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EDITORIAL: China
won¡¦t bail out the LCD industry
It was only a year ago that the government¡¦s second wave of cross-strait
deregulation opened the door for Chinese firms to own up to a 10 percent stake
in Taiwanese LCD panel makers. The relaxation came after persistent calls from
local firms, which were in a race against South Korea¡¦s Samsung and LG Display
to gain a faster foothold in the newest battleground ¡X China, which had
overtaken the US as the world¡¦s biggest LCD TV market.
Forming partnerships with Chinese firms through equity investments was
considered to be a shortcut.
Taiwanese firms had their eyes on five licenses Beijing was giving out for
advanced 8.5-generation factories, which would allow local panel makers to sell
their displays in the world¡¦s largest market without a 2 percent tariff applied
to imported panels. Based on this, AU Optronics (AUO), Taiwan¡¦s second-biggest
LCD panel maker, submitted a US$796 million investment proposal last year for a
49 percent stake in Chinese peer Longfei Optoelectronics ¡X which happened to
receive one of the licenses.
However, the industry started to tumble beginning in the second half of last
year. AUO¡¦s proposal was the only China-bound LCD investment proposal and
nothing was heard from the Chinese, sending an early indicator that it was going
to be tough to push for closer cooperation between the Chinese and Taiwanese LCD
industries through equity investment.
AUO suspended its plan to build a 8.5G factory with Longfei in China as the
wobbling European and US economies dampened demand for luxury goods and TVs in
the third quarter of last year. To get through these tough times, AUO retained
cash to help manage the industry¡¦s volatility instead of investing in new
capacity. The company cut its equipment outlays 30 percent to NT$40 billion
(US$1.35 billion) this year, from last year¡¦s NT$57 billion.
Despite all this, the Cabinet last week dropped a bombshell and passed the third
review of a proposal to raise the ceiling for Chinese investments to 50 percent
of local LCD panel makers.
Will this further relaxation of the rules suddenly make debt-ridden Taiwanese
LCD panel manufacturers more attractive? Will the new rule increase the chances
for mergers and acquisitions across the Taiwan Strait? The answer will be no.
The hopes of an injection of Chinese capital look faint.
The timing of further deregulation is wrong. During the past year and a half,
stagnant demand and plunging prices have driven display makers into deep losses.
Chinese panel companies are no exception. Even South Korean electronics giant
Samsung announced it would to spin off its display unit to focus on new
technologies after Japanese company Sony pulled out of a panel manufacturing
joint venture.
With their technological advantage narrowing, Taiwanese companies are gradually
losing the bargaining edge. Chinese firms are catching up as they ramp up
production and supply standard flat-panels for PCs and TVs, and now Chinese
firms such as BOE Technology Group are set to crank out bigger TV screens from
their own 8.5G plants this year.
Chinese panel makers will soon need even more advanced technologies, but
Taiwanese firms will avoid technology transfers for fear of losing their
competitive edge. Besides, Taiwanese firms have been lagging behind Samsung and
LG Display in the development of next-generation technologies for
high-resolution AMOLED displays ¡X seen as the next mainstream technology.
As panel supply typically exceeds demand, there is no urgency for Chinese TV
brands to invest in local panel companies to secure supply. They will maintain
flexibile panel sourcing and steer clear of any equity investment in local
suppliers to avoid any cost increases or investment losses.
Taiwanese LCD companies can only count on themselves and support from local
banks to make it through this difficult time.
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