By Ross Young
The times they are always changing in the display market.
A couple of days after this blog was posted, it was published and later denied by a company official that Samsung will be moving its a-Si TFT LCD operations out of Samsung Display and into Samsung Electronics. This aligns perfectly with its intention indicated below to close its a-Si fabs as in a couple of years its a-Si TFT LCD operations may be limited to providing panels to its TV business.
Samsung Display, one of the leading a-Si TFT LCD manufacturers for the past 20 years, is shutting down its 1st 7th gen line, Line 7-1, from as early as the end of July and there are rumors of a few more fab closures to come. Its a-Si TFT LCD footprint is expected to shrink dramatically over the next few years with potentially just one a-Si fab in operation in 2018 to serve its market leading TV business. Panasonic LCD is also rumored to be shutting down most or all of its 8.5G line. Based on the near term decline in a-Si TFT LCD capacity, Credit Suisse upgraded AUO and Innolux on this news and their shares surged.
The a-Si Fabs They Are A Closing
Samsung’s Line 7-1, which began operation in October 2004 and production in May 2005, reached capacity of over 150K 1870 x 2200mm substrates per month and is rumored to be shutting down from July 30 through the end of the year. It is a unique glass size which was the largest in the world at the time of its introduction and is optimized for both 40” and 46” LCD TV panel production. It was also the site of the Samsung-Sony joint venture, S-LCD, established in April 2004. This line enabled Samsung and Sony to rapidly take share from smaller 6G fabs optimized for 32” and 37”. During that time, the two companies competed aggressively in retail while establishing 40” and 46” as mainstream sizes. The JV with Sony ended in 2011. S-LCD also built an 8th gen fab that began production in Q3’07 and Samsung also built a second 7th gen line, L7-2 on its own, with even more capacity at over 170K substrates per month which started production in Q3’08.
Line 7-1 , which reportedly accounts for around 3% of global production and 15% of Samsung’s production, was primarily producing 40” LCD TV panels which have been losing ground to 42” and 43” panels produced on larger, more cost effective fabs. As a result, this fab was most likely one of its worst performers and it made sense to close it down as more capacity comes online from China targeting the TV market over the next couple of years.
Displays are already a weak spot in Samsung’s financial performance. It caused the device solutions division to be the only division to suffer a loss among all major divisions within Samsung in Q1’16 and its revenues of 6.04 trillion won ($5.2B) were the lowest in 2 years. The display division alone posted an operating loss of 270B won ($233M) in Q1’16 resulting in an operating margin of -4.4%. While it has a number of technology and capacity advantages in OLEDs for mobile displays, it’s a-Si TFT LCD business has matured and is increasingly becoming commoditized as new entrants from China with government support are taking share. In addition, most of the a-Si TFT LCD market segments have become stagnant or are in decline which points to more losses given the growing Chinese competition. On the other hand, OLEDs and flexible OLEDs are poised for rapid growth as they take share. As a result, it makes good business sense for Samsung to exit much of the a-Si TFT LCD market.
There are rumors that Samsung intends to sell the equipment from Line 7-1 to Twinstar in India which plans to spend $10B with government support to establish an LCD manufacturing center in Maharashtra, India. Samsung is rumored to be converting this facility to a 6G OLED line to support demand from Apple.
Line 7-2, newer and larger than Line 7-1, is also rumored to be for sale and is expected to be shut down in 2017 but it likely depends on profitability. Line 7-2 has been producing 3-4M 40” panels, 300K 75” panels as well as monitor panels. Twinstar is also a potential customer for the manufacturing equipment and this line may also be utilized for OLED production in the future.
Samsung is expected to begin shipping for the first OLED iPhone in volume from Q3’17 with input capacity from the modified Line 7 ramping up to between 90K and 120K substrates per month. Apple is expected to purchase 70M OLED panels in 2017 according to sources.
That is not all however. Line 6, its last 5th gen line with 1100 x 1300mm substrates and around 190K substrate per month capacity, is also expected to be shut down according to industry insiders. That line, which features a-Si and oxide TFT LCD production, has been producing tablet, notebook PC and LCD monitor panels. Those markets have also been hit by stagnant demand, growing competition from China, commoditization and declining margins. This line is expected to be shut down between the end of 2016 and 2017. Line 6 is expected to be converted to a semiconductor facility, making application processors.
If Samsung closes down Line 6 and Lines 7-1 and 7-2, it’s a-Si production will be down to just two 8.5 gen fabs, one in Suzhou, China and one in Tangjong, Korea. The Suzhou fab, ramping to over 100K substrates/month, is also rumored to be a candidate for sale with Chinese and Indian TFT LCD suppliers potential customers. If Samsung licenses it’s latest a-Si TFT LCD or oxide TFT LCD technology, that would certainly make the sale more attractive. This means Samsung would have just one a-Si TFT LCD fab, Line 8.
I believe Line 8 will be sufficient for Samsung to support its internal TV brand with leading edge panels for the TV market as it has 400K, 2200 x 2500mm (8.5G) substrate per month capacity. Samsung would likely continue to outsource its low end panels for its TVs to other LCD manufacturers and focus this fab on higher margin products such as 8K, HDR, QD WCG, etc. I cannot see Samsung abandoning LCD TV panel production until it believes OLEDs are cost effective enough to takeover the mid-range and high end of the TV market. This likely means until OLED materials can be inkjet printed which dramatically reduces OLED material costs, Samsung will still likely focus all its TV panel production on LCDs.
If this occurs as described, Samsung Display's output 42" and larger would be LCD and would be OLED below 42", although it may not have much production between 15" and 40". This would be an amazing, but expected transformation given the supply/demand and profitability outlook for the a-Si market.
Panasonic is also following Samsung’s lead. It is expected to reduce the glass input at its 8.5G line from around 50K/month to just 10K/month in September. Given the limited scale and costs of this Japan factory and its loss of share of its TV brand in many regional TV markets, the company is better off purchasing panels from LG and lower cost Chinese suppliers than trying to run a high cost fab in Japan in a market where commoditization is becoming increasingly common and a large wave of new, lower cost capacity from China is on its way. It may keep 10K of capacity for some period of time for Panasonic branded products, but it is hard to imagine operating a fab at just 10K/month for long as their lack of volume will increase their costs relative to other higher volume players.
Interestingly, with both Samsung and Panasonic reducing their a-Si capacity in the near term, Credit Suisse has upgraded their outlook for AUO and Innolux to outperform and both companies have seen significant share price increases as a result. Credit Suisse indicated that the closure of L7-1 will reduce supply by 12M 40” panels or 1/3 of the 40” market which will tighten supply in the 40”-43” market and produce a better pricing environment in this segment. AUO’s EPS was raised from NT$10.2 to NT$13 while Innolux’s EPS was raised from NT$10.10 to NT$14. Both companies stock prices have taken off with AUO’s stock price rising by 22% in the US in 3 days.
As Japanese and Korean players take more a-Si capacity offline, it will create a better environment for the Taiwan and Chinese suppliers, enabling the market to better digest all the new capacity being brought online in China. However, there is a tremendous amount of capacity coming and much of this older capacity from Samsung and Panasonic may get sold and reintroduced. As pointed out at SID, by 2019 China is expected to have:
2016 and 2017 are expected to be back-to-back years of over $12B in LCD/OLED equipment spending. Unless these fabs struggle with their ramp and their yields, the a-Si market will continue to be oversupplied although conditions should improve in the 40"-43" market in the second half of 2016.
Rather than battle it out with government subsidized Chinese players, Samsung appears to be accelerating its exit of the increasingly commoditized a-Si TFT LCD market. This should please its shareholders, especially if it can sell all its old equipment and license it’s a-Si technology for a royalty, but will be harmful to some of its suppliers. It is also likely going to protect its TV business by holding onto its most competitive fab, but will increasingly become an OLED company. Interesting questions as a result of these moves include:
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