The global panel industry has entered the winter break. How should we respond?

"The collapse of panel prices is terrible, and almost the entire industry continues to suffer losses." This is what an analyst who follows the panel industry told reporters.

Looking through the performance of various manufacturers in the first half of 2019 and the performance of manufacturers in the "LCD panel" in the past few years, we can find that the global panel industry has entered a severe winter. We can find that the global semiconductor display panel industry is gradually showing a new pattern under the trends of worldwide transfer, technological route change, and scale concentration on leading companies.

Of course, most panel manufacturers have been facing problems such as overcapacity, price declines, and continuous losses in the past two years. So how can they successfully survive the winter? Even turning the crisis into an opportunity and establishing a cyclical advantage in this situation is worth thinking about.

Panel industry dilemma: oversupply may continue

Li Dongsheng, chairman of TCL Group, said at an earnings conference in August: "The global display panel industry will remain in the trough for another two to three years, and industry concentration will increase, and industry mergers and acquisitions are inevitable."

Since 2017, the prices of display panel products have been falling. Industry insiders believe that the decline in panel prices is mainly due to overcapacity and oversupply. Take BOE as an example. Two of the three major business segments have achieved growth, and only display and sensor devices have declined year-on-year. BOE said that the overall growth of the display device market is lower than expected and there is oversupply.

In fact, the price of display panels has continued to decline in the past one or two years. The main reason is that the investment in domestic panel production lines has increased in recent years. Although the panel market has great potential and the market demand for new forms such as folding screens and curved screens is brewing and increasing, the traditional LCD panels have been significantly reduced. Therefore, the production capacity of panel factories has expanded and even exceeded demand, which is also the main reason for the price drop.

Staff at BOE's production line told reporters: "Once the production line starts, it is difficult to stop or reduce output." This is because once production is stopped, the losses may be greater than those from overcapacity.

Most panel manufacturers are cautiously watching the future market. In the foreseeable future of the display device market, the overall growth will still be dominated by oversupply, which means that there is a great chance that the price of display panels will continue to fall. However, some industry insiders also said that the market segmentation of display panels is already brewing, and the growth rate is starting to pick up, and the prospect of the innovative market is very promising.

Industry profits have "dive", closures and production cuts

The first half of 2019 was a year of challenges for panel manufacturers. Taking large-size TV panels as an example, the global TV panel industry is facing difficulties. Sigmaintell pointed out that panel production capacity maintained rapid growth, supply and demand were seriously unbalanced, panel prices accelerated their decline, and manufacturers faced severe challenges in operation and profitability.

As prices of major panel sizes fell, major global panel manufacturers all reported losses in their 2019 financial reports, including South Korea's Samsung and LG, as well as Taiwan's AUO and Innolux.

Amid the bleak situation of the continued decline in prices of major panel sizes, the 2019 interim reports of major global panel manufacturers have been released one by one over the past month. Whether it is Samsung and LG in South Korea, or AUO and Innolux in Taiwan, all of them have reported losses in their respective semi-annual reports.

Samsung's first-quarter revenue was 52.4 trillion won (about 45.18 billion U.S. dollars), a year-on-year decrease of 13.5%; net profit was 5.04 trillion won (about 4.35 billion U.S. dollars), a year-on-year decrease of 56.9%, and the drag of the display business was an important reason. Samsung's display panel business fell into a loss in the first quarter due to a decline in demand for flexible screens and an increase in market supply of large displays.

LG Display, LG's display company, saw its revenue fall 5% to 5,353 billion won (about $4.56 billion) in the second quarter of 2019, with an operating loss of 369 billion won (228 billion won in the second quarter of 2018).

AUO's self-reported consolidated revenue for September was NT$23.87 billion, down 1.1% from August and 13% from the same period last year. Consolidated revenue for the third quarter was NT$70.05 billion, the same as the second quarter and down 13.6% from the same period last year. AUO Chairman Peng Shuanglang once said that the company's capacity utilization rate will be adjusted flexibly in the third quarter, mainly depending on two factors: one is market demand, and the other is whether panel prices remain at a sufficiently healthy level.

Innolux's self-reported consolidated revenue for September was NT$21.7 billion (RMB 5.028 billion), up 3.1% from August but down 11% from the same period last year. Its self-reported consolidated revenue for the third quarter was NT$63.3 billion (RMB 14.669 billion), down 14.4% from the same period last year and up 0.2% from the second quarter.

Looking back at their financial performance over the past three quarters, this is the third consecutive quarter since the fourth quarter of 2018 that Taiwanese manufacturers have been in the red, and the second consecutive quarter that Korean manufacturers have been in the red.

Although we have seen Korean and Taiwanese manufacturers trying to reverse the loss situation by continuously increasing R&D investment, capital expenditures, and advanced products, it seems that the results are minimal.

South Korea's Samsung Electronics' operating profit margin has fallen to -2.4% in the first half of 2019. This is the first time in three years since the first quarter of 2016 that Samsung Electronics' panel business has suffered huge losses again.

As more and more Chinese manufacturers continue to join the large-size panel market, the price war in this field has become increasingly fierce, and panel manufacturers have suffered losses. Many manufacturers have been forced to reduce production or shut down some production lines since September.

According to relevant persons from the research institution, Samsung's 8.5-generation line with a production capacity of 120K/month in South Korea has been shut down one after another since July; LGD, a Korean display giant that has invested heavily in OLED in recent years, has also planned to gradually shut down its large-size LCD panel production capacity in South Korea.

TrendForce senior research manager Wang Jingyi pointed out that Korean panel manufacturers were the most active in this wave of panel capacity adjustment. Among them, Samsung Display (SDC) was hit by the sudden freeze in brand TV panel purchase demand in the fourth quarter, and significantly reduced the capacity of its 7th generation and 8.5th generation lines in Korea in September and October. It is expected that the 7th generation line will reduce more than 50% in September and October, and the 8.5th generation line will be reduced by about 30% to 40%.

AUO has reduced the production of 8A (8.5-generation line) and 6B (6-generation line) since September. The main impact of 8A is the poor price and demand of 55-inch panels. The production of 4Q is estimated to be only about 50%. 6B has reduced the production of 65-inch panels, and is expected to decrease by 20% in 4Q.

CSOT is renovating its T2 (Gen 8.5) line, so from September to the end of the year, T2 production is expected to decrease by 20%. BOE's Hefei 10.5-line and CHOT's 8.6-line production are also expected to decrease by about 20% by the end of the year. Sharp's 10.5-line panel plant in Guangzhou has also temporarily suspended its mass production plan this year due to the poor TV market conditions.

As Korean panel manufacturers have shut down many production lines this year, new production capacity of Chinese panel manufacturers has continued to be added. As a result, the proportion of large-size glass investment area of ​​Chinese panel manufacturers has increased to 42.3%, and is expected to approach 50% in 2020.

As the production capacity of large-size panels of domestic LCD panel manufacturers such as BOE and CSOT continues to increase, they can only cut prices madly to seize the market when market demand is not high. Although they cannot escape the impact of the industry downturn, the net profit of CSOT, Tianma, and BOE has declined in the semi-annual reports of 2019 that have been released. However, compared with the losses of panel manufacturers such as Samsung, LGD, Sharp, Innolux, and AUO, domestic mainland manufacturers are still in a better situation.

How to survive the harsh winter?

After decades of development, the global display panel industry has undergone great changes. Currently, the focus of the panel industry is shifting to mainland China, and it is believed that mainland China will become a major center of the panel industry in the future.

According to IHS forecast data, the global panel area scale will see an annual compound growth rate of 5% in the next five years. Among them, China's leading companies TCL Huaxing and BOE will rank first and second with 17% and 11% respectively.

As the 11th generation lines of the two mainland giants are put into production one after another, mainland Chinese manufacturers will continue to consolidate their voice in the global LCD panel market and continue to compete with Korean manufacturers in terms of scale and technology.

After Chinese panel manufacturers increased their investment in 10.5-generation lines, Korean panel manufacturers gradually shifted their focus to OLED and Micro LED; Taiwanese panel manufacturers are no longer able to invest in OLED, so they are betting their future on Micro LED; Japanese panel manufacturers, which have always stuck to LCDs, are in a very passive position and are gradually being marginalized.