Small LCDs, Panel Pricing and PC Demand

One of the stories which caught my eye recently is the possible merger of Sony and Toshiba’s small panel business to create what would be the largest player in that space in the market.

For Sony and Toshiba, a joint venture would look a reasonable proposition. Both companies have good display technology, especially in polysilicon, and they will each struggle to compete in the long term with the giants of the LCD world if they remain alone.

Also a couple of weeks ago, Sharp said that it was planning to restructure its business by moving more small panel production to larger substrates and reducing its business in the ‘commodity’ market of TVs of 40″ and below. Although a number of commentators remarked on this ‘new’ strategy for Sharp, to me it seemed to just be a return to the strategy of old. When others were pursuing monitor panels, at the time when G5 and G6 was ‘state of the art’, Sharp focused on its high value add small panels, exploiting its CGS (LTPS-like) technology, and its large TV panels. At that time, the strategy was known as the ‘smile curve’ – the profit was at the raised ends, not in the volume middle. It was only with the G8 and G10 fabs, and especially the G10, that Sharp got more into the volume markets and part of this was strongly driven by the success of the firm’s TV business in Japan.

Now that the TV business in Japan is so grim, following the tsunami and the huge peak in sales as a result of government subsidies, there is simply not enough demand to fill its fabs and we hear that Sharp didn’t really get the hang of working in the commodity panel market with potential TV competitors – which could have been a factor in Sony scaling back its plans to invest in Sharp’s G10. There seems little prospect of Sharp’s TV business outside Japan coming to the rescue, so this realignment looks sensible.

One of the problems for the whole market is demand, which is still weak in Europe. We have seen PC analysts downgrading their forecasts and our own inventory and sales surveys show that monitor and TV brands are not meeting their targets and even the monitor brands, which are good at controlling their stock levels, are starting to see some inventory build-up. Part of that is normal seasonality, but last time we saw this build up was a year ago. The difference this time is that the slowdown in 2010 followed a period of shortage and positive sales at the end of 2009 (especially for TVs), but the 2011 difficult market is following a tough year, so there is little ‘fat’ in the system.

For this reason, even though panel makers are talking up a rise in panel prices over the next few months, we really don’t see this as a possibility unless the panel makers radically reduce their capacity plans to squeeze supply, and our friends at DisplaySearch are not indicating that this is likely at the moment. There is simply not enough demand in any of the main markets to allow price increases and margins are already cut to the bone. Panel makers have discovered before that if they drive set makers out of business, one of the side effects is that it concentrates more power in the hands of the major brands and reduces their customer base. That is not in their long term interest.

The reduced demand for PCs is real and I noted on UK TV this week, an advertising campaign from Microsoft to highlight how much ‘computers have improved’ in recent years. The advert hardly mentioned Windows or any other Microsoft product, it was just promoting the concept of buying a new PC, and I don’t remember ever seeing that before. I plan to return to the wider question of PC demand soon.