February 10th Update on the Coronavirus and the Display Industry - Updated on February 12th
February 12th Updates in Bold
The coronavirus has now killed 908 people in China, surpassing the 774 killed worldwide due to the SARS epidemic. The pace of infections has slowed, but doctors believe it can still re-accelerate. The highest number of deaths from the virus in a single day was recorded on Sunday the 9th at 97. However, the number of people recovering from the virus exceeded the number of deaths for the 10th day in a row at 356 in the Hubei province on Sunday, so there is hope that deaths from the virus will slow. Nonetheless, there are 40,171 confirmed infections in China with 3,062 new cases recorded over the last 24 hours.
To prevent the spread of the virus, China has locked down a growing number of cities and instituted a rule where only one resident per household was allowed to go out every 2 days to buy necessities in many of them. It also announced $10.3B in funds for fighting the coronavirus to ensure that the public throughout China can afford diagnosis and treatment without financial constraints.
China required most companies outside of Hubei province to extend their Lunar New Year Holidays to at least February 9th including both retailers and manufacturers to slow the spread of the disease. Within Wuhan, companies are not expected to return until after February 14th, however, that may be delayed further if disease does not get under control. A growing number of schools are not returning until March 1st.
All Guangdong TV factories were closed until February 9th impacting TV production. If a company is found to have an infection, they will suffer an additional 1 month shutdown. Companies are also worried about the additional time it will take after February 9th for their workers to return to work. One display company with operations in Guangdong sent a letter to customers saying that although most of their employees are local and should return to work right after the shutdown, they can’t predict how fast their supply chain will resume production. They can’t predict whether certain provinces will quarantine their workers longer and whether workers will voluntarily return later due to fears of contracting the virus. Thus, their customers should expect delays. We expect company operations may be impacted throughout the month of February.
Apple had shut down all its mainland China stores until February 9th. However, now they are not expected to re-open until at least February 14th. Apple’s largest iPhone production facility is in Zhengzhou City where more than 80% of its iPhones are produced. It was expected to restart operations on February 10th. However, according to Mizuho Securities, Zhengzhou City released a “Notice 10” on February 6th which means companies can’t re-start operations until they fulfill a number of requirements and get approval. The requirements include:
- Workers returning from outside of Henan province must be quarantined with others or isolated in their home for 14 days.
- Workers returning from outside of Zhengzhou City but inside of Henan province must be quarantined with others for 7 days or isolated in their home for 7 days.
- Monitoring groups must be set up to prevent infection and coordinate this with the city’s Infectious Disease Eradication Board.
- Two weeks’ worth of masks and disinfectant liquid must be maintained along with a usage log.
- Disease prevention measures must be strictly enforced on production lines, other plant areas, employee living quarters and other centralized areas. Company cafeterias must provide lunchboxes and efforts must be taken to prevent employees from eating in large groups.
Once these requirements are satisfied, companies can submit applications for restart which can take up to 3 days for approval. Restarts will be separated into 3 stages:
- February 10th for companies where the majority of the workforce is local and where the supply chain is completely contained within the city.
- February 17th for companies where some workers come from infected areas and where the supply chain is mostly contained within the city.
- February 24th for other companies.
Thus, Foxconn’s restart in Zhengzhou may take some time and has the potential to delay the launch of the iPhone SE2 and impact Q1’20 calendar year results if the launch was expected in Q1’20.
It was also reported that Apple’s Shenzhen facility has not yet been approved for restarting production and it was still conducting checks.
In terms of the latest from display manufacturers, we learned last week that:
- CSOT T3 and T4 are asking employees who left to return to work on February 14th if the government allows, but the shutdown will likely be extended further. No staff have contracted virus through February 9th and they have enough materials and components to restart production. They actually have been operating with a skeleton crew of people of around 20% of their staff who did not leave, less than 200 people at T3+T4. For the week of February 10th, T3 expects to operate at 30% utilization with T4 at 35%. However, CSOT has now identified one person who was infected as of February 10th. If they do re-start on February 14th, this means they will only be impacted by 3 weeks in terms of fab utilization. Even if Wuhan is locked down, they believe they can get approval to re-start shipments to customers. CSOT T4 is on mass production ramp status producing the Motorola Razr and TCL Series 10 in February and then the Xiaomi Mi10 from March. Although volumes are still small, the delays will impact their 2020 forecast.
- Tianma has been transferring rigid demand for 5.5”, 6.0” and 6.39” to Shanghai, although many of these programs were completed in January. In Shanghai, they are primarily producing for the Apple Touch bar and other brands’ wearable products. Their flexible panels are only made in Wuhan and they expect about one month of delays. Their flexible customers include Motorola and Xiaomi with Oppo taking panels on the Reno 5G in March. The skeleton crew which remained over Chinese New Year expects utilization of around 40%.
- BOE B17 inputted 1K substrates of G10.5 glass in January as their ramping effort was slowed down. With equipment engineers returning to their home country, there will be delays in installing new equipment. The move-in from February is expected to be delayed by a quarter.
- Regarding key materials, each company said they have enough material inventory because they prepared for additional inventory before the Lunar New Year holiday. However, we hear polarizers may be a problem. For AMOLED production, which is operating at low utilization anyways, material shortages are not so serious. However, for CSOT T3 which makes LTPS LCDs and operates at high utilization of 85%+, it is a bigger concern. AGC’s LTPS glass is shipped from Taiwan and will face some logistical challenges getting to Wuhan. The glass input is 100K including CF glass. On the other hand, with brands also seeing less demand, their CSOT’s demand is declining and shortages will not likely be a problem through the end of February.
- Regarding engineer shortages – direct labor cannot return to 100% due to restricted travel and foreign engineers can’t return. Thus, total utilization in China may fall as much 20%. The lack of foreign engineers will impact new capacity installation as well as new product development and sample production, especially for Wuhan fabs. The lack of overseas experts could further impact utilization and yields.
- Regarding demand, most retailers have been closed since January 24th. A number of brands have reduced their demand forecasts by 20% and we have heard that Huawei inventory levels have risen to 35% of their production vs. normal 10% levels and will need to reduce their forecasts. We expect Chinese smartphone brands may lower their 2020 forecasts by at least 10%. For 1H’20 new models, demand may fall by 20%. Mizuo has said they will lower production in Q1’20 by around 30%.
- In terms of the impact on other OLED and LCD suppliers:
- BOE’s production is not hear Hubei and have more supply and demand than CSOT or Tianma. Their CEO said they have already recovered 75% of production. We believe they are operating at 75% utilization at B7 and B11.
- Visionox is also not near Wuhan and is relatively safe. Their engineer and other staff shortage are not so serious, but are concerned about material shortages after February.
- EDO is benefiting from enough panel inventory at their distributors and agents. They are running at lower utilization due to a staff shortage, but it is not so serious as others. They are operating at around 55% utilization in Shanghai.
- CSOT T1 and T2 in Shenzhen are operating at around 70% utilization.
- Panel prices – panel prices will continue to rise on labor and material shortages and this trend should continue to at least June/July when demand rises on the Summer Olympics and European Cup.
Analysts are reducing their outlook for China’s economy. Citibank cut China’s Q1’20 growth outlook from 6.0% in Q4’19 to 4.8% in Q1’20 and cut its full year forecast from 5.8% to 5.5%. However, that was before widespread company shutdowns through February 9th. As the shutdowns get extended, others are saying China’s growth could be 0% in Q1’20 which would certainly impact the global economy, albeit temporarily if production gets back to full strength by the end of February. Coherent reduced its Q1’20 revenue outlook by $20-$25M since it can’t sell to or service their customers. Other companies are giving a wider range in their Q1’20 outlook as a result of the virus.