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.
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.
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.
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