After my article last week on the possibility of Foxconn building an LCD fab in the United States (DCSM 01.23.2017), I’ve had a number of e-mail exchanges from people wanting to understand some of the economics, so I’ve run through a few calculations to ponder. The starting point for this idea is that the USA is the biggest market for big-screen TVs, 60” and larger. Although the China market has a bigger average TV screen size and China has larger volumes than the US up to 55”, in the 60”+ category the US constitutes more than 50% of all global volume. So it’s worth asking the logical question: if the market for the biggest TV sizes is in the US, why make all these LCD screens and TVs in Asia and ship them all the way to the US? Why not make them in the US and save on all that shipping?
I have a side story on this question, going back about 10 years to the high growth days of LCD TV, when I was the Director of Marketing Intelligence at Corning Display Technologies. We would meet with TV makers to understand market dynamics and exchange forecasts, and during this time we met regularly with Sharp-USA, based in Mahwah, NJ. Sharp at that time had recently completed their Gen 8 fab at Kameyama, and were considering locations for the next big investment, that ultimately became the Gen 10 fab in Sakai City. The Sharp-US team told us that Sharp considered exactly the question above – why not build in the US to save on logistics? The next question became: where in the US should they build? Looking at a map of the US, some of their Japanese counterparts pointed to the center of the map. So the code name for the project became “Kansas-yama”, which of course ultimately never came to pass.
The first issue to understand is the quantity of TVs that could be produced by a single fab. The largest LCD fab today is that Gen 10 fab in Sakai City, now called Sakai Display Products with ownership split between Terry Gou (his personal investment, rather than Foxconn), Sharp (now a subsidiary of Foxconn, Samsung (a 5% share), and a few other suppliers. Several Gen 10.5 fabs have been announced and/or are being built in China, by BOE, CSOT, HKC, and Foxconn. The Gen 10.5 fabs have a substrate size of 2940 x 3370mm, and therefore are capable of making 65” and 75” TV panels with high efficiency, with one substrate making 8x65” or 6x75”.
While Foxconn has not given any information about a US fab other than the investment amount ($7 billion) and one location under discussion (Pennsylvania), we can make some assumptions about the fab to understand the implications. The investment figure is similar to, but a bit larger than, the large fabs being built in China. These fabs have a design capacity of 120,000 substrates per month. An investment of $7 billion would get more than 120k capacity if it was a-Si, but it some or all of the capacity was a more advanced backplane technology such as oxide-TFT LCD or OLED, then the required investment would increase rapidly. So let’s assume that the proposed fab has 120k of capacity.
Such a fab, when fully ramped and running at full capacity, would be capable of making:
120k * 8 panels / substrate * 90% yield * 12 months = 10.4 million 65” panels per year
Or alternately, 7.8 million 75” panels, or a smaller number of larger panels (132” or 11 foot diagonal would also be made efficiently with a 2-cut) or 23 million 44” panels or whatever combination Foxconn would prefer. Let’s assume that they target the biggest sizes, and split capacity between 65”, 75”, and larger sizes in the ratio 50%/25%/25%. This would allow them to make 5.2 million 65”, 2 million 75”, and about 800,000 larger sizes (90”, 100”, up to 132”). Such a capacity for large-size TV panels would enable this fab to completely supply the US market for 60” and larger sizes. There were about 4 million 60”+ TVs sold in the US last year, and although the market for very large TVs has seen its growth slow over the last several years, when we consider the growth of 4K and even 8K programming, it is not implausible for this market to double in the 6-7 years before this fab would be installed and running at full capacity.
If a similar number of TVs were in Asia, what would be the shipping cost to get these to market in the USA? For 65” TVs, about 150 can be packed into a standard 40-foot shipping container. With the cost for shipment from Shenzhen to Los Angeles at about $1500 per standard container, that’s $10 to get to port. Add to that the inland truck shipment, assume an average of 2000 miles at $1.50 per mile is $3000, or another $20 per set to get to the average warehouse, for a total of $30 shipping. If the TV sets were made in Mexico from panels made in Asia, the ocean shipping can be substantially reduced by shipping LC cells and completing module assembly in Mexico, reducing the ocean shipping by a factor 3-4, but if assembly is in Tijuana there is still the truck shipment, so figure $23 per set in that case.
If LCDs were made at a plant in the USA, and that fab was strategically located in the industrial Midwest, the average shipping distance might be reduced to 1000 miles or maybe a bit less, giving a figure of $10 per 65” set, compared to $23 for a Mexican-assembled TV or $30 for an Asian-assembled one. Although Pennsylvania was mentioned by Foxconn, Ohio or Kentucky would be a bit more centrally located, and each of those states has some LCD resources to provide a prospective manufacturer.
The TV industry historically has struggled with low margins. Subscribers to our Quarterly Display Supply Chain Financial Health Report will know that even some of the top brands in the industry squeeze by with profit margins of just a few percent of sales; several brands in 2016 managed to set record-level profits but those operating profits still did not exceed 10% of sales. The savings on logistics of $13 or $20 per TV set would be 2-3% for a typical set today retailing at $1000 with a $700 wholesale price, and this percentage would increase as the set price fell over time (in the TV industry, prices always fall year-after-year), potentially making the difference between an unsuccessful business and a profitable one.