Investors — and that includes institutional investors — aren’t always logical, but they’ve finally realized that the combination of overcapacity, rising inventories, and falling prices at LCD panel manufacturers are not signs of robust good health.

Ken Werner
Senior Analyst and Editor
of HDTV Retailer and
Mobile Display Report

This morning, Bloomberg.com (among others) reported that "shares of LG.Philips LCD Co. [LPL] tumbled to a record low, leading a decline in liquid-crystal display makers, on signs that sales of televisions to watch the soccer World Cup missed expectations." Duh. This is a surprise? We’ve been seeing reports of soft HDTV sales and rising inventories in Europe for weeks, and our financial partner Townhall Proprietary Research has analyzed the situation at some length.

But reality is now sinking in across a wide front. LPL shares fell 13%; Samsung Electronics suffered its largest decline in three months, and Sharp had its biggest drop since September 2001, according to Bloomberg. Sony fell 3.3%; AUO, 4%; Chi Mei, 5%.

Where panel-makers go, component suppliers follow. Asahi Glass, Japan’s biggest supplier of LCD glass, dropped 4.8%; Nippon Electric Glass, 5.3%; and Corning, the world’s biggest maker of LCD, fell 6.2% yesterday.

It should be noted however, that these declines come at the same time as all global markets experience big declines in share prices driven by inflation fears and slowing economies. Nevertheless, the economics of the LCD industry are not that sound and can certainly account for a portion of these declines.

As reported in this space a couple of weeks ago, LPL and AUO said they would review their production plans. And Bloomberg quoted Yoo Byoung Ock, a fund manager who oversees $1.3B at Mirae Asset Investment Management Co. in Seoul, as saying, "The industry will continue to disappoint for the time being. This is a structural problem." Analysts are predicting sizable 2Q operating losses at LPL.

But other companies persisted in denying there’s a problem, or much of one. Samsung said it was "slightly behind schedule,'’ and would not slow its production rate. It doesn’t expect a significant impact on company earnings. Chi Mei said the erosion of panel ASP was "a bit bigger than we forecast in April."

AUO has been the most forthright in confronting the issue, and said last week, according to Bloomberg, that it plans to utilize 90% of its production capacity during 2Q instead of the 95% it anticipated in April. LPL’s 2Q shipments of TV panels are now expected to grow 25% from the preceding quarter, half the anticipated amount. And 2Q prices will be 15% less than 1Q prices, up from earlier expectations of a 10% decline.

And as night follows day, declining profits breed renewed discussions of further industry consolidation. Taiwan’s AUO and Quanta Display announced their merger, which is to be consummated in October, earlier this year. The talk about mergers or acquisitions involving Chi Mei (second of Taiwan’s Five — now four — Tigers), CPT (#3), and HannStar (#4) will now intensify. And raw necessity may finally overcome the merger resistance that is born of pride and the desire to maintain a distinctive company culture. As JPMorgan Chase analyst Bhavin Shah put it, "Some of the second-tier producers may consider giving it up."