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Samsung Reconsidering its A5 OLED Investment
February 03, 2018

ETNews claimed that Samsung Display's utilization rate at its A3 flexible OLED line has fallen more than 10% compared to 2017 as the company sees decreased shipments to Apple. ETNews said that Q1 is always a seasonally low quarter, but this year's utilization rate is lower than what Samsung experienced in Q1 2017. ETNews says that Apple's share of the A3 capacity was about 77%, with the rest of the production going for Samsung Electronics and Chinese phone makers. ETNews further reports that Samsung Display is increased interest from customers for flexible OLEDs, which could somewhat compensate for lower sales to Apple. Samsung is reconsidering its investment in its A5 flexible OLED fab. Digitimes claimed that Apple could discontinue its 5.8" OLED iPhone in 2018, which may lead to Samsung losing its biggest OLED client next year. Fourth quarter iPhone X sales were a disappointing 28m significantly below planned shipments of 50m. Apple is also reducing the amount of parts it is purchasing for iPhone X and has confirmed that it is not planning to order any more parts during the second half of this year. It is unusual for Apple to make large adjustments to its part inventories. The relative slow sales and the reduced buying is suggesting that Apple may have sufficient parts of the iPhone X for 2018 and will look to a new model in September.
Samsung Display informed its suppliers around the 19th of last month that it would be reducing the number iPhone X components that it orders from them. Samsung Display corrected the previous forecast and indicated that the orders would be reduced by more than 50% compared to its initial plan. The orders were reduced from 40 million units to 20 million units for the first quarter of 2018. Samsung Display is also predicting that amount of orders will continue to drop during the second quarter. "Amount of orders is being reduced by more than 50% every quarter and there are not any scheduled orders for the second half of this year as of now." said a representative for a component manufacturer. This indicates that amount of orders will continue to drop throughout the second quarter and that there are not any scheduled orders during the second half. Apple could be planning to discontinue iPhone X based on this trend.
 
Samsung Display's partners are looking at the decline in orders as a serious issue. Usually first quarter and second quarter are slow seasons. Also, there tends to be adjustments to inventories as Smartphone manufacturers are beginning to prepare to release their new products during the second half. As a result, the amount of orders tends to drop during the first and second quarters. However, recent decline surpassed the normal level of decline. "Because we lost a number of orders more than usual, we believe that lack of sales of iPhone X besides usual slow quarters is also impacting number of orders we receive." said a representative for a different component manufacturer that supplies its products to Samsung Display. Samsung Display's partners are currently supplying what is left on their inventories and they were informed from Samsung Display that it would stop ordering additional products from them.
 
Apple is also using products such as 3D sensing modules, cameras, and semiconductors from South Korean companies. Because changes in production of iPhone X impact South Korean companies directly and indirectly their performance is likely to drop compared to 2017.. Although iPhone X is the only current iPhone model equipped with an OLED display, South Korean industries are interested on changes of strategies by Apple as Apple is looking to use OLED displays in future iPhones.
To overcome the drop in iPhone X shipments, Samsung Display is strengthening its marketing on Chinese markets and expects to replace orders lost from Apple with orders from Chinese Smartphone manufacturers by supplying more of its OLED panels to them.
 
A local South Korean news outlet has stated that Samsung Display is reconsidering its ~$18b investment in the A5 OLED fab it was planning to build in Asan (announced in July 2017).  The fab, known as A5, was planned to be a four phase Gen 6 flexible OLED fab, with a total gross capacity of 120,000 sheets and using LTPS backplanes, but the project is said to be on hold currently, even though land development continues without physical construction.  The article states that Samsung Display is reevaluating plans due to concerns about the growth of the smartphone market and therefore the need for additional small panel OLED capacity, despite the increasing adoption of OLED displays. The A5 fab, when fully built out, was expected to represent ~21.6% of Samsung Display’s OLED capacity, and coupled with the A4 fab, is the basis for Samsung Display’s small panel OLED capacity growth in 2019 and 2020, which makes it a key investment for both Samsung Display and the OLED industry. Samsung will watch the results of smartphones sales during the Chinese New Year holiday and further, the results of Apple’s iPhone X sales before making any decisions about the A5 fab.
 
 
Figure 1: Samsung Display Expected Fab Build-Out Timeline

​Source: OLED-A, Company Data
 
 
For rigid small panel OLED, the completion is getting tougher as significant LTPS LCD small panel capacity is forcing lower ASPs and giving OLEDs a run for its money, particularly as the bezel-less display rage evens the playing field even further.  Production rates at a portion of Samsung Display’s A1 and A2 fabs are slowing, where Gen 4.5 and Gen 5.5 rigid OLED production is based.  The A1 fab is Gen 4.5 and primarily rigid OLED based and represents ~7.7% of Samsung Display’s overall OLED capacity, and the A2 fab has both Gen 5.5 and Gen 6 lines, both rigid and flexible.  These fabs represent 32% of Samsung Display’s total OLED capacity, with the remaining 68% based on flexible substrates.  Aside from the typical seasonal decline in production, the increased competition between rigid small panel OLED and small panel LTPS LCD could result in cutbacks in Samsung Display’s small panel rigid OLED production rates
 
In the long-term however, the demand for the option of using a flexible substrate will obviate the need for much rigid OLED capacity, and we would expect Samsung Display to update their rigid OLED lines to flexible.  This would entail changing the material handling tools and the encapsulation methodology, and might lead SDC to upgrade some of that capacity from Gen 4.5 to Gen 6, but the cost would be far less than building a new fab. 
 
 
Samsung’s Fourth Quarter Financial results for its Display unit are summarized below: 
 

1. 4Q - Display – General Demand
   1. OLED Flex profitability strong – Maintained premium over rigid
   2. LCD profitability weak – Despite low-value fab closings 4Q
2. General Demand
   1. Overall up slightly –
   2. Increase in flagship percentage – Less competition here than in low-end
   3. Units down
   4. Realigned low-end models – Too many, too expensive
   5. Shipped 86m handsets
   6. Shipped 7m Tablets
   7. Blended ASP high $210
   8. Smartphone mix – Mid 80% = ~73m smartphones – Below expectations (~82m)
   9. OLED shipments up but revenue down on lower ASP               
   10. LCD shipments weak as were ASPs
3. 4Q - TV – General Demand
   1. Overall weak TV demand
   2. Increased ultra-large & QLED sales but QLED still a small part
4. 1Q – Display – Seasonal Smartphone weakness
   1. Increasing competition between Rigid OLED and LTPS LCD – Now a differentiation issue not price
   2. Lower overall smartphone demand – Inventory levels increased
   3. Weaker OLED profitability – Lower utilization rates?
   4. Units up (?) due to new flagship (S9)
   5. Total Handset/Tablet volume – Slight increase -- 1% and 2%
   6. ASP up – Likely on increased contribution from S9 – Makes 1Q display results very dependent on new flagship success.
   7. Smartphone mix – high 80% range – 87% - 88%? Would imply ~75m – 77m smartphones in 1Q – also below expectations (~80m) but would seem to imply much higher ASP/unit
5. 1Q – TV
   1. 20% decline in TV shipment volume
   2. 5 Year industry average declines from 4Q to 1Q in TV shipment units is 8.2%, but the table below shows a decline around 11% typically. 
   3. Company expects stable LCD TV demand in 1Q which is in conflict with the decline in shipments

 
Table 1: TV Panel Shipment Decline 4Q to 1Q

Year	Decline %
2013	-11.40%
2014	-5.80%
2015	-0.60%
2016	-11.70%
2017	-11.50%
Average	-8.20%

​Source: SCMR LLC
 
2018 Outlook 

• Overall growth will come from components
• Set business (TV, smartphone, etc.) – Will refocus on profitability not volume               
• Focus on connectivity & software
• OLED – Continued focus on flexible
• OLED – Foldable commitment in 2018 but likely to be low volume
• TV – Focus on 8K, Micro-LED long-term goal; will Samsung Display participate? QLED remains static

 
All in, the quarter seemed a bit worse than expected on a general basis, and there was certainly a cautious tone to 1Q guidance for display and CE, but  Samsung’s memory and chip business is thriving.