Inventory of LCD panels at Chunghwa Picture Tubes, Taiwan’s third largest LCD manufacturer, increased 16% sequentially in the first quarter of this year; at AUO it was 8.4%; at CMO, 44.8%; and at LG.Philips LCD, a whopping 56%, DigiTimes reported this week, citing data supplied by the companies.

Ken Werner
Senior Analyst and Editor
of MDTV Retailer

Other sources cite poor sales particularly in Europe as a main cause of the inventory build-up. With the Football World Cup about to begin, many first and second tier brands put large inventories of LCD-TVs in place in anticipation of a surge in buying. Apparently, consumers have not gobbled up the LCD-TVs as fast as anticipated.

While Europe is soft, there is a general feeling that sales of LCD-TVs are soft globally as well.

Reacting to the problem, Hsiung Hui, EVP of AUO, the undisputed market leader among Taiwan’s remaining "four tigers," said panel makers should reduce production to decrease inventory levels. Previously, Hsiung noted that panel prices continued to fall while panel makers continued to increase production and accumulate inventory. If the panel makers maintain their rapid ramping of capacity, he said, panel prices will fall further.

And they are. From March to April, prices of 32-inch LCD-TV panels dropped at an increased rate of 7.3% to $481 and prices of 40/42-inch panels also dropped 7.3% to $879, according to iSuppli.

So prices are down. Does that mean that shipments are up? No, according to DigiTimes, reporting information from industry sources. Specifically, shipments of over-30-inch TV panels from AUO and CMO were flat from April to May. AUO’s 32-inch shipments stayed at 200K per month, while its 37-inch shipments dropped from 80K to 60K.

So, with inventory levels up, ASPs down and shipments soft, are profits under pressure? You bet. AUO and CMO may see operating margins in the single digits in 2Q, and JP Morgan predicts a sequential profit drop of 40% at AUO and 63% at CMO.

Are things any better across the water in Korea? Not at all. Goldman Sachs is predicting negative gross margins at Samsung’s LCD division and LG.Philips LCD (LPL) in 2Q.

So, with this grim background, are the major panel makers lining up behind AUO’s Hsiung Hui and saying "Right on, brother! Let’s decrease those inventories." Not all of them. CMO and CPT said they would not cut production, according to the Apple Daily, with CMO saying utilization rates will not directly impact inventory conditions (!) and CPT saying that oversupply is not as serious as is generally thought and there is no need to reduce output. LPL seemed more willing to face reality, saying it agreed with AUO and will continue to rearrange its product mix.

So some of the major players seem intent on producing their way out of over-production. That’s a huge gamble, which only pays off if the anticipated 3Q rebound is sufficiently robust to swallow the accumulated inventory as well as the increasing output of new manufacturing lines. Of course, if it doesn’t pay off for the panel makers, it will pay off big time for TV set makers and consumers, who will have even cheaper TVs this holiday season than anyone predicted.

This is the LCD business we know and love. The last few quarters, in which nearly everybody managed to make money, couldn’t last long. And those who thought that the rise of LCD-TV would end the "crystal cycle" will now have to use Windex on their crystal balls.