Is LCD Market Overcapacity Being Reined In?

by: William Trent, CFA

The good news is that companies are seeing the light and cutting back on planned capacity expansions.

According to DigiTimes, CMO is to delay equipment installation at its 8G plant. Furthermore, the lower prices are starting to spur some demand. On their recent earnings conference call, tech reseller CDW Corporation (CDWC) said:

Continuing the recent trend, average selling prices of large format LCD monitors have declined significantly year over year. The more affordable prices have driven unit volume.

The bad news is that some manufacturers continue to pour on the capacity. Sharp (OTCPK:SHCAY) will invest 500 billion yen (about US4.26 billion) to build a tenth-generation (10G) TFT LCD plant, with construction to begin in the third quarter of 2007 and volume production to begin in mid-2008, according to the Japanese-language Nihon Keizai Shimbun. The plant will process 2,850×3,050mm glass substrates into eight 57-inch panels or six 65-inch panels.

Prices are now expected to fall a further 25% by year-end for some categories. As DigiTimes reports:

The ASP (average selling price) for a sixth-generation (6G) substrate is expected to drop to 14,000-15,000 yen (US$119-128) by year-end, according to the Chinese-language Economic Daily News (NYSE:EDN).

First-tier makers are now offering prices for a 6G substrate at 20,000-19,000 yen while prices from second-tier makers are about 22,000-23,000 yen, the paper indicated citing sources as saying.

In the meantime, Samsung Electronics managed to sustain profitability for its LCD division in the second quarter despite weak LCD TV sales, inventory pile-ups and an ASP (average selling price) reduction. LG.Philips LCD (NYSE:LPL), on the other hand, turned to losses during the period. There are several factors that contributed to Samsung’s success, including an earlier ramp up at its seven-generation (7G) LCD plants and strong support from downstream LCD TV brands.

Taiwan liquid crystal display panel maker AU Optronics Corp. (NYSE:AUO) said its second quarter net profit dropped nearly two-thirds because of steep price declines.

LCD panel producer 1-yr comparison chart:

LCD panel producer 1-yr comparison chart