In his 2002 State of the Union Address, George Bush called North Korea, Iran and Iraq the “Axis of Evil”. If Bush were running Samsung now, he might use the same label for Hon Hai, Apple and Sharp. Hon Hai, the largest OEM and Apple, the largest of everything are rescuing Sharp, which owns the largest display Fab (Gen 10) in the world. Apple supported Sharp’s effort to convert an a-Si 8th Gen Fab to metal oxides (IGZO) and Hon Hai became a major investor in Sharp while committing to 50% of the Gen 10 output. The rescue is indicative of the rapidly changing landscape in the once robust flat panel display (FPD) industry. All the major display manufacturers have suffered from losses over the last 2 years, due in large part to the slow growth in the IT and TV industries. The display industry has always been faced with cyclical revenue growth (crystal cycle) due to the 18-month fab build time and the high capex, which now reaches up to US$5B per fab. Panel makers bet on the come that if they built the supply, the demand would appear and the new more efficient fabs would support lower prices and therefore increase the size of the market. But what happens when the market stops growing, these larger fabs become dinosaurs that operate at low utilization rates increasing the average costs. FPDs depended on the conversion of CRTs but now there are no more CRTs to convert.
The industry is faced with over capacity and huge operating losses. Unfortunately, the new applications, smart phones and iPads, though timely and growing have smaller displays and do not use enough capacity to support the new fabs. Sharp believed they could overcome the downturn by building bigger fabs, enabling larger TVs, but the volume was not high enough to use all of the new capacity. So they looked to Sony as a partner to buy the capacity, but Sony’s TV business was even more under water and Sony wants to walk away from their commitment. A second approach employed by Samsung was to bet heavily on OLEDs, which offered higher performance and potentially less cost. But Samsung could not move fast enough and has a number of legacy LCD fabs that are suffering from losses. LG Display is in the same category as Samsung, but has been slower to adopt the OLED technology. AUO and CMI, which invested heavily in Gen 7 and Gen 8 fabs now have large loans, very poor capital to loan ratios and are suffering from large losses and an inability to repay the loans. AUO and CMI are trying to adopt the OLED technology but have not had the capital to move quickly. The Chinese operating in the only TV market that is growing invested in new LCD fabs, but have not been able to yield quality panels and the Chinese brands are returning the inventory and looking to the Taiwanese and the Koreans for supply. And in Japan, Sony, Panasonic, Hitachi and Toshiba have essentially exited the FPD industry turning their capacity over to Japan Display Inc., a government backed entity designed to salvage jobs and knowledge. Panasonic also has an alliance with Sumitomo and is planning an entirely new process to print OLEDs for display purposes.
The business models are very different:
· Apple, Hon Hai and Sharp – distribute the work to the best in class operation
· Samsung – Vertically integrated, do as much in house as possible, control the sources of supply; similar to the IBM mainframe model in the 60s and 70s. Create an independent entity to maintain leadership in displays
· LG – follow Samsung when possible
· AUO/CMI – move from low cost fast follower to low cost slow followers
· Chinese and Japanese – Look to government and other sources to bail them out
· Microsoft/Nokia – alliance of struggling giants; OLEDs from Samsung a differentiator. Can they buy apps fast enough?
The dominance of Apple, Hon Hai and Sharp in the fastest growing display segments – smartphones, tablets and large size TVs creates major challenges for Samsung. As long as Apple uses LCD displays, Samsung’s display market share will be severely constrained. Apple has always claimed that the LCD display in the retina format had higher pixel density and lower power consumption than OLEDs. But Samsung’s new AMOLEDs are as dense as the retina displays and the use of phosphorescent green and doped transport layers provide the OLEDs with similar power consumer in white dominated images, the only place where OLEDs had used more power than LCDs. But the major reasons why Apple did not use OLEDs are:
· Insufficient capacity
· Lack of a second source, which meant that Apple would be dependent on its largest competitor for a component they could only get from Samsung.
Samsung’s restructuring of its display business is one of the tools the company is using to combat this situation by demonstrating to their customers that they are independent of Samsung Electronics, which produces phones, tablets and TVs; Samsung is also increasing its capacity and their other approach is to create OLED displays so compelling; high performance, flexible and transparent, that Apple will be forced to surrender and buy from Samsung. In the interim, before the availability of these game changing displays, Apple is unlikely to use OLEDs. So don’t put much stock in the variety of reports that the iPhone 5 will have an OLED display. Won’t happen this year!