Tuesday, August 16, 2011

Poor global economic performance and over-capacity constrains flat panel manufacturers

TAIWAN: According to WitsView, the research department of TrendForce, the poor global economic performance, including worsening Europe and US debt problems and unremitting inflationary pressure, are the main reasons for the depressed demand in the end-user consumer market. Both brand-name products and distribution channels are becoming more conservative in their sales forecasts for this year, casting shadows over the customary peak season, which falls in the second half of this year.

WitsView indicates that flat panel manufacturers were originally optimistic about the product demand for the customary peak season for the third quarter, expecting the restocking demand to pick up month by month. Manufacturers increased the utilization rate in the second quarter in the hope that rising demand of customary peak season would push up the sales volume and prices, boosting the overall revenue and profit margin to end the nightmare of three consecutive quarterly losses.

However, the demand from downstream customers in the second quarter was lower than expected. The visibility for the third quarter was unsatisfactory, and the inventory pressure was rising. This economic down turn forced flat panel manufacturers to cut the utilization rate to minimize the potential excess supply.

Looking at the gloomy sales outlook for the third quarter, with the double blow of inventory pressure and weak demand flat panel manufacturers now expect the price drop on flat panel products to return; to cope with the situation, flat panel manufacturers will be forced to reduce the utilization rate. However, manufacturers in Taiwan, China, and South Korea are responding differently to the situation.

Taiwan-based manufacturers are expected to cut back the production in the present dilemma; due to lack of own-brand products that could help them alleviate the pressure in the inventory adjustment. When downstream customer-demand becomes weak, Taiwan flat panel manufacturers estimate that the average utilization rate will fall to around 70 percent to 75 percent in the third quarter.

On the other hand, although the Korean flat panel manufacturers are also faced with poor overall market demand, their sales volume will be more stable with the support of their own brands, with an average utilization rate between 80 percent and 85 percent in the third quarter, which will continue to increase month by month. BOE's 6G production line has the pressure of accelerated depreciation and amortization, so it will be maintained at full production capacity.

Furthermore, its 8.5G production line has already started small amount production in the test phase in August, and it is expected to launch mass production in September. At that time substantial pressure will be felt by the large-size flat panel market.

For the market supply to stabilize into the fourth quarter, flat panel manufacturers must cut their production in the third quarter. WitsvView indicates that key factors determining demand in the fourth quarter include: China’s sales performance from the Chinese Mid-Autumn Festival to the October 1st National Day as well as European and American on Black Friday before Christmas.

On the supply-end, Korea and Taiwan flat panel manufacturers need to adjust their production capacity in the third quarter but with different adjustment strategies to avoid cancelling out some of the effects of the production cutback. If flat panel manufacturers still intend to push up the utilization rate in the fourth quarter, it may spoil the supply and demand situation again.

With no solid customer base and inferior cost structure, compared with Korean counterparts, Taiwan-based flat panel factories may be forced to remain in operation at low utilization rate. In addition, the imbalance between supply and demand may create new worries among Taiwan-based flat panel manufacturers; flat panel prices this year may not rise and financial pressure on the flat panel manufacturers will continue to grow.

The figure below demonstrates changes in average utilization rate (2Q11-3Q11) among the flat panel manufacturers of Korea, Taiwan, China, and Japan.

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