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As demand for LCD TVs continues to surge and is expected to reach 75 million units this year, the application is becoming the top segment in terms of panel shipment area consumption over that of LCD monitors and notebooks. The trend has also changed the way the crystal cycle evolves – the effect of seasonal factors is becoming even more obvious in the panel industry. Amid a brand new industry environment, panel makers are working to adjust to catch up with the changes.
In the first quarter of 2007, AU Optronics (AUO) snatched the top position for monitor panels from Samsung Electronics. The maker merged Quanta Display (QDI) in October 2006 and has been adjusting its business strategies to reflect its rapidly growing operation scale and ranking.
To further understand the adjustments, Digitimes recently had the opportunity to meet with HB Chen, president of AUO, to discuss the future business operations of the company.
Business operations
Q: AUO launched a restructuring scheme at the beginning of this year, with its IT, TV and consumer electronics displays units divided into three business groups while supply chain and procurement responsibilities were also redistributed among the groups. What were the considerations behind the restructuring? What effects will that bring? How will the new structure make the company more competitive and flexible?
A: It has already been nearly 20 years since the development of the IT industry. In the past, when makers of IT products, such as LCD monitors and notebooks, used to be the major clients of panel makers, the ups and downs of the panel industry was easy to track and panel makers were more familiar with the business models of the IT industry.
However, when LCD TV demand started surfacing with the segment being positioned as a consumer electronics one, the crystal cycle for the panel industry started changing, bringing new challenges to panel makers. In addition, be it technology or platform developments, LCD TV products are different from those for IT products, so is the customer base.
If our structure remained unchanged amid changes in the industry, our differentiation between product lines would diminish and it would be harder to stay focused. As a result, AUO restructured its businesses at the beginning of the year to keep our business groups focused.
The same applies to the management of the procurement and supply chain. Since the companies from which we purchase components for small- to medium-size and large-size panels are varied, we need to spread out the responsibilities for individual procurement and supply chain management.
Due to the changes, we are quicker in responding to changes of different business units. In addition, the economies of scales help us to remain competitive in our bargaining power.
In fact, we were considering structural changes since the second half of 2006. With the new structure running for nearly four months now, we are seeing positive results from it.
Q: AUO is continuing to raise the proportion of outsourcing for its LCD module (LCM) production. With the business model in progress, you can leverage the model as one of your advantages in negotiations during different seasons. Nevertheless, compared to front-end manufacturing, the investment amount for LCMs is lower. How will you distribute your resources among LCM outsourcing and self-reliance for the utmost benefit?
A: For better use of investments, AUO will not see a proportionate growth for its front- and back-end processes.
Not only are panel makers striving to optimize their supply chain, system integrators are also aiming for the same goal. Hence, duplicated investments from the makers will inevitably occur. For a win-win situation, it will be good to share the costs for the duplicated portion. After we are set with the LCM outsourcing strategy, we will start releasing orders in small volumes, to be followed by increased order volumes should the process go smoothly. However, we have not decided about the upper limit of the outsourcing volume.
Moreover, back-end assembly is not as intensive as the front-end process. Due to a more varied specification, the back-end process is more complicated. If we work more closely with system integrators, our response speed amid urgent orders can pick up.
Furthermore, with the revolution of panel specifications, outsourcing LCMs can be helpful for our business.
With the scale of outsourcing activities expanding, AUO will benefit from a less frequent change in production allocation and speeding up of asset turnover.
Q: After the parting of BenQ’s branding and OEM business, is there any chance your corporation will be intensified?
A: After the change, it requires five- to six times that of BenQ’s assembly capability to meet our outsourcing needs and BenQ’s OEM scale is smaller than that of either Innolux Display or TPV Technology. Hence, even if BenQ seems to be in a closer relationship with AUO,[link widoczny dla zalogowanych], BenQ will only be one of AUO’s partners for LCM production. AUO is open to any partnership with capable system integrators.
(Note: On April 26, BenQ's board of directors convened to approve a plan to spin-off its branded business. After the spin-off, BenQ will be renamed Jia Da (temporary translation) and the spun-off company is scheduled to succeed the name of BenQ. The spun-off company will be a 100% owned subsidiary of Jia Da.)
Q: With the growing size of LCD TVs, it is becoming more obvious the dominant party in the industry are branded TV makers. After the production commencement of AUO’s 7.5-generation (7.5G) plant,[link widoczny dla zalogowanych], most of the orders for 40- and 46-inch panels are from Samsung Electronics. Once Samsung adjusts the volume of its orders, how will AUO respond to this? Will seeking cooperation with major brands become one of your options?
A: Relying on only a few clients is not AUO’s strategy. In fact, we have an internal rule about the upper limit to the degree of reliance we have on each client. Apart from Samsung, most of the current top ten TV brands are our clients.
In addition, although branded makers are now controlling the LCD TV market and it is not easy to see a change of the situation, second-tier brands may see a chance for breakthrough within the next two years for 30- and 50-inch LCD TVs.
Since staying neutral is our policy, we are not considering seeking any branded makers to invest in us.
Q: AUO had net losses of NT$5.1 billion in the first quarter of 2007,[link widoczny dla zalogowanych], due in part to a low utilization rate. How will you seek a better balance between utilization rate and inventory management amid the evolution of the crystal cycle?
A: We do not store inventory, be it a slow or peak season. Instead, we are basing our production plans on the actual need of our clients.
The first quarter of 2007 is the first complete quarter after we merged Quanta Display (QDI). Due to the change, we did not perform that well, but our performance is expected to improve.
In addition, although the first quarter of this year being the traditional slow season, overall demand picked up compared to the same period last year. We believe demand in the first half of 2008 will be even stronger than the same period in 2007.
Since the market is expanding,[link widoczny dla zalogowanych], new applications are being rolled out and few capacity is being added to the industry, we believe we will not run our plants at a lower utilization rate in the first quarter of 2008 than last quarter.
Q: Besides cost reduction and performance improvement, what other strategies will AUO adopt when facing a slow industry demand?
A: One of our strategies is the LCM outsourcing move. In addition, we are confident that our performance can be further improved by a trend toward new applications and larger panels.
The market scale for public displays is rapidly increasing and the segment will be less affected by seasonality.
Furthermore,[link widoczny dla zalogowanych], the recent growth of panel output by area is much lower than the growth of panel demand, which is good for panel makers during a slow season.
China investments
China will need at least four 7.5G TFT LCD plants to accommodate the strong demand for LCD TVs in the market by 2010, according to Taiwan's Industrial Economics and Knowledge Center (IEK) under the government-sponsored Industrial Technology Research Institute (ITRI). LCD TV demand in China will climb to 25.1 million units by 2010, accounting for around 20% of global LCD TV demand, IEK indicated.
Q: What is AUO’s opinion on investing in front-end LCD production in China?
A: In fact, both branded companies and system integrators choose to stay close to their clients when selecting a location for their plants. However, it is not the case with panel makers. We need to stay focused for better management. In addition, it is always not too late to invest in another region until the supply chain at the place is complete. Before that, we tend to rely on different shipment methods for supplying international clients.
For investments in China, we can view this from two different dimensions. Besides the policy restraints from the Taiwan government, we also view related investments from the angles of capacity expansion and business opportunities. There is no urgent need for AUO to invest a front-end LCD plant in China within a year, as there is still room for expansion in Taiwan. Besides, there are other regions than China that have strong demand for LCD panels (such as South East Asia, Europe and the US). Hence, now we do not have plans for front-end production investments in China.
Nevertheless, from a global point of view, setting up LCD plants in China is only a matter of time – the issue lies in the timing of such investments. In addition, the investment schedule of Taiwan-based panel makers in China will be affected by the choice of location in China and the developments of the panel supply chain in the local region.
Q: A centralized operation facilitates internal management. However, China-based panel makers are soon to merge and they will inevitably invest in next-generation plants. In addition, there have been rumors that panel makers such as Sharp and LG.Philips LCD are eying partnerships with China-based panel makers. What is your opinion on AUO’s possible partnership with China-based companies?
A: We have not discussed in depth about working with China-based panel makers. AUO is not ruling out any investments in China, be it an independent investment or a joint venture.
About the market
Q: How do you see the public display market? What is AUO’s plan for the segment?
A: The size for public displays is not necessarily huge. In fact, the sizes of display for hotel lobbies and elevators can be as large as 50 inches or as small as 10 inches. In addition, the application is less susceptible to price changes. For AUO, related system integration for public displays is not difficult; the issue lies in adjustments of certain technology platforms.
The requirements for public display panels vary with the display method and the conveyed messages.
For instance, some displays require a horizontal display method, which does not require many changes for related technology platforms. However, for those requiring a vertical viewing angle, not only do we need to change the way cold-cathode fluorescent lamps (CCFLs) are arranged, the use and design of phosphors and color filters (CFs) also need to be changed.
Q: AUO is skipping 8G production and plans to migrate to an even more advanced generation. What size does AUO consider the largest possible one for future panel development? Could 8G production, which process 2,200×2,500mm glass substrates, likely offer the ultimate panel size for average LCD TVs?
A: AUO’s next-generation deployment will definitely involve processing substrates of larger than 2,200×2.500mm ones.
Since AUO is a pure-play panel maker without a strong support of its own-brand and 8G facilities require huge investments, which could bring high risks, we are not going to hastily enter the segment.
In addition, since we already possess the know-how for 7.5G volume production, it is not too difficult for a migration to LCD production using processes more advanced than 8G. We will only invest in more advanced generation technology when the large-size panel demand further expands, improvements of technologies for optical films and CFs are made while costs are further reduced.
Q: Matsushita Electric Industrial will see an earlier volume production from its second PDP (plasma display panel) plant in Amagasaki, Japan while Sony recently introduced a 27-inch OLED (organic light-emitting diode) panel. What is AUO’s take on this?
A: Matsushita’s earlier volume production of the plant will definitely affect the competition of PDP against LCD in the large-size FPD TV market. PDP is still competitive for the 50-inch-class TV market. The new capacity from Matsushita’s new plant will bring more uncertainty to the large-size FPD TV market and the market share will be further snatched away by the PDP party. Therefore, AUO is also watching very closely the developments of the segment.
In the future, for TFT LCD to compete against PDP in the 50-inch-and-above TV market, the former needs to not only stay cost competitive, but should offer better quality in areas such as resolution, color representation and power management. Should the PDP sector encounter any problems involving the aforementioned areas, TFT LCD makers stand a better chance. All in all, the competition between TFT LCD and PDP for the future 50-inch-and-above TV market will be a game of technology advancement and cost reduction.
For Sony’s attempt in using OLEDs for large-size panels, we are not worried about a quick change in the shift of mainstream display technology since OLED is still constrained by several technical limitations.
The interview was translated from Chinese.