News came in today of Samsung Electronics 2Q profit with headlines that read "Profit Down 11%" and "Worst Operating Profit Since 2003."

Steve Sechrist
Senior Analyst and Editor
of Projection Monthly

Next we get news of Samsung/Sony (S-LCD) planning to invest $1.9B into yet another Gen 8 fab in Tangjeong. The factory has an expected capacity of 50K substrates (2,200 x 2,500 mm) per month  each of which can be sliced into eight 46-inch LCD-TV panels. That’s an added capacity of 400K 46-inch TVs per month in time for Christmas ‘07.

On top of this, Samsung also announced plans to boost monthly capacity of its existing Line 7-1 to an additional 15K units/month starting now. Build-up is expected to reach 90K units/month capacity by the beginning of 2007.

Does this represent mindless expansion in the face of apparent industry-wide oversupply? Maybe not. In spite of all the nay-saying, Samsung reported revenue of $15B with $1.5B in net income. Yes, the numbers are down from last quarter, but Samsung is healthy and thriving even in the midst of "intense price pressure in mainstay products," particularly LCD monitors and TVs.

Economics 101 tells us quite clearly what to expect from oversupply: It leads to decreased prices (check), a lowering of manufacturing profits (check) and a resulting decrease in manufacturing output to move toward stabilization. (Oops. Missed that one). So what’s going on?

With the adoption and subsequent success of LCD-TVs, panel makers started to believe they had the "third-stool" to support flat-technology manufacturing and could finally tame the wild "crystal cycle," which is punctuated by overcapacity from a continual build-up of ever-higher-generation manufacturing plants coupled with higher yields leading to oversupply.

In fact, "reduced utilization" of LCD manufacturing capacity or was listed as a "key concern" by industry watcher Ross Young of DisplaySearch at the recent SID Business conference in early June. He also said there were too many players, citing 18 manufacturers shipping 10-inch and larger TFT-LCDs, with more entrants expected from China.

But all is not lost on this industry that seems to fly in the face of best economic practices. The invisible hand is working, as each panel manufacturer seeks to maximize utility by acting in its own best interest.

Samsung is a case in point. The company experienced increased price pressure over the past quarter, as did all the other LCD panel manufacturers. But Samsung is enjoying the benefits of its partnership with the hottest brand in LCD-TVs today - Sony Bravia - and sales of its own Bordeaux series were up 7% last quarter. Samsung recently reported inventory levels at just three weeks, when most other manufacturers were sitting on six weeks of inventory. In fact, last quarter Samsung’s LCD business reported sales on 40-inch and larger panels jumped a whopping 87% (Q on Q), and that revenue and operating income hit $3.04B and $80M respectively. While the numbers are down slightly from last quarter, they are in the black, - unlike rival LG.Philips LCD, which suffered a $396M loss in the quarter.

In the face of such realities, it makes sense for Samsung to invest in capacity, particularly when sales of top-selling brands grew 87% in a relatively down quarter. But as Samsung acts in its own best interest, the continuing LCD investment will trigger yet another crystal-cycle run, where higher capacity coupled with higher yields in the +40-inch category will translate into lower costs for panels. This, in turn, will spur demand for larger flat TVs by keeping downward pressure on prices. You can almost see that invisible hand.