The Top Ten Stories of 2019
Now in this year’s final edition of the DSCC Weekly Review, it’s time to review the year with the top ten stories. While I solicited and received some input from my DSCC colleagues on this column, the decision on which stories made the top ten was mine.
#10) Quantum Dot LCD TVs Proliferate
While OLED TV stands on top of the premium TV market (Samsung would disagree, but most industry observers outside Samsung would agree), TVs with Quantum Dot Enhancement Films (QDEF), labeled by Samsung and TCL as QLED, have found a profitable place at the high end of the market. With lower prices for QDEF films, QD LCD TVs were introduced by a wider array of brands in 2019 and at increasingly lower price points.
Samsung led the way in QD proliferation by broadening the use of quantum dots in its TV product line. Up to 2018, Samsung sold QLED TV only in their highest-end 8- and 9-series models, but in 2019 Samsung brought quantum dots to their 6- and 7-series as well. Black Friday saw Samsung selling 65” QLED TVs for only $999.
At the same time, Vizio, TCL and others introduced a wide array of TVs with QDEF. TCL’s 65” QD LCD TV started at $600, and we’ve seen TVs from JVC brand selling for as low as $400.
With the lower prices, quantum dot TVs have sold in higher volumes. DSCC estimates that 2019 sales of TVs with quantum dots will increase to more than 7 million, from about 4 million in 2018, and that this growth will continue in 2020.
#9) LGD Starts OLED TV in China, But Stumbles
For years, LG Display has focused its greatest efforts in its White OLED TV panel business, and in 2018 LGD made tremendous progress from both a market perspective and in business results. At the beginning of 2018 LGD was losing money on OLED TV, but robust sales by its internal customer LGE and acceptance by an increasing number of TV brands allowed LGD not only to increase volume but to raise its prices for OLED TV panels.
LGD’s long-term plan has been to dominate OLED TV, and by extension premium TV, by scaling up production, bringing down costs and increasing the volume of sales. A key part of that plan has been the start of the company’s OLED TV panel production line in Guangzhou, China. LGD expected Guangzhou to achieve lower production costs, allowing the company to profitably serve the market even as prices fell.
LGD appears to have made some miscalculations, though, in starting Guangzhou. We understand that the company adopted a different design in the OLED stack and that this, among other reasons, resulted in poor yields. LGD acknowledged in its Q3 earnings call that yields in the China factory were lower than expected.
In fact, LGD has officially delayed the start of production from Q3’19 to Q1’20. On top of the supply problems, LGD has been faced with problems on the demand side as well. The sharp drop in LCD TV panel prices in 2019 has widened the gap between LCD and OLED into a chasm. LCD TVs at 65” and even 75” are routinely less expensive than OLED TVs at 55”, and there is a limited market for TVs at the high prices OLED requires. As a result, LGD will not achieve its original business plan of selling 3.7 million OLED TV panels, and DSCC’s latest estimate is that OLED panel sales will reach only 3.2 million in 2019.
#8) Tough Year for Equipment Suppliers
With big investments in LCD and OLED capacity from 2016-2018, equipment suppliers had three years of robust sales, but that pattern fell apart in 2019. The oversupply in LCD led to some planned capacity expansions (notably Sharp SIO in Guangzhou) to be pushed out, downsized or canceled, and the oversupply in mobile OLED led to a sharp reduction in new fabs in 2019. While LCD equipment spending, driven by Gen 10.5 expansions, managed a 5% increase Y/Y, equipment spending on OLEDs fell 65% in 2019 compared to 2018.
Less equipment spending led to lower revenues for equipment makers. Revenues for the 30 companies covered in DSCC’s Quarterly Display Supply Chain Financial Health Report declined in each quarter of 2019, with Q3 2019 revenues of $2.145 billion down 47% Y/Y and at the lowest level since Q2 2016. The lower revenues, of course, translated to lower profits: whereas in Q3 2018 28 out of the 30 companies covered registered positive operating margins in their display equipment business, by Q3 0219 there were nine companies in the loss column, and average operating margins had declined from 15% to 8%.
LCD and OLED Display Equipment Spending
#7) China Gains and Loses Ground in Mobile OLEDs
While Samsung holds a commanding lead in the production of flexible OLED panels for smartphones, the many investments in flexible OLED capacity in China have been an effort to catch up to the leader. Whereas in the LCD TV market Chinese panel makers with new capacity have tended to run at the highest utilization possible to rapidly progress up the yield curve, it has been a different story in flexible OLED.
The TV market is supplied by an abundance of commodity panels in standard sizes, so a panel maker can start production with several of those commodity products and be confident that the products will be sold, if the price is low enough. The smartphone market, though, is not so commoditized, and especially at the high end each product is different. So a panel maker that produces, for example, iPhone-spec panels without an order is likely to find that they can’t sell their product. While panel makers in China, with generous government subsidies, are less sensitive than their non-Chinese competitors about managing cash, even the Chinese panel makers can’t go on very long making panels that don’t sell.
BOE’s experience with Huawei in 2019 exemplified this problem. With their yields improving in late 2018 and early 2019, BOE first won the business to make the panels for the Huawei Mate 30 Pro, then lost the business due to poor yields for the 3.5D design with BOE’s version of on-cell touch, FMLOC. BOE’s B7 line in Chengdu fell from 45% utilization in Q2 to only 12% utilization in Q3 after losing the Huawei orders. BOE has recovered in Q4, though, by winning business for the Huawei P40 handset and starting shipments for the Xiaomi Mi 10, Vivo X31 and Oppo Reno 5G handsets.
#6) Foldable Phones Have a False Start, Then a Real One
Foldable phones are the wave of the future, or they need to be if flexible display industry investments are expected to every payoff. First Samsung, the LGD and Chinese panel makers invested heavily in flexible OLED capacity, and while that capacity is used to make high-end smartphones today such as the iPhone Pro series, the Galaxy S series and top-of-the-line models from Huawei, Google and others, the fixed and rigid form factor of those handsets underutilizes the benefits of the flexible OLED display. The investments in flexible OLED will only pay off if foldable products can become a viable category.
So although we saw the first introduction of a foldable phone in late 2018 with the Royole FlexPai, the whole world was waiting for the real thing from Samsung. The Korean giant obliged with the introduction of the Galaxy Fold in April, only to pull the product off the market after early users misinterpreted Samsung’s poorly-worded instructions and tore off the plastic cover layer of the display.
Samsung re-released the Galaxy Fold in the fall, with an improved cover and hinge and better instructions to users. The updated Galaxy Fold has been a modest success in the marketplace, with sales exceeding Samsung’s most recent expectations and has sold out quickly in China.
In the meantime, while Samsung remains a clear leader in the space, we’ve seen foldable phones introduced by Huawei, Motorola, and others. Samsung will introduce a 2nd foldable phone in early 2020 with a clamshell design and Ultra-Thin Glass (UTG) as a cover material. Now to bring things full circle, in December we’ve seen the introduction of the Escobar Fold 1, which appears to be a rebranded Royole FlexPai but marketed by the unlikely Escobar, Inc., a spinoff of the Medellin cocaine cartel.
Samsung Galaxy Fold
#5) Japan Display Restructures, Finds a Savior in Apple
Japan Display Inc (JDI) spent most of the year trying to find an investor to shore up its finances, but eventually found an investor in December.
JDI has been losing money for several years and has been at risk of bankruptcy. In April, JDI announced a financial restructuring organized by the Suwa Consortium, a Hong Kong-based investment firm which would gather investments from Taiwan-based TPK and Hong Kong-based Harvest Tech Management. That deal, which was originally scheduled to conclude at the end of June, gradually fell apart in the spring and summer months as investors pulled out.
By the end of the third quarter, JDI’s financial distress had become acute, with the company reporting negative stockholder equity and a risk of de-listing of its stock. In October JDI announced that it would receive funds from a customer (widely known to be Apple) in the form of an investment and improved payment terms. Finally in December JDI announced that it would receive an investment from Ichigo Trust, a Singapore-based investment management company.
The restructuring program implemented during 2019 resulted in a shutdown of JDI’s LTPS LCD plant in Hakusan and the voluntary retirement of more than 1200 employees. With the reduction in costs, and improved sales in the fourth quarter, JDI expects to make a profit and stabilize its operations. The company hopes to make a fresh start in 2020.
#4) US-China Trade War Disrupts the Display Industry
The trade war between the world’s two largest economies had already threatened to harm the display industry in 2018, but that threat became a reality in 2019. The threat of tariffs led some display makers and brands to speed up imports from China to the US as early as the fourth quarter of 2018, in an effort to avoid a tariff. While the first three rounds of tariffs did not directly affect most dis- play-related end products, the List 4A group of products announced in August included TVs, and the 15% punitive tariffs were applied to imports starting September 1st.
A last-minute deal in December, described as a “Phase 1” deal but essentially a cease-fire in the trade war, averted another wave of tariffs that Trump had said would be implemented on nearly all imports from China not on previous lists. The List 4B tariffs which were scheduled to take effect on December 15th includes smartphones, tablets, laptop PCs and monitors.
Although List 4B was averted, the damage to the display industry had already been done. The inventory build-up driven by fear of the tariff on TVs led to an inventory train wreck when those tariffs were implemented in September. TV makers in China dramatically slowed down their production for the US market, and imports to the US of TVs from China fell precipitously in September and October. The slowdown exacerbated the industry’s existing oversupply and led to sharp price drops in Q3 and Q4 for TV panels.
#3) Samsung Decides to Invest $11 Billion for QD-OLED
For several years, LG Display has held a monopoly on OLED TV panels. LGD’s White OLED TV panels have increasingly gained market share in the premium TV space, boosting the LG brand and helping to revive the Sony brand at the top end of the market. Samsung has struggled to find a response, and while they still hold the #1 position in TV, their “QLED” TVs – LCD TVs using Quantum Dot Enhancement Film (QDEF) have been unable to sustain Samsung’s reputation for having the best TV money can buy.
So after years of development, in fall 2019 Samsung announced a major long-term initiative to shift from LCD TV to OLED, with Quantum Dot OLED products. Samsung will spend 13.1 trillion Korean won ($11 billion) on QD-OLED research and development and capacity. Samsung will convert their T8-1 line with 125k/month of LCD capacity into a production line named Q-1 with 30k/month of QD-OLED capacity. The big loss of capacity results from a higher number of mask steps, the need for frontplane equipment, and the need to manufacture the quantum dot color converter along with the continuing need to produce color filters.
Samsung indicated that it expected to convert or shut down all of its LCD capacity by 2025. Samsung Display CEO DH Lee indicated, “Quantum dots are our future growth vision of the large display industry.”
#2) LG Display and Samsung Display Shut Down Gen 8.5 Capacity to Shift to OLED
Because of the oversupply in LCD, the business of making LCD panels has become unattractive for panel makers. The two Korean panel makers have seen the future, and it is OLED. So rather than continuing to run unprofitable LCD lines, and rather than simply idling the lines temporarily to wait for better times, both LGD and SDC decided in 2019 to shut down a substantial part of their Gen 8.5 capacity permanently with the intent to convert these lines to make OLED TV panels.
LGD will convert Gen 8.5 LCD capacity to make White-OLED, while Samsung will convert Gen 8.5 capacity to make its new technology – Quantum Dot OLED. The combined reduction of capacity by the two Korean firms amounts to 15 million square meters of TFT input capacity per year, or about 5% of total industry capacity. That capacity reduction, along with some delays in 2020 expansion, might be enough to stabilize industry supply/demand.
#1) LCD Oversupply – TV Panel Prices Fall to All-Time Lows
This particular story is several years in the making, as the capacity increases that led to the oversupply were planned in 2016-2017.
The start of Gen 10.5 fabs, first BOE Hefei in 2018 and then CSOT Shenzhen in 2019, along with Gen 8.5/8.6 capacity in China led to two years of double-digit supply growth in an industry with demand growth in the mid-single digits. As it always happens in the industry, this leads prices for commodity large-size panels – which includes TVs, monitors, and notebooks – to fall more or less continuously until they reach cash costs. That has been the pattern in 2018 and again in 2019.
The chart here shows an index of TV panel prices formed from the average of seven TV sizes. Between January 2019 and December, TV panel prices dropped 25%, and the TV index which was set at 100 in January 2014 now sits at 42. TV panel prices have had double-digit Y/Y declines for 27 straight months.
The impact of the TV panel price declines has been felt in panel maker operating margins, which have fallen sharply to negative for panel makers depending on large-size panels for most of their revenues.