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.
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