A Bright, Flat Future

by Matthew Smith, Taipei

Taiwan is fighting it out for the number one spot in a major high tech manufacturing industry that is poised for extremely rapid growth.

"It's shaping up to be a real horse race. This is one foreign observer's assessment of the fierce competition between Taiwan and South Korea in the flat panel display manufacturing industry, which is poised for rapid growth -- and tremendous change -- over the next decade. With potential applications for almost every consumer IT product sold, color flat-panel displays (FPDs) -- mainly the thin-film transistor, liquid crystal display type (TFT-LCDs) -- are expected to become a standard feature of products such as digital still cameras, personal digital assistants, and mobile phones over the next few years. In the meantime, large-sized applications, notably for notebook and PC monitors, have been rapidly gaining in popularity, and a global flat-TV market in the millions of viewers beckons a few years down the road.

South Korea and Taiwan, the two nations best positioned to supply the world with flat screens, currently account for roughly 70% of the global market, with Taiwan slightly in the lead. Japan is an increasingly distant third, and China, the only other country with commercial TFT-LCD production capabilities, accounts for less than 1% of market revenue.

For Taiwan, which entered the market for TFT-LCDs just three years ago with help from Japanese technology transfers, the economic implications are enormous. According to DisplaySearch, a U.S.-based research firm that focuses on FPDs, the global TFT-LCD market will grow by 55% this year alone, and industry epresentatives insist that even that impressive figure will be dwarfed after 2004, when TFT-LCD televisions are expected to start becoming a popular consumer item.

But makers here face a tough challenge from the major South Korean players, who are in far better financial shape for expanding their operations in this capital-intensive industry -- and who, according to some analysts, are now working to drive down the prices of large FPDs (those wider than 10.1 inches, measured diagonally) in a bid to limit the financing abilities of their Taiwanese competitors. To take advantage of this fastest-growing segment of the market, most Taiwanese makers feel that they must first build expensive new fabrication facilities, which will require raising funds.

To be sure, Taiwan's TFT-LCD manufacturers are not without strengths and resources of their own. According to the Market Intelligence Center (MIC), a unit of the Institute for Information Industry, Taiwan accounted for 28.3% of global large-sized FPD production in 2001. Overall, the nation's manufacturers generated revenues of US$5.4 billion last year, an annual sales increase of 42% despite the global technology slump, according to the Photonics Industry and Technology Development Association (PIDA). With such large potential, the government is heavily promoting the industry in Taiwan. The Ministry of Economic Affairs has selected FPD manufacturing as a key industry for national development (along with semiconductors, biotechnology, and digital media). And the Council for Economic Planning and Development (CEPD) has set a target of US$39 billion in combined production value for flat panels and FPD monitors (with most assembled in China) for 2006.

However, despite the industry's rapid rise and the government's rosy forecasts, it would be premature to declare that the FPD industry is a Taiwanese success story. In fact, many recent international media reports have warned of the opposite outcome. Critics believe that, as so often happens in Taiwan, the domestic FPD industry is fragmented, with too many makers offering too little product differentiation. This situation raises the specter of over-competition and poor profitability, fears that have not been eased by the imminent prospect of a massive increase in global manufacturing capacity.

This year, the world's two largest TFT-LCD panel manufacturers, Samsung Electronics and LG-Philips, are coming on line with new, more efficient fifth generation (Gen 5) fabrication plants that will allow them to significantly boost production output while continuing to cut the prices they charge for large-sized flat panel displays.

A Gen 5 plant can produce a single 15-inch PC monitor panel, an industry benchmark, for about US$20 less than a Gen 4 plant. That figure currently represents a cost savings of about 10% on the price of such panels.

Going Large

Despite the risks, most makers will feel the pressure to expand capacity with Gen 5 fabs capable of producing larger size panels.

It's hard to argue about the competitiveness of the new fabs, although some believe moving to Gen 5 is a matter of timing. Jeff Hsu, vice president of CMO, says that his company is in no rush to expand and that those who rush into design and construction -- especially without plenty of outside technical assistance -- could risk creating Gen 5 facilities that are less efficient than well-designed Gen 4 plants, the current standard.

Two Taiwan makers, AU Optronics (AUO) and QDI, will ramp up production at their brand-new Gen 5 fabs in the second quarter of this year. AUO took the lead in this area when it became Taiwan's fourth company and the only pure-play TFT-LCD maker to list on the New York Stock Exchange. AUO raised more than a half billion U.S. dollars to help pay for its Gen 5 fab.

Building it might be risky, but the larger capacity will be needed if makers here are to take advantage of the key area of current and future sales growth: the increasing popularity of larger-sized 17-inch monitor screens and -- industry executives hope -- the onset of the TFT-LCD television set industry in two years. Nearly 90% of LCD consumer demand (measured by glass area) is currently attributed to notebook and PC monitors. Gen 5 plants can cut twice the number of 17-inch panels as their predecessors, so analysts predict nearly 100% growth in global 17-inch production capacity after the initial Gen 5 plants -- in Korea and, this spring in Taiwan -- begin manufacturing operations. This extra capacity will undoubtedly bring down the end price of the wider screens, perhaps paving the way for 17-inch LCD monitors to take the place of 15-inch screens as the standard consumer choice. If so, this would only increase the early-mover advantage, since companies with Gen 5 fabs would be able to garner a larger customer base for their wider screens.

If that sounds too theoretical, it should be noted that the same scenario has already been played out. In 1997, Korean makers began stealing away market share from Japan by offering 14.1-inch notebook panels, which quickly overtook sales of the Japanese-made 13.3-inch models. According to a PIDA forecast, the same thing should happen next year, with 17-inch monitors making inroads on the booming flat-screen monitor market.

The larger-size panels that Gen 5 fabs can produce are also seen as hastening the onset of the TFT-LCD television industry, which currently accounts for very limited output. According to the MIC, global demand for flat TVs reached only 120,000 units last year, but that figure will hit 1.6 million in 2002. Impressive enough growth, but it nevertheless pales in comparison to this year's forecasted output of 30 million notebook screens and another 30 million PC monitor displays.

Gen 5 fabs also can produce screens wider than 30 inches, which industry executives say is roughly the maximum reasonable size for a TFT-LCD TV screen, since plasma display panel (PDP) technology is more appropriate for wider screens. (AUO says it is developing PDP products that will be commercially available in 2003y.) Given the 200 million to 250 million television sets sold around the world annually, 99% of which still come equipped with a traditional cathode ray tube (CRT), it is understandable why panel makers are rushing to set up Gen 5 plants. In other words, to take advantage of what could become the hottest market for displays in a few years, makers have to upgrade to the next generation of manufacturing technology.

But at the same time, this rapid expansion of capacity is also fostering concern that TFT-LCD panels are becoming a commodity-type product. The theory is that the most popular large-sized FPDs are following the same pattern as did DRAMs, the memory chips whose prices can fluctuate wildly within just a few weeks. DRAM pricing instability results from its product uniformity -- there is no differentiation among different makers' chips, which leaves prices extremely susceptible to swings in production capacity and market demand.

Likewise, some TFT-LCD industry executives admit that certain highly standardized products, such as desktop PC monitors, can in fact be considered commodities. That was made clear last year, when manufacturing costs were 30% higher than today but the price of 15-inch monitor panels fell through the floor. But other products, including small screens for handheld IT devices and notebook panels, are differentiated from one another by the widely varying design requirements of downstream makers of finished IT products.

The trouble is that the commoditization of the PC monitor market - and concomitant pressure on large-panel prices -- is precisely what is currently driving TFT-LCD demand growth. Prices for 15-inch panels, which climbed throughout the first half of 2002 to reach US$250 in June after a serious dip in 2001, had fallen back to roughly US$200 to $210 by late September. The drop was due partly to sluggish demand from end consumers, but perhaps also to Korean makers' alleged strategy of purposely driving down prices. In any case, given the upcoming boost in capacity, prices are expected to continue declining, with one industry executive suggesting they could fall as low as US$150, significantly below production cost, by the end of this year.

So there are great risks of overcapacity in the market -- but only if all the proposed fabs in fact get built.

It seems clear, that all these makers have their eyes on the TV market. "Interest in fifth generation fabrication plants is mainly all about TV," says David Joe, vice president of global sales and logistics at Hannstar. "And oversupply will kickstart TV demand. I want to emphasize that price is the key issue -- as long as the price is low, the TV market will fly."

Flat-panel manufacturers might be eagerly tuning in to the TV market, but not everyone is as sanguine about the product's potential over the short-term. "TFT-LCD TVs will become a big factor in the future, but it's really not happening at this point," says the MIC's Sean Wu, who believes that makers will have to wait until the United States switches to digital TVs in 2006 before seeing major sales growth. That would require surviving through two or three years of production overcapacity, and it is unclear that all the makers could weather the demand drought.

More interesting applications

Industry executives note that there are other potential FPD applications, such as car audio-video systems. Some 50 million new cars are sold annually, and makers say that auto companies are now considering making CAV systems standard features in some models, including minivans. And with 200 million to 300 million used cars rattling around the globe, makers are also targeting the aftermarket potential. David Joe of Hannstar emphasized the benefits of cheaper costs for this largely untapped market, saying that consumer demand will kick in when the price of an 8-inch panel car monitor reaches US$150 to US$ 200. Of course, the technology must be developed to handle extremes of temperature and other environmental factors, but these problems are being handled now, he adds.

Another smaller panel application is the color PDA, sales of which the MIC says will grow by 30% this year. An estimated 40% of the products are bundled with TFT-LCDs. As for the promise of mobile phones with color TFT-LCD screens, industrialists insist that it does not depend on the success of 2.5G or 3G mobile data services. They project a worldwide market of 500 million handsets next year, with a color STN- or TFT-LCD bundle rate of 30%. "Once you've used a mobile phone with a color screen, you?ll never go back to black and white,? says Jeff Hsu of CMO. However, MIC analyst Sean Wu again pours cold water on such enthusiasm, arguing that it will take many years for the color cell phone market to develop.

If selling monitor panels is a commodity game, most industrialists say they are looking elsewhere for growth. "Sometimes I wish people would stop focusing on the pricing for monitor and notebook panels", says one executive who asked to remain unidentified. "These other applications have so much more potential." Perhaps in the future, but LCD monitors remain the key driver of industry growth now. And with prices trending downward, the Taiwan makers are not the only ones who can see the potential for other products.

The Korean Competition

The huge capacity and healthy finances of the world's largest two makers will force more industry consolidation in Taiwan.

Can Taiwan makers compete on their own with the vast scale and capital resources of the likes of Samsung and LG-Philips? The answer most experts give is a resounding ?yes? -- but it may require some industry consolidation. Indeed, while not as large as the two big Koreans, Taiwan's AUO and CMO rank as the world's third- and fifth-largest producers. according And AUO is itself the product of the September 2001 merger of Acer Display Technology with Unipac Optoelectronics, a former subsidiary of semiconductor foundry United Microelectronics Corp. "Even our customers are consolidating, so they're looking for big suppliers to service them", AUO chairman Lee explains his business strategy.

With five Taiwanese firms engaged in the manufacture of large-sized TFT-LCD panels, Lee believes there are "two or three" too many. However, he offers no forecasts for further mergers and acquisitions within the industry. "When the opportunity comes, it will be quite clear," he says. "But this is probably not the best time, since most companies are profitable and there is little pressure to consolidate."

While 2001 was the worst year for the industry and everybody lost money right across the board, the Koreans invested anyway, garnering almost half of the worldwide large-sized FPD market share that year and, at least for LG-Philips and Samsung, putting themselves in the leadership position of Gene 5 fabs. This raises fears that Taiwan, particularly the smaller-scale manufacturers, will be squeezed out by their larger, faster-moving competitors.

Nonsense, say local makers. For one thing, they argue that unlike the Korean conglomerates, their generally pure-play TFT-LCD business model allows them to outsource their materials and components, which is more cost efficient than the Korean model of producing nearly everything in-house and manufacturing under their own brand names. Also, they dismiss the notion that the South Koreans will enjoy an advantage in scale for very long. By the end of 2003, Taiwan TFT-LCD production capacity (based on area) is forecast to grow by 61%, compared to just 28.6% for Korea. "Afterthe next four Gen 5 fabs are built, Taiwan's capacity will be double that of Korea's," says David Joe of Hannstar, referring to plants scheduled to be built by CMO, CPT, and his own company over the next two years. "That will be fun!"

The Japanese Allies

The world's second largest economy learns the benefits of sharing -- or at least selling -- its manufacturing technology.

If the depression year 2001's heated competition was tough for Taiwan makers, it was misery for the Japanese. They saw their share of the worldwide market fall from almost half in 2000 to 33.5% in 2001, a figure that further fell to 22% this year, according to Taiwan's Electronics Research Service Organization (ERSO), a division of the Industrial Technology Research Organization (ITRI). Many Japanese vendors reacted by moving away from commodity products into more profitable, smaller-scale lines, such as screens for cellular phones and personal digital assistants, and into low-temperature polysilicon (LTPS) TFT-LCD technologies for small-panel applications.

In fact, Taiwan should be grateful to Korean FPD makers, who have been squeezing their Japanese counterparts for years. After all, it was this intense pressure, coupled by Japan's decreasing manufacturing competitiveness and Taiwan's increased technical capabilities, that forced the Japanese to transfer their industrial know-how to Taiwan starting in the late 1990s. It is seen as something of a unique case, and interviewees agree that it is unlikely to be repeated with any other industry.

The Japanese TFT-LCD makers did not come to Taiwan for charity. They had no real alternative, other than quitting the business entirely. With Japan?s economy in a slump for more than a decade and South Korea on the rise, Japan's world-class consumer electronics companies decided it made more sense to license their technologies to Taiwan firms than to invest in costly fabs at home. This way they have been able to stay in the business while transferring most of the capital risks to Taiwan.

"I think they are going to make a lot of money out of Taiwan, since of course we have to pay them for their technology," says Liu Yi-hwa of the CEPD.

Rachel Huang, director of ERSO's International Program and Public Relations Divisions, says her agency was instrumental in convincing the Japanese to work with Taiwanese makers, something they were initially reluctant to do. "We built up a base for negotiations with the Japanese by developing our own technologies," she says. "When they saw that we had the ability to do it ourselves, they realized that they had to cooperate with us or else watch us become their competitors anyway."

The Japanese had another reason for transferring thei technologies to Taiwan: the nation's massive output of IT products that require FPDs. Taiwanese manufacturers control 60% of global LCD monitor production, plus half of the notebook and digital camera markets. In its first year of operations, CMO, which originally partnered with Fujitsu, focused all of its capacity on 14.1-inch monitors, with 70% of its output dedicated to the Japanese market. "Even as a small player, we made our name, made a good profit, and penetrated the Japanese market - all within the same year," says Jeff Hsu.

Also, and in contrast to the South Koreans, most original equipment manufacturers in Taiwan have traditionally eschewed brand names, which means that they do not compete with their OEM customers. In fact, the one notable Taiwanese exception, Acer, spun off its display subsidiary (which later became AUO) with the declared intention of eliminating the inherent conflict between simultaneously making its own brand and those of other makers. "We're a pure TFT-LCD panel maker, so we have no conflict," says H.B. Chen of AUO. "The Koreans are major brand name monitor makers, and that's a clear conflict."

The combination of Taiwan"s OEM competitiveness with Japan's manufacturing technology and world-class brand names should allow both sides to take full advantage of the predicted boom in flat panel TV sales. Sharp is currently the world's largest maker of TFT-LCD TVs, but the flat television is still a niche product with just 1% of overall global TV sales this year. "The Japanese are here for the TV market," says the MIC's Sean Wu. "TV makers like Sony don't want to continue losing out to the Korean brands."

But did the Japanese have any viable alternative to Taiwan? Probably not when the Korean pressure began to bite in the late 1990s. But that may be changing, as shown by NEC's recent announcement of intentions to build a Gen 5 plant in the Shanghai area by 2004.

Is TFT-LCD a "China-Proof" Industry " ?

The mainland is considered far from ready to become a major player in the capital-intensive and technically complicated FPD industry.

As noted above, Taiwan's FPD industry suffers from the nation's all-too-common malady of fragmentation and over-competition. But almost everyone believes that it is at least partially immune to that other common bug -- mainland fever! "This may be the one major industry that is China-proof," says a foreign analyst who closely follows Taiwan's economic and technological developments. Industrialists and observers agree that China is years behind in terms of technical development, logistical support, and ability to weather the business cycle in such a capital-intensive industry as FPDs. While the mainland?s IC manufacturing capability has come a long way, TFT-LCD production entails far more complex upstream supplier relationships than China can support. With more components to be sourced, efficient first- and second-stage production of FPDs would require a major upgrade in the nation's logistical capabilities.

While NEC is indeed planning a Gen 5 plant with a Chinese partner, they are talking about ramping up production in 2004, relatively late in the game.

Nevertheless, China is still benefiting from the rising worldwide market for flat-panel displays. Its huge labor market has attracted interest from both Korean and Taiwanese makers, who are setting up their labor-intensive TFT-LCD panel assembly operations (the third and final stage of production) in China. Not only is this more cost competitive, but it also provides geographic proximity to the assembly operations of the FPD makers' downstream customers, whose IT product assembly plants are also in China. The theoretical result should perhaps be a major boost to Taiwan's cross-Strait exports, while the highest value-added parts of the manufacturing process -- the array and cell processes - remain here for the next ten years at least.

But there may be flaws in that theory. Intriguingly, Japanese FPD makers Sharp and Epson have set up their cell processing facilities in China. Whether or not they can succeed remains to be seen, and while there is no shortage of skeptics on this side of the Taiwan Strait, the Taiwanese FPD makers are certainly paying attention. In any case, industrialists here say they do not see the need to move their highly technical operations to China or anywhere else for many years to come, because of the intense requirements of supporting infrastructure, technology, and engineering. "Whenever any of our machinery goes down, we can call our equipment suppliers here and get the failed module replaced very quickly," says K.Y. Lee of AUO. "It's a big advantage for Taiwan." So while China is becoming the assembler of FPD screens for both South Korea and Taiwan, the real horse race only has two entrants. The industrial chain that is growing up around the Taiwanese TFT-LC industry should make it difficult for China to "hollow out" this manufacturing sector for a long time.

Coming next: OLEDs, Organic and Cool !

New technologies have arrived in the (liquid) crystal ball.

TFT-LCD technology might be the Big Kahuna on Flat Panel Beach right now, but other contenders are shining up their boards. If new and upcoming FPD applications are more than hype and are actually going to succeed, panel makers must first develop screens that are physically thinner and more versatile, offer a wider viewing angle and still brighter, clearer picture, and have faster reaction times than current amorphous silicon TFT-LCDs can provide. With help from foreign technology developers and government agencies like ERSO, two small Taiwanese panel manufacturers already offer commercially available screens built with the latest FPD technologies, and the larger panel makers have noticed.

Viewers are demanding wider screens, but nobody wants them any thicker. Because TFT-LCD panels require as components color filters, backlights, and liquid crystals, the thinnest panel is still about 5 millimeters thick. One promising technology can reduce panel thickness to as little as 1.5 millimeters: Organic light emitting diode (OLED) panels have a simpler structure that does not require these three components, instead substituting a thin layer of light-emitting organic material. OLED panels also offer a brighter and higher contrast image, a faster response time, and a viewing angle of 160 degrees - all vital for the flat TV application.

Additionally, getting rid of the liquid crystals eliminates the costly and time-consuming process of applying them, making OLED especially suitable for large-sized screens. According to DisplaySearch estimates, worldwide OLED revenues will grow by 110% annually over the next four years to reach US$2.2 billion. If the technology works, it could displace conventional TFT-LCDs in the large-panel market. "OLED has the most potential of any FPD technology over the next decade," says PIDA's Cheng Te-kuei.

Truthfully, OLED has been around for years, but the high cost of the key organic material and the short lifespan of OLED products have limited its commercial success. There are currently just two OLED panel suppliers in the world - Japan's mighty Pioneer Electronics and Hsinchu-based RiTdisplay Corporation. Established in 2000, RiTdisplay's two fabs are now running at full capacity to fill orders from mobile phone suppliers, says president and CEO D.C. Wang. "We're confident that we'll break even and become the number one OLED panel supplier next year," he says. The company plans to issue a Taiwan IPO in the third quarter of 2003 as preparation for a GDR or ADR issuance in the hopes of raising US$100 million the following year. Another recently commercialized technology, low-temperature poly-silicon (LTPS) TFT-LCDs, allows for system-on-a-panel screens, in which the ICs that drive and control the system are mounted directly on the glass. Because amorphous silicon panels, the current norm, must be processed at temperatures of up to 500 degrees Celsius and higher, the ICs cannot easily be mounted directly on the glass. This is why most FPDs available now have a frame surrounding the screen (the controllers and drivers are inside the frame), and also a reason why the speed of the image is insufficient for many multimedia applications. Put simply, the distance between the ICs mounted in the frame and the TFT circuits on the panel slows down the system's reaction time. Because of the atomic structure of poly-silicon, the IC drivers and controllers can be safely mounted directly on the screen at lower temperatures, eliminating the need for a surrounding frame, increasing speed and resolution, and lowering the production costs of small-sized displays.

Japanese panel makers have invested heavily in LTPS TFT-LCDs, and Taiwan's large panel suppliers are likewise trying to develop the technologies. But in Taiwan, only Toppoly Optoelectronics Corp. has ramped up operations so far, and it claims to have pulled in 25% of the world LTPS market after less than a year of production. The company is perhaps unique among Taiwanese TFT-LCD makers in that its technology is all being developed in Taiwan, either in-house or in consultation with the government-backed Electronic Research and Service Organization (ERSO),

AUO, Taiwan's largest panel maker, is hedging its bets by developing both OLED and LTPS technologies. "At this moment, we have not made any decision on ramping up commercial production of any of the new technologies," says company president H.B. Chen. Fortunately for companies that have already invested heavily in amorphous TFT-LCD plants, the basic principles behind producing the conventional panels are similar to both LTPS and OLED manufacturing. MIC analyst Sean Wu says that it won't be extremely hard for makers to spend "a couple hundred million" to convert their fabs: "They won't enjoy it very much, but when the time comes they're not going to have any choice."

- ends -

The above article, courtesy of the American Chamber of Commerce in Taipei, (www.AmCham.com.tw) is part of a bigger story written for TOPICS, the chamber's monthly print and online magazine. It was edited for contents and brevity to suit our international readership.

Ed.