sales pattern is only loosely connected to the panel maker production, and this is consistent with what we know about the product and its use in the production process. However, the total annual figures for the two companies provide some insight to OLED industry costs. Total revenues from Samsung in 2016 were 63% of all UDC revenues, or $125 million. Based on an estimated total output of 375 million panels, this translates to a revenue of 33 cents per panel. From LGD, 2016 revenues were 28% of the UDC total or $56 million, and assuming that nearly all of this was for TV (it’s fair to say that LGD shipments of OLED for the Apple Watch and other products were negligible compared to TV) then for the 900,000 OLED TV panels shipped in 2016 UDC recognized $62 per panel.
Looking at material sales, UDC reported total material sales of $29.2 million, up 5% over Q4 2015, with an unusually large portion of the sales coming from developmental material. UDC states that their margins on material sales have consistently averaged 70-75%, and this is consistent with their reports on commercial material sales, but margins on developmental materials are lower, only 46% for the full year 2016. UDC commented that materials costs increased in Q4 2016 largely because of the introduction of new phosphorescent emitter products, but also commented that this start-up or ramp-up cost factor would not persist in coming quarters.
In UDC’s earnings call late Thursday afternoon, CEO Steve Abramson and CFO Sydney Rosenblatt highlighted UDC’s opportunity as the OLED industry grows. Abramson listed the many panel makers with plans for new capacity, and the beginning of a “multi-year capex cycle”. On OLED TV, Abramson said that LGD’s production would be increasing from 900,000 in 2016 to 1.5-1.8 million in 2017 to 2.8 million in 2018, lining up closely with DSCC estimates. In our white paper on Quantum Dots issued earlier this year, we estimated OLED TV as 1.7 million in 2017 and 2.6 million in 2018.
In much of their communication before this week’s earnings release, UDC had indicated that after two successive years with little to no growth (0% growth in 2015 and 4% growth in 2016), the company could expect significant growth in 2017. Abramson referred to “double-digit revenue growth” in his comments, and Rosenblatt issued the following main points for 2017 guidance:
One of the questions on the earnings call asked UDC management if they were being conservative in their revenue outlook. Based on my pre-earnings analysis (from one week ago), I had the same question. With 50% growth in OLED input area, we should expect more than 18% growth in material sales revenue. The high end of UDC’s guidance would represent about 26% growth in materials sales, while with a 50% increase in area even with quarterly price decreases of 3% we should expect 32% Y/Y growth. Abramson correctly stated that material sales will depend on the timing and ramp of new capacity, and we agree that there is some uncertainty about the specifics, but I found the UDC guidance too conservative.
There are a few items on UDC’s balance sheet worth noting. First, they have a big pile of cash: $328 million, or $7 per share, equivalent to more than a full year’s revenues and more than two years of expenses. UDC has said in the past that this cash would be used to fund acquisitions and improve its IP portfolio, and in 2016 UDC consolidated the acquisition of the portfolio of BASF and also acquired the contract research company Adesis. On Thursday’s earnings call, although CFO Rosenblatt highlighted the cash on the balance sheet, he did not mention acquisitions, so perhaps that activity will not be a major part of 2017. One the other hand, the cash will be used to pay dividends, but not very much is needed: the $0.03 dividend will cost UDC about $1.4 million.
UDC carries a surprisingly high amount of inventory, which is consistent with their strategy on capacity to highlight their ability to reliably supply the customers’ needs. Longer-term investors may remember, though, that UDC took a $33 million inventory write-off in Q2 2015 as they decided to exit the host material business. While the current inventory level is much lower at $17 million, it still constitutes more than 6 months of inventory on a forward-looking basis. As UDC introduces new emitter materials, they may have a risk that older materials also become obsolete and require write-offs.
UDC certainly faces challenges in 2017, but clearly benefits from the coming wave of OLED products and capacity. As announced earlier this month, UDC will be doubling capacity at PPG’s manufacturing facility for phosphorescent OLED materials, and the company will need to manufacture new materials cost-effectively while managing a more complex product line. Perhaps no task on their annual checklist is more important than a renewal of the Samsung licensing agreement, which will continue to supply 38% of UDC revenues in 2017 per the mid-point of their guidance. The existing agreement expires on December 31, 2017, so look for UDC to announce its renewal soon, and look for UDC to benefit this year from the tremendous increase in the OLED display market.
The stock price of OLED emitter materials provider Universal Display Corporation (ticker symbol: <OLED>) jumped last week on new analyst coverage from Susquehanna’s Mehdi Hosseini. Hosseini rated the stock a “Positive” with a price target of $100, helping the stock jump nearly 5% on Wednesday, February 14th. <OLED> shares were priced at $72.15 at market close on Friday, up 13% for the week, and up 28% year-to-date, and close to their all-time high of $73.82 which they hit on August 1st of last year.
Perhaps it’s not a coincidence that <OLED> is again hitting a peak just ahead of its earnings release on February 24th: last year <OLED> hit all-time high just before it’s 2nd quarter earnings release on August 4th. As I related in a prior story on this company (“Cubs Finally Win But For OLED It’s Still Wait ‘Til Next Year”, DSCM 11.07.2016), UDC has a history of disappointing investors in its earnings calls. In order for UDC to avoid this history repeating, they will need to show that they can take advantage of the great wave of OLED capacity coming online to drive growth in revenues and earnings. In that context, what UDC says about 2017 will be much more important to investors than their results in Q4 2016.
In its Q3 earnings call in early November, UDC maintained their full-year revenue guidance of $190-200 million. The mid-point of that guidance implies a Q4 revenue of $71 million, which includes $37.5 million of royalty revenues from Samsung’s licensing agreement. Considering the various sources of revenue to UDC, the Q4 revenues might look like the figure below:
UDC Revenue by Source 2015-2016 (Q4 mid-point of guidance)
Such a picture would represent 14% year-over-year revenue growth, a tremendous improvement from the 23% Y/Y decline reported in Q3. Unfortunately, though, the biggest part of that revenue growth comes from the Samsung licensing royalties, increasing 25% Y/Y from $30 million in Q4 2015 to $37.5 million in Q4 2016. Take out the Samsung royalties, and revenue growth is only 4% Y/Y.
There are many reasons to be optimistic about the prospects for OLED, and almost as many reasons to be optimistic about the prospects for <OLED>. As subscribers to DSCC’s Quarterly OLED Supply Demand and Capital Spending Report will know, panel makers will be installing and/or ramping 16 different fabs for the production of OLED in 2017 alone, with additional fabs starting in 2018-2021. While some of these are merely research and development lines, many of these fabs will add substantial capacity to the industry, and industry capacity for OLED will grow at a CAGR of 52% from 2016 – 2021, as shown in the figure below
OLED Input Capacity 2016-2021
As the figure shows, input area in 2017 alone will increase more than 50% Y/Y. It is charts like these for OLED that have industry analysts optimistic about <OLED>. Even at its current price, the company’s stock has a price/earnings ratio of 84; obviously at the Susquehanna target price of $100 the P/E would be over 100. In order to justify the rarified air of such a stock, UDC will need to translate the potential for OLED growth into real revenues and earnings.
Breaking down some of the revenue numbers in the chart above, UDC’s 2016 revenues can be grouped as follows:
The opportunity for upside lies in new phosphorescent emitter products with higher prices, which could drive revenue growth higher than area growth. Against this the downside is the relentless price pressure faced by all companies in the display materials industry. One other item to watch is the Samsung royalty agreement, which expires at the end of 2017. DSCC sources indicate that the main components of a new agreement have been in place, but until they announce the new agreement, the expiration will remain a concern.
UDC issues its Q4 earnings report with a conference call on Thursday, February 24th. Subscribers to DSCC’s Quarterly Display Supply Chain Financial Health Report will see a full analysis of the results in a weekly update on Friday.
PSSI Drops 2% on Morgan Stanley Report, Significantly Underperforms - DSCC Says Not a Turning Point as Earnings & Revenues Will Grind Higher on Richer Product Mix, Stable/Rising Prices and Lower Costs
On a weekly basis, I try and explain display stock price movements in our weekly newsletter. Last week was a particularly difficult week for display stocks, so I thought I would try and explain what happened and why it may be unwarranted.
The Panel Supplier Stock Index (PSSI) fell 2.1% the week of February 6th – February 10th while the US large cap stock index (SPY) rose 1.2% and the emerging market index (EEM) rose 1.2% as shown in Figure 1. As indicated in Figures 2 and 3, only CPT and BOE enjoyed stock price appreciation last week, up 3% and 1% respectively. Meanwhile, 5 suppliers – AUO, Innolux, Japan Display, HannStar and LG Display – suffered declines ranging from -3% to -7%. What happened? There were two reasons for the decline. First, the dollar strengthened after weeks of declining on signals from President Trump of significant corporate tax cuts and tax reform combined with infrastructure spending which could accelerate US market growth and inflation. As a result, last week the $US gained:
Overseas company market values typically fall when the dollar strengthens, as their businesses are then worth less in $US. However, this is offset by anticipated higher export opportunities as their products get priced lower in $US which benefits exporters. The 2.2% decline in the $US from Dec. 30th through February 3rd, helps explain the 11% increase in the PSSI over that time. If the dollar continues to recover and gain ground, the PSSI will likely lose ground. However, the 0.9% increase in the DXY doesn’t explain why 5 display stocks suffered 3% - 7% declines last week alone.
Figure 1: Panel Supplier Index vs. S&P and EEM (5/2/16-2/10/17)
Figure 2: Latest Panel Supplier Stock Index Results (5/2/16 – 2/10/17)
Figure 3: Feb. 6 – Feb. 10 Display Company Stock Price Performance
The large declines in display stocks can primarily be attributed to a Morgan Stanley report that double downgraded LG Display’s stock from a Buy to a Sell on February 6th, and was widely reported by Barron’s. The Morgan Stanley report includes Figure 4, which shows that panel price increases slowed to 1% in January. Morgan Stanley interprets the slowing price growth as a sign that the market has peaked. Shawn Kim from Morgan Stanley wrote that
“Supply is unlikely to tighten for 40”+ panels following aggressive customer inventory restocking after LCD capacity closure and elevated panel prices impacting demand elasticity. Chinese 8G fabs incremental output should ramp up from 2H’17, while pricing of small-size panels may prove hard to maintain, as we anticipate a reduction in utilization when OLED smartphone builds begin in 2H.”
As a result, Morgan Stanley lowered the price for LG Display’s stock on the KOSPI to 26,000 Won from 29,550 Won, implying a 12% price cut.
From our standpoint, it is early to make that call. 2017 will clearly be a profitable one for panel suppliers and 2018 should be profitable as well. First, panel prices are still rising. Yes, the ASP growth has slowed, but we are still seeing price increases. Witsview reported on February 20th that 49”-50” prices were still rising and reported no price reductions. Innolux said in its earnings call that 50”+ prices were still rising nicely. Companies reported blended double-digit price increases on an area basis in Q4'16. Innolux reported a 15% Q/Q increase in blended ASPs in Q4'16, LG reported a 16% increase and AUO reported an 11% Q/Q increase. With February prices significantly higher than October prices, etc., it is hard to believe that ASPs will decline Q/Q in Q1'17. So, profit margins should improve further in Q1'17 as costs also fall.
Figure 4: Blended Large-area M/M Price Changes
Second, the mix is still shifting to larger sizes and higher resolutions. Innolux indicated in its call that it expects its average TV size panels to grow by 2.5” in 2017 with the industry average growing around 2”. LG calculates demand rising by 5% on an areas basis in 2017. In addition, as we show in the next article in our 2/3/17 issue of The Display Supply Chain Monitor, blended ASP growth actually improved for all Taiwan suppliers in January on the mix shift from small/medium to large-area and within those categories themselves.
Third, there is minimal supply growth expected in 2017. Both LG and Innolux have stated in their earnings calls they expect supply growth to be modest. Innolux indicated low-single digits and also said it expects 50”+ demand to be very tight in the next few quarters. As a result of this continued demand for larger sizes (50”+) and higher resolution (4K and 8K), Innolux even indicated 2018 does not look too bad. They expect to remain profitable as costs continue to fall.
Fourth, yes, costs are falling and should fall faster than prices throughout all or most of 2017. So, we expect to see margins continue to expand in 2017. As shown in Figure 5, gross and operating margins are up nearly 100% from Q3'16 to Q4'16 with Q4'16 based on the companies who have reported so far - LG Display, Samsung Display, Innolux and JDI, and we expect them to stabilize at these or higher levels for the rest of the year.
Figure 5: Gross and Operating Margins, Q1'14 - Q4'16
Source: DSCC's Quarterly Display Supply Chain Financial Report
Do improved margins and earnings deserve a sell call? We don’t think so. Panel suppliers are shifting to a richer product mix, which should keep blended prices up. They even re-accelerated in January for Taiwan suppliers. We see panel supplier revenues grinding higher, and earnings continuing to grow as brands and consumers demand larger and higher resolutions across most categories.
Financial analysts are divided on the panel supplier outlook. As shown in Figure 6, BoAML believes operating margins haven't peaked yet, they expect them to peak in Q2'17 and remain at elevated levels throughout 2017 and 2018. On the other hand, JPMorgan expects a sharp decline in operating margins although still positive.
Figure 6: AUO Operating Margin Forecast
Source: JPMorgan and Bank of America Merrill Lynch
From our standpoint, the outlook remains healthy in large-area panels until 2019 when multiple 10.5G fabs ramp, which could worsen in 2020 when even more 10.5G capacity comes online. However, we expect a number of older fabs to continue to come offline as that happens. In addition, 10.5G fab ramps should be limited by Nikon lens capacity, which could significantly delay and capacity ramps for the latecomers. See this article/blog for more info.
In the case of small/medium panels, yes, there is a lot of OLED capacity coming online. However, the entire smartphone market will eventually shift to OLEDs, especially when flexible OLEDs come to market resulting in more rugged, lighter, larger and foldable/rollable smartphones. The demand for OLEDs will be high, so we don’t necessarily see significant price reductions in OLEDs until 2H’2019 or even 2020. OLEDs are the best thing to happen to the smartphone industry enabling smartphone suppliers to raise prices based on the OLED performance, size and form factor. Demand should be very high and supply will be constrained until the smartphone market is saturated with OLEDs. This phenomenon has occurred in TVs and in desktop monitors before it with LCDs and CRTs. This will be similar as smartphone brands will look to migrate as quickly as possible to enable higher prices. There will be lots of room for differentiation based on form factor, and average sizes will grow which should keep blended prices high. Panel suppliers will also be able to price higher and enjoy higher margins. There is a substantial difference between LTPS LCD and flexible OLED panel prices. However, unlike TVs which are very price sensitive, consumers can justify spending more on smartphones due to their critical nature and that they are paid off in payment plans, plus there is a large commercial smartphone market as well.
TThe outlook is less rosy for LCD smartphone panel suppliers. When there is enough OLED smartphone supply, what happens to LCD smartphone suppliers? There will always be demand at the low end of the market for less expensive feature phones and smartphones. As other suppliers chase more advanced smartphones, companies like HannStar and CPT are making a killing in the feature phone and low-end smartphone market where there are shortages. However, at some point, this market will be served with OLEDs or LTPS LCDs rather than a-Si LCDs that could eventually cause a-Si LCD suppliers to have to exit this market. When this happens, we would expect to see more fab closures or repurposing of those fabs to OLEDs or LTPS LCDs. LTPS LCDs might eventually have the same problem when there is sufficient flexible OLED capacity to service the low end market, unless JDI and others create flexible LCDs or flexible organic TFT LCDs. These and other similar subjects are explored in our Quarterly OLED Supply/Demand and Capital Spending Report.
Back to last week’s results,
This blog is an excerpt from the February 13th issue of The Display Supply Chain Monitor. Contact firstname.lastname@example.org for a sample issue.
President Trump, during his election campaign and since his inauguration, has pushed the need to increase US manufacturing to create jobs. Some prior articles (“LCD Manufacturing in the USA? Don’t Hold Your Breath”, DSCM 01.23.2017, “Expect to See More “Assembled in the USA” Products, DSCM 01.23.2017, “LCD Manufacturing in the USA – Logistics Impact”, DSCM 01.30.2016) have discussed some of the aspects of possible Trump policies on the display industry; in this article we’ll discuss one likely idea for a US import barrier and how it might play out in the display industry.
During the campaign, Trump railed against both Mexico and China as unfair trading partners, and called repeatedly for up to a 35% tariff on goods from Mexico and up to a 45% tariff on goods from China. Since the inauguration, though, one idea floated as a mechanism to pay for a border wall with Mexico is a “border adjustment”, as one part of a comprehensive re-write of the US tax system.
The border adjustment idea stems not from Trump but from the Republican leadership in the US House of Representatives, specifically House Speaker Paul Ryan. The proposal would work as follows:
To illustrate the impact of a VAT and a border adjustment, let’s take as a theoretical example a 65” LCD TV. This type of large-size TV would be the most likely end-product of a proposed Foxconn LCD manufacturing plant in the US. Such TVs are sold in the US for a wide range of prices, from as low as $498 (special prices this weekend, for Super Bowl promotions) to several thousand dollars, but for this example we consider a US retail price of $1000.
Although this example is LCD TV, the numbers and concepts will be quite similar for most end-products of the display industry. An analysis of iPhone production and sales would be similar, as would a notebook computer or a desktop monitor.
Further, for the purposes of this illustration, we parse the value chain for this TV into four pieces: (display) components makers, display panel makers, TV set makers, and retailers. We lump “components makers” into a single group for simplicity, although in reality this would be dozens of companies supplying glass, liquid crystal, LEDs, polarizers, etc. Although not a precise picture, these four pieces of the value chain each have roughly ¼ of the value added of the TV set, about $250 each. Finally, we make the assumption that at each stage, the maker incurs various costs of $225 and reaps an economic profit of $25 which is subject to income tax. Although these are gross simplifications, they are not very far removed from the actual economics of the LCD TV value chain today.
Figure 1 below shows a diagram of this value chain for an LCD TV made in China using a China panel and China components, exported to the US and sold to a consumer by a US retailer. Note that in the manufacturers are “Chinese” because of their location, not their ownership. Component makers could include Corning, 3M, Merck, Nitto Denko and other non-Chinese multinationals; the panel maker could be Samsung or LG, and the TV Set Maker could be Sony or another international brand. For the purposes of tariff and taxation, though, these are considered Chinese companies because of their location.
Figure 1: China Value Chain for US Consumer
In the diagram, the goods flow is represented by the yellow arrows and the payment flow by the light green arrows. The other costs are shown in blue, and income taxes in red. The net of the flow in minus the flow out is the after tax income for each stage of the value chain. The China manufacturers earn a profit of $25, pay the China corporate tax of 25%, and get an after tax income of $19, while the US retailer pays a 35% tax for a net income of $16.
As a point of comparison, it is helpful to see how this picture is different for sales in the China domestic market, where a VAT is applied. This is shown in Figure 2.
Figure 2: China Value Chain for Chinese Consumer
At each stage of the value chain, the China VAT of 17% is applied, so in comparison to the case where products are built for export (and VAT does not apply or is refunded) the prices get progressively higher. Some readers may be surprised that TVs that are made and sold in China are sold for higher prices than comparable TVs in the USA, but that is precisely the case, largely because of the VAT paid. The US, which alone among major economies does not have a VAT, consistently has the lowest prices in the world for consumer goods like TVs, and not coincidentally has consistently run the world’s largest trade deficit for more than a generation.
In order to make some comparisons with a hypothetical border adjustment scenario, it’s helpful to envision the manufacturing steps as a single vertically-integrated company making the TV set. In China, the panel maker China Star (CSOT) combined with the TV maker TCL comes close to this example, but we can visualize it as per Figure 3:
Figure 3: China Value Chain for US Consumer (Compact version)
Next we envision this picture if we implement the border adjustment proposal described above. Without changing anything else, this becomes an unfortunate picture for the retailer. For this reason, Wal-Mart and other retailers have been leading the criticism against the border adjustment approach.
Figure 4: China Value Chain for US Consumer, with Border Adjustment
Why is the retailer suddenly paying so much income tax? Because the retailer is now unable to deduct the cost of the imported TV. As a result, for tax purposes the retailer’s profit becomes $1000 - $225 = $775, on which they pay 20% income tax or $155. Their economic picture, though, is a severe loss: $1000 - $750 - $225 - $155 = -$130.
It should be obvious that retailers would not proceed with this business, they would raise prices on goods imported. In principle, they would want to raise prices to recover their after-tax profit position of $16 per TV. The result of that adjustment can be seen in Figure 5
Figure 5: China Value Chain for US Consumer, with Border Adjustment Scenario 1
As many critics of the border adjustment have pointed out, this scenario results in higher prices for US consumers, and may result in higher inflation. However, this higher inflation would only occur if the products continue to be imported. Consider the situation if the products were sourced locally, and if (it’s a big if, but stay with me for the time being) the cost structure for a US manufacturer was similar to its Chinese counterpart, as shown in Figure 6.
Figure 6: US Value Chain for US Consumer, with Border Adjustment Scenario 2
Scenario 2 would not be a realistic picture for TVs in the US in 2017, but if Foxconn or someone else invested in US capacity for LCD panels, it might be a feasible picture in 2020 or 2021. Scenario 2 is also helpful to consider for an industry that relies only partially on imports. In industries with a substantial portion of US production, there may be little to no pricing impact of a border adjustment scheme.
In our LCD scenario, though, a single US manufacturer competing with imports would be tempted to raise prices, and might be capable of raising prices up to near the price level of the imported product. That leads us to Scenario 3, where a US manufacturer is pricing to compete with imports, and reaping huge profits, as shown in Figure 7:
Figure 7: US Value Chain for US Consumer, with Border Adjustment Scenario 3
Such is a dream scenario for a US manufacturer; like most dreams it is unrealistic, but it forms a boundary condition for a possible US business. With such a large possible profit pool, a US LCD maker could sustain higher costs than its China counterpart (thus increasing the $675 cost portion) and still be strongly profitable. However, in a highly competitive global industry like LCD, it is likely that competitors would continue to push for business in the US market. Further, many economists claim that the likely result of a border adjustment would be appreciation of the US dollar against other currencies. In our example, a weaker Chinese yuan would mean lower costs in the China value chain, allowing the Chinese manufacturers to sell at lower prices. If in such a scenario the yuan depreciated by about 20% against the dollar, the China value chain would again be capable of delivering a $1000 TV set to US consumers, as shown in Figure 8
Figure 8: China Value Chain for US Consumer, with Border Adjustment Scenario 4
The table above summarizes these scenarios for the main financial flows.
Compare scenario 4 with the current state of affairs. For the US consumer, there is no difference, they buy their TV for $1000. Likewise, for the US retailer, although the transactions are quite different the result is the same: they have operational costs of $225, revenue of $1000, and a net profit after tax of $16. The main difference is a shift in value from the Chinese manufacturer to the US government in the form of a depreciated currency and the border adjustment.
Although each of Scenarios 1-4 are unrealistic (each for a different reason), they illustrate the boundary conditions of the industry under this proposed tax and import change: think of these scenarios as a rectangle, with the likely reality lying somewhere inside. It’s quite clear from Scenario 3 that there would be a powerful incentive to increase US manufacturing, which after all is the main purpose behind the proposal, but it’s inconceivable that this would occur without some corresponding reaction from importers.
These are early days for the Trump administration, and the US Congress’ work to overhaul the tax system has hardly begun. There will be powerful interests arrayed against the idea of a border adjustment, but likewise there will be strong proponents. The display industry may be profoundly changed by the results.
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