With South Korean rivals stretching their lead in unveiling substantial capacity expansion plans in China, Taiwanese liquid-crystal-display (LCD) panel makers are scrambling to follow suit to defend their Chinese turf and play catch-up before the imminent emergence of the world’s most populous nation as the biggest market for flat-screen TVs.
In October, South Korean LCD panel maker Samsung Electronics Co signed a memorandum of understanding with the Suzhou Industrial Park Administration Committee to collaborate on building a cost-efficient 7.5-generation TV display factory in China for about US$2.25 billion. LG Display Co has also struck a deal to build a 8.5G plant to cut LCD glass panels in China.
Limited by Taiwanese government restrictions, local LCD panel makers have lagged behind their South Korean rivals in mapping out plans for China. Two weeks ago, however, the government lifted long-standing restrictions on local panel companies, allowing them to build production lines in China in a bid to reduce the risk of Taiwanese manufacturers losing even more of their market share to South Korean competitors. In the past, Taiwanese manufacturers had to export panels to Chinese clients.
“Under such circumstances, we have to be pragmatic [about limiting investment in China] and lend a hand to local enterprises,” Minister of Economic Affairs Shih Yen-shiang (施顏祥) told a media briefing earlier this month, unveiling the government’s decision to ease bans on local LCD panel makers building factories in China.
“Our [new] rules are similar to those imposed by the South Koran government,” Shih said.
Despite repeated calls from local companies, the government had previously been unwilling to relax restrictions on China-bound investments by flat-panel makers for fear of losing core technologies to China.
Taiwanese LCD-panel manufacturers are now allowed to build more cost-efficient 7.5G and 8.5G factories for cutting 40-inch or 52-inch TV panels from glass substrates, the Ministry of Economic Affairs said in a statement.
However, manufacturers are still required to keep more advanced technologies at home and to invest more locally, the ministry said.
Shih said the restrictions were being eased in anticipation of China becoming the world’s biggest market for TVs and flat panels.
Next year, China is expected to surpass North America as the world’s biggest LCD TV market with projected sales of 37.2 million units, which would make up 21 percent of global LCD TV, projected at 174.6 million, according to a forecast by Austin, Texas-based DisplaySearch.
That would make TV manufacturers in China big enough to compete with major TV brands such as Samsung and Sony Corp in purchases of LCD panels.
AU Optronics Corp (友達光電) chief executive Chen Lai-juh (陳來助) said China has been making its influence on the panel industry felt in view of rising demand for slim-screen TVs during the Lunar New Year holidays.
“If Taiwanese LCD-panel suppliers can start smoothly ramping up Chinese plants in 2012 [at the same time that Samsung and LG Display are expected to do so], they will be able to safeguard their current market position. Or even better, they may be able to narrow the gap with [South] Korean rivals,” said Corwin Lee (李秋緯), a flat-panel industry analyst with Topology Research Institute (拓墣產業研究所) in Taipei.
In a statement released right after the government made the announcement, AU Optronics, the nation’s top flat-panel maker, welcomed the relaxation of China-bound investment policy, saying it would help make the local LCD industry more competitive.
It added that it had definitive plans to speed up its capacity buildup in China.
AU Optronics has more to gain by expanding its manufacturing capacity in China than some of its local rivals, as it supplied only about 26 percent of the TV panels purchased by Chinese TV makers last year, compared with more than 50 percent supplied by Chi Mei Optoelectronics Corp (奇美電子).
“It would be an effective solution to reverse local panel makers’ disadvantageous market position by supplying panels to Chinese customers from on-site production lines, coupled with the successful business model built last year between Taiwanese LCD panel suppliers and their Chinese TV partners,” said Roger Yu (游智超), a LCD industry analyst with Polaris Securities Co (寶來證券).
Last year, inflows of fresh orders from major Chinese TV makers such as Haier Group (海爾) and TCL have helped cushion the blow for local LCD suppliers as the global economic recession froze consumption of almost all kinds of electronics in the US and European markets, Lee said.
That also helped Taiwanese panel companies recoup some of the market share they had lost to South Korean competitors in other global markets last year, Lee added.
Local LCD panel makers increased their Chinese market share to more than 53 percent last quarter, from 37 percent in 2008, Topology’s figures show.
Meanwhile, their global market share in terms of unit shipments dropped to 42.3 percent last year from 46.9 percent in 2008, according to the latest figures released by another Taipei-based researcher, WitsView.
South Korea overtook Taiwan as the world’s biggest LCD-panel supplier last year by grabbing a 50.9 percent global share, the figures show.
“To some extent, Chinese TV customers can provide a buffer for Taiwanese LCD-panel makers against an overcapacity-driven downturn as reflected in the industry’s severest slump last year,” Yu said.
Local players were disadvantaged by not having own-brand TV businesses that could digest excessive production when demand slackens, while Samsung and LG Display, for example, suffered less during the downturn by selling panels to their brand operations and reducing panel purchases from rivals like AU Optronics, Yu added.
Highlighting the crucial role the Chinese market plays for local panel companies, Lee said the relaxation of restrictions “could be the last chance for local firms to win back market dominance, if they can succeed in holding a bigger share in China, which will soon replace the US and Europe as the new driving force for TV panel makers.”
“And Chinese authorities seem to prefer Taiwanese firms because of the cultural factor,” Lee said.
To fend off growing competition, “signing supply contracts or building panel assembly lines jointly with Chinese TV makers is not enough,” Yu said.
AU Optronics has formed a joint venture with Chang-hong Electric Co (長虹) to assemble TV panel modules in Sichuan, China, while Chi Mei Optoelectronics is collaborating with Hisense Group (海信), one of China’s biggest TV makers.
As political and economic ties between Taiwan and China have improved, AU Optronics and Chi Mei obtained orders amounting to US$3.4 billion from supply contracts signed with Chinese TV factories last year, company figures show.
This year, the purchases expanded to US$5.3 billion based on the latest contracts signed last month. TV demand in China is expected to grow further after China increased TV subsidies this year as part of its economic stimulus measures.
However, setting up production lines in China is not a cure-all, analysts said. Aside from intensifying competition there, oversupply and intellectual property right protection will be major concerns, they said.
“I believe it is a real challenge for any global company to run a business in China, as they have to cope with new game rules and new standards created there,” AU Optronics chairman Lee Kun-yao (李焜耀) said at a forum last month in Taipei.
Besides, it is “undeniable that Chinese players are posing a growing threat to companies doing business in China, Lee Kun-yao said.
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