Because they are by a wide margin the largest glass supplier to the display industry, Corning’s earnings are closely followed by many in the business, and not just investors. Corning issued results of an improved business today, and in this article I’ll cut through some of the issues.
The first issue with Corning earnings is sorting through the GAAP results vs. “Core” results reported by the company. Many news outlets and many automated sites will report only the GAAP results, which is intended to avoid manipulation by creative corporate accounting. In Corning’s case, though, the GAAP results have lately been overwhelmed by special factors: in Q2 there was a $2.7 billion gain ($2.50 / share) related to the sale of the Dow-Corning JV, and a $791 million loss ($0.73 / share) related to the change in value of ¥/$ hedges that Corning uses to stabilize their LCD business results. These two factors dominate the GAAP result compared to the Core earnings of $434 million ($0.37 / share). So while the GAAP reporting is useful to keep all corporations on a level playing field, Core results give a better insight to the health of the business.
When looking at the Core Net Income on a year-over-year basis, there is a striking difference between the corporate total, down 17% from $522 million, and the EPS down only 3% from $0.38. This testifies to the heavy share buybacks Corning has conducted in the last 12 months. Display core earnings of $237M represented 55% of corporate core profit (down only slightly from 56% a year ago), but down 18% compared to Q2 2015, illustrating the key problem in the industry: insufficient growth to offset the price declines. In their detailed 10-Q statement Corning reported that glass volume increased in the low single digits in Q2 compared to 2015, while prices declined “slightly higher than 10%”.
For the full year 2016, Corning held to their outlook of 8-10% area growth at retail, and mid-single digit growth in glass demand. This would imply a very strong 2nd half, up 10% or more from 2015. Q3 is expected to be up mid-single digits in volume QoQ, which would be +9% YoY by my reckoning, and would imply Q4 at least flat with Q3. Although some might consider that “normal” seasonality should mean that glass demand would peak in Q3 to prepare the value chain for the Q4 holiday demand surge, in most years Q4 glass demand exceeds Q3: since 2005, only two years have seen Q4 market declines, 2008 and 2015.
Corning CFO Tony Tripeny cited strong TV demand in North America and Europe as drivers of the rebound; this is consistent with my thesis about TV (see my article “Can 4K Drive Replacement Cycle Growth in TV?” from 7/24). Tony specifically cited strong screen size growth, greater than 1.5” average screen size, as an area driver, and this too is consistent with my outlook.
On glass pricing, Corning continues to use the word “moderate” and strains to apply superlatives like “more moderate” and “even more moderate”. The YoY price decline reported in the 10-Q implies “slightly higher” than 2.6% per quarter on a compounded basis, and Tripeny later described it as “low-single-digits”. As one caller pointed out, this means that in dollar terms panel maker costs for glass have actually been increasing in the first half of 2016, since the yen has strengthened from about 120 in January to 105 today.
Nevertheless, Tripeny did not expect additional price pressure; in his outlook section he described the Corning outlook as indicating that “glass supply should remain tight for the balance of the year, especially in the large gen sizes, as a result of strong TV demand.” (emphasis added). I find it highly significant that Corning used the word “tight” in their outlook. In my time at Corning, from 2012-2015 I worked every quarter on the material for the earnings call, including the script and Q&A. Corning has a very rigorous review process for the script, involving all the leadership of the business and the corporation. I cannot remember when Corning ever described tight supply; in April 2016 and for many quarters prior to that they stated “we believe that glass supply and demand will remain balanced”. So a change in this language is a clear signal to the industry that LCD growth may be constrained by glass supply. If this bears out, based on history (the last glass supply shortage was 2009-2010) we can expect panel prices, and panel maker profits, to increase in the coming quarters.
The past 12 months have been rough for the LCD industry, as dramatic declines in panel prices turned profitable businesses to break-even or loss-making, and continuing capacity investments by Chinese (relative) newcomers has endangered the business model for LCD makers in Japan, Taiwan, and Korea. Samsung has reacted to this environment with an announcement that they will shut down a significant proportion of their Gen 7 capacity (see Ross’ blog from 6/30).
The main reason for pessimism in LCD is the absence of growth drivers among LCD applications. PCs peaked in 2011, tablets peaked in 2014, and we may have already seen the peak of smart phone sales. None of these, though, is as important to the LCD industry as TV, but there the picture is also depressing: although LCD TV continued unit growth in 2011-2014 at the expense of CRT and plasma, the total TV market including all technologies peaked in 2011 at 262M, before falling to 230-240M in each of the last three years.
In my time at Corning, we built a comprehensive model of the global TV market, and came to the conclusion that the key to growth in TV was the replacement cycle. Using consumer market research to understand replacement behavior, we concluded that the replacement cycle was 6-8 years. If this is really true, then Flat Panel TVs sold in 2008-2010 should be in the prime age for replacement.
For players in the display industry who have been waiting for a demand upswing, we may be starting to see it in 2016. The hundreds of millions of TVs sold in 2008-2010 were typically 32”-42” sizes with CCFL backlights and 1080p resolution (or less, especially for plasma). Now these TVs are being replaced by 55” 4K, which can drive demand for LCD area. The huge investments the industry has made in Gen 8.5 capacity, which efficiently cuts 6 55” panels per substrate, are finally shifting consumer habits.
Here are a few of the signs that TV demand is strong:
For the US market, TV makers can typically make healthy margins when the average TV price is 3x the panel price (of an open cell). Healthy in this case can mean 5% margin on sales. Given the economics of the TV set business, with minimal capital equipment, the investment in the business is mostly working capital, so a return of 5% on sales can represent 30% or more return on assets. With current panel prices of $186 for 55” 4K open cell panels, 3x would represent $568. Although 4K prices have declined substantially in the last year, they are still well above this threshold: a quick check on bestbuy.com shows only 1 out of 28 models of 55” 4K under $568, and a similar check on Walmart.com shows only 3 out of 30. The largest branded players – Samsung, LG, Sony, and Vizio – all have multiple models under $1000.
One of the frequent questions I get about TV pricing is whether there is a “sweet spot” when prices come down enough to stimulate demand. I believe that there is some evidence that when an attractive product comes below $1000, the demand increases significantly. Historically, 42” LCD TV crossed that threshold in 2008, when the LCD TV industry grew by more than 100%. The consumers who bought 42” LCD TV then (and also the significant number of consumers who paid a bit less and bought plasma TVs), can upgrade to a top-brand 55” 4K TV for the same price they paid 8 years ago. The data suggests that many of them are doing just that.
With the recent panel price increases (driven, as noted above, by supply reductions), the LCD TV industry may have reached a sweet spot of its own – for profitability. TV setmakers, as shown, are getting healthy prices for 4K TV, and panel makers have seen prices rise as much as 20% (for 32”) from their Q1 bottom. Even though the pricing on 32” has climbed rapidly, on an area basis it is still favorable for panel makers to produce 55”: at current 32” price of $58 (Witsview), a Gen 8.5 panel maker can earn $1044 per substrate making 32” (18-cut) and $1116 per substrate making 55” (6-cut). We should expect to see optimistic Q3 outlooks in this week’s earnings announcements from Corning and LGD.
History tells us that favorable economics in the LCD industry do not last forever: inevitably supply increases will lead to oversupply and price declines. However, it’s important to remember that the opposite is also true, that unfavorable conditions do not last forever. The steep price declines in 2015-2016 may have claimed a casualty in the Samsung G7 line, but demand elasticity in 4K TV can help the industry to a new upswing in the 2nd half of 2016. What’s further, we’ve been following some developments that some Chinese manufacturers may delay planned G8.5 fabs (well suited for TV) and build G6 flexible OLED fabs instead. With the Samsung and Panasonic closures, we could be headed for a TV panel supply shortage.
By Bob O'Brien
China has been the workshop of the worldwide electronics industry for years, but up to now Chinese brands have been minor players on the global stage. In terms of its national economy, China has followed the Asian path of export-oriented growth first established by Japan and later copied by Korea, Taiwan and others. Japan’s national economic growth was accompanied by emergence of major electronics giants in the 1970s and 1980s – Sony, Toshiba, Sharp, Panasonic, and many others. Similarly, Korean brands
Samsung and LG emerged in the 1990s and 2000s to become the global powerhouses we see today. So it’s worth asking whether (or when) we will see Chinese brands following the same path.
For the most part, these Asian brands followed a similar formula to become successful globally:
First, let me describe the major players in this brand battle:
Now here’s the data for the 12 months ending February 2016:
Source: Global GfK/NPD Brand Report
This chart shows how successful the global brands have become, dominating nearly every market. The notable exception, of course, is China, where the domestic brands have pre-eminence. Chinese brands have also established a respectable position in a few other markets, including Australia, South Africa, and Mexico.
Now, how about the approach of these Chinese brands to the marketplace? Are they using their low-cost position to gain a foothold at the low end of the market? Here’s a chart with 32” TV prices in the G20 countries. 32” is a good example because it has the highest volume of any screen size, roughly 25% of the TV market, and is a highly competitive, commoditized product available by nearly every brand in every country.
While the global brands are consistently priced at a premium, and regional brands are usually close to the industry average, the China brands are usually selling at a discount compared to the industry average. Two exceptions worth noting: in the US and Canada, China brands sell at prices above the industry average, because the 32” category has a large presence of “house” brands like Insignia, Emerson, and Dynex. These house brands typically sell at a deep discount to the industry average, and take away the “opening price point” opportunity, which makes it more difficult for the China brands to establish a share position, and indeed the China brands have only a limited presence in the US and Canada.
In contrast to the US & Canada, the Chinese brands have achieved some success down under in Australia. That country represents a great case study, because as noted in a previous blog (DSCC, July 5th), Australia has the highest average TV prices among the G20. Further, it’s worth noting that these are not intrinsically high prices due to an uncompetitive retail or brand landscape: the average price of a 32” TV in Australia is close to the G20 average. Rather, Australia has a very high “product factor”, i.e. a high proportion of sales of big screen sizes and premium features.
Ultra-High Definition (UHD) or 4K resolution TV sets are one of the most significant trends in the TV market, and in Australia 4K sets have grown rapidly in the last few years, comprising 26% of all TV in the latest 12-month period. The popularity of 4K in Australia has been driven at least in part by the aggressive discounting applied by Chinese brands, as shown in these charts:
By offering 4K at nearly a 50% discount to global brands, the China brands have taken an 18% share of the 4K segment in Australia, and a 27% share overall, their best performance outside of their home market. Although the discounting is clearly similar to step 1 of the globalizing strategy outlined above, the China brands are choosing to discount most steeply on premium 4K products: note that their discount to global brands’ prices on the low-end sub-1080p products was only 25%. So in Australia at least the Chinese brands seem to be trying a combination of step 1 and step 3. Can this work? Will we see the rise of Chinese brands to leadership in the electronics space?
First, it’s worth noting that in comparison to the Japanese brands in the 1970s (competing against US companies like RCA and Zenith and European companies like Philips) or the Korean brands in the 1990s (competing against the Japanese), the Chinese brands today may not have a substantial cost advantage compared to their global competitors. All of the global players today have TV assembly in China or other low-cost areas (Mexico, Eastern Europe, etc.) rather than the home countries. Furthermore, the purchasing power of global brands (especially Samsung) allows them to source key components at lower prices than smaller players. Whereas their Japanese and Korean forerunners could price at a discount and still be profitable, the Chinese brands will find this more difficult.
Second, as noted above the emergence of house brands, sourced through contract manufacturers in China, has taken away the opportunity of new brands to enter the market at low price points. This has clearly constrained their success in the US and Canada, and very likely in other markets.
Third, and perhaps most important, with one exception the big 6 Chinese brands have not invested in display technology to compete as fully integrated electronics players. Japanese companies started investing in CRT technology in the 1960s, and Sony’s introduction of the Trinitron allowed them to capture the premium TV market for a generation. Samsung grew to one of the largest CRT companies in the world, and by establishing a joint venture with Corning in CRT glass became the most vertically integrated CRT player, before repeating the same trick to become the largest and most profitable player in LCD TV. In contrast, most of the Chinese brands have not backward-integrated to displays (nor semiconductors, nor other key components) and therefore rely on their suppliers to provide picture quality innovation.
The exception to this is TCL, the main investor (aside from government sources) in panel maker CSOT, whose Gen 8.5 fab in Shenzhen, China, established a benchmark for the fastest ramp-up in the industry. We understand that CSOT now plans to build a Gen 11 fab, which would allow them to efficiently produce 65” and 75” sizes (or larger; the precise size of Gen 11 is not yet fixed), thus surpassing the capabilities of the Gen 8.5 fabs of Samsung and LG. TCL recently surpassed Sony as the #3 seller of TVs in unit terms, although they still trail in dollar terms, so it looks like they have the inside track toward becoming a truly global player.
Although the other top 5 brands in China have not been investing, display companies have leveraged government support to make China the center of gravity for LCD investment in this decade. By 2019, China may have 12 G8.5 and larger fabs, including two G10.5 and larger, and will have the largest LCD capacity. It’s likely that one or more of the emerging display makers in China (BOE, CEC, HKC) will seek a more secure path to market and partner with a top China brand to create an integrated company.
The rising importance of China in the display and electronics industries cannot be overstated. China has become indispensable in the assembly stages of production, as well as a growing presence in both display capacity and as an end market. However, at a brand level the top Chinese brands lag far behind the global leaders, and given the structural changes in the industry, it is far from certain that any of them will be capable of achieving global leadership.
By Ross Young
After years of disagreeing on substrate sizes from 1st Gen to 7th Gen, LCD manufacturers finally standardized on the glass size of 2200 x 2500mm which became the dominant glass size installed from 2007 – 2016 and was adopted by 9 different manufacturers. It was the first time the same glass size was adopted by both Samsung and LG Display since Gen 2 at 370 x 470mm. All of the 8G capacity optimized for 49”, 55” and 65” played a key role in bringing down LCD costs and killing off Plasma TVs. The benefits to standardizing are significant which is why the semiconductor industry has done so for decades. Benefits include:
As in the semiconductor industry, a standard substrate size results in manufacturers competing on performance (resolution, contrast, power, brightness, etc.), process and device technology, cost as well as service and support, commercial terms, logistics, etc.
Creating a world of unique substrate sizes results in more emphasis on specific panel sizes optimized from the unique substrate size. It also:
So, after 9 manufacturers built 2200 x 2500mm fabs from 2007 – 2016, 3 TFT LCD manufacturers have decided to go just slightly larger at 2250 x 2600mm. Companies building 8.6G include:
What is the benefit of this? As you can see in the table below, 8.6G allows manufacturers to produce 10-up 48”, 8-up 50” or 6-up 58” vs. 8.5G fabs at 8-up 48”, 6-up 50” and 3-up 58”. The differences at 45”-48” are probably not worth the risk. The differences at 50” and 58” on the other hand, may very well be. Doubling the output at 58” with potentially similar costs per sheet could be a huge win as depreciation per 58” panel at 8.6G would be 50% of the depreciation per 58” panel at 8.5G. It will be up to these manufacturers to try and make 58” unseat 55” as the new standard above 50”. Are they likely to do so?
It will be HKC’s first TFT LCD line, so it is a risky choice for them from a manufacturing standpoint. From a product and marketing standpoint, they are best known as a monitor OEM and brand. Do they have the marketing muscle to establish 58”? Probably not.
On the other hand, Innolux and CEC Panda have already ramped 8.5G ramps. So, these investments are more of a small expansion of their 8.5G fabs targeting slightly larger sizes. The 3 companies combined are only adding around 160K monthly input capacity, so it is not a lot of capacity. If 58” costs fall as they should and they can land some major brands as customers, they could establish 58” as a standard and we may see more capacity come online at 8.6G. On the other hand, we could see manufacturers once again slightly increase the size and optimize for 60” or a larger size and another slight increase in glass size. However, with 10.5G and 11G fabs under development and risks to new glass sizes significant, it is more likely that 8.6G is the last unique glass size until 10.5G and 11G fabs arrive in a few years.
By Bob O'Brien
One of my continuing projects that should be interesting to Display Supply Chain Consultants followers involves a new global report on TV Point of Sale (POS) data. Those of you who saw my presentation at the SID Business Conference last month saw some of the output of this report, but I’d like to share some conclusions and insights for DSCC.
The project involves combining the data from the two leading point-of-sale (POS) companies, NPD and GfK. For a number of reasons, mostly historical, these two companies have operated in geographic isolation: NPD provides POS data in North America (NAFTA region including Mexico) but not outside NA, and GfK provides POS data in most of the rest of the world. During my time at Corning, we subscribed to data feeds from both companies, to pull together a global view of demand. Now the companies are working to generate a unified report, and I’ve been consulting with them to pull it together.
The data from this report confirm something that I have held for some time: the TV market differs fundamentally from other consumer electronics device markets in that it is not a single global product market, but rather varies greatly from country to country. One of the ways to see this is by looking at the average TV prices from the G20 countries:
The average TV price (the blue line above) varies by more than a factor of 3 from the lowest (Indonesia) to the highest (Australia). This overall average is a function of both product- and country-specific factors: screen size mix, product features, brand mix, retail competitiveness and margins, logistics, tariffs, VAT, etc. Even when we strip out the main product mix variable and focus on the 32” screen size, there is still a factor 2 between low price countries like Canada and the US, and high price countries like India, Japan, and Korea, and more than a factor 3 to the highest price country, Argentina.
Just for ease of comparison, I take the data in the chart above and index it to the G20 average in the following chart:
I’ve relabeled the index of 32” prices as a “country factor” – an index of how individual country factors affect the TV price. Countries with a low country factor (US, Canada, China, Indonesia) tend to have:
In the product factor, the range of outcomes is less striking, but Australia stands out with a very high rating. Australians tend to buy very large TVs with a lot of high-end features. It’s worth noting that the product factor is not very strongly related to income: several high-income countries (Japan, Italy) tend to go for smaller screens and/or slower adoption of premium features, while several low- or mid- income countries (China, Korea) go for large screen sizes and lots of premium features. Among the countries with low product factors are 3 out of the 4 BRICS – Brazil, Russia and India.
The case of India is worth discussing more. India is one of the lowest-income countries in the G20, with a huge population and some of the highest TV prices in the world. Thus the TV market in India is dramatically constrained by affordability, both in terms of the number of units sold and the average screen size. The India TV market is ~18M units per year, while neighboring China with a similar population has a market 3x as big. Furthermore, the difference in average screen size is just as dramatic: in India the average TV is about 32”, while in China the average is about 45”, almost double the size in area terms.
Therefore, unlocking this opportunity for the India TV market may represent the single biggest factor for growth in area terms for the worldwide display industry. Although this might be achieved by a reduction in import barriers, that’s not likely: the current government in India has re-iterated its push to develop local manufacturing and deter importers, as seen in its battle with Apple.
So this is where we come to the recent rumors (see Ross’ blog from 6/29) that an Indian firm, Twinstar, is rumored to be purchasing the equipment from Samsung’s line 7-1 to set up an LCD manufacturing center in Maharashtra, India. The capacity of line 7-1 has been 150k substrates per month; when fully ramped this fab could produce about 19 million 32” TVs per year at 90% yield, almost exactly the size of the current TV market, and as I’ve noted this is only a small fraction of the potential India TV market.
Another important item to note about this equipment transfer: Samsung is among the leading TV brands in India. We can well imagine that the equipment deal includes a provision for future supply of TV panels from Twinstar to Samsung in India.