7G at LG.Philips – 1Q 2005

Introduction

LG.Philips LCD raised some eyebrows in late November 2004 by announcing its seventh generation (7G) TFT LCD panel specifications at a time when most other competitors were putting on hold their expansion projects amid slumping panel prices. LG.Philips is optimistic about the market. It predicts that demand for TV-use TFT LCD panels will grow 120% in 2005 over 2004, and its 7G glass substrate specifications can be readily cut into 42- and 47-inch panels to meet growing demand for larger LCD TV screens.

While plasma display panel (PDP) TVs and other display technologies remain strong competitors, competition from Samsung Electronics has been a major factor pushing LG.Philips ahead. Samsung’s first 7G plant is scheduled for volume production in the second quarter of this year. Although Samsung is less optimistic about the market, predicting only 78% growth in TV-use LCD panels, it has announced a plan to build a second 7G plant. For LG.Philips, defeating Samsung in setting industry standards and getting started earlier are crucial to cutting production costs and increasing its share of the 40-inch-and-larger LCD TV market.

Slumping prices force Taiwan players to postpone expansion plans

In the first half of 2004, Taiwan’s TFT LCD makers were optimistic about the market as they averaged 25% sequential growth in gross profits. AU Optronics (AUO) and Chi Mei Optoelectronics (CMO) even enjoyed gross profit growths of more than 30%. They were then aggressively planning capacity expansion.

In the third quarter of 2004, LG.Philips’s LCD business was better than its bitter rival, Samsung, and most of its Taiwan-based competitors. LG.Philips’s 67% drop in operating income was better than Samsung’s 72% drop recorded for its LCD division.

AUO secured a syndicated bank loan of NT$60 billion for a 7.5G plant in June, while CMO secured a NT$66.6 billion syndicated bank loan a month later for its 7G plant. As prices began to plunge in the second half of the year, both makers suspended their new projects. At the same time, they decided to delay the capacity expansion of their 6G lines.

Chart 1: Decrease in 3Q04 operating income for LCD panel makers

Source: Companies’ 3Q financial reports, compiled by DigiTimes Research, February 2005.

LG.Philips is not slowing down its capacity expansion. The LG.Philips 7G plant, located in Korea’s Paju, broke ground in March 2004 when the sector was enjoying strong growth. The new plant is scheduled to begin production in the first half of 2006. Initially, LG.Philips will begin monthly production of 45,000 substrates, gradually ramping up to full capacity of 90,000 per month.

The new plant will process 1,950x2,250mm glass substrates chiefly for 42- and 47-inch TV-use panels, according to the company in a November 2004 press release. While S-LCD, a joint venture of Samsung and Sony, was the first to begin construction of a 7G plant that will use 1,870x2,200mm substrates, LG.Philips says it hopes to establish the 7G industry standard with the world's first 7G TFT-LCD factory to use 1,950x2,250mm glass substrates.

Source: Companies; compiled by DigiTimes Research, February 2005

The third quarter was just the beginning of a quick plunge in profits for LCD panel makers, as most of them still registered positive operating income. The fourth quarter saw most of them suffer heavy losses, except for LG.Philips and Samsung, both of whom still managed to report positive operating incomes. Samsung’s NT$310 million, and LG.Philips’s NT$60 million, despite being small in comparison to their previous profits, indicate they remain head-to-head, leaving their Taiwan competitors chasing.

Chart 2: Decrease in 4Q04 operating income for LCD panel makers (billion NT$)

Source: Companies’ 4Q04 financial reports; compiled by DigiTimes Research, February 2005.

Both LG.Philips and Samsung are increasing their capital expenditure (capex) for 2005. LG.Philips has budgeted US$4.41 billion in capex, up 20% from 2004’s US$3.67 billion. Although Samsung’s capex budget is smaller at US$2.75 billion, the sum represents an increase of 96% from last year’s US$1.41 billion. CPT is the only Taiwan-based competitor who has plans to increase capex for its 4.5G and 6G LCD and color filter plants.

Chart 3: LCD panel makers’ 2005 capex budgets (billion US$)

Source: Companies; compiled by DigiTimes Research February 2005.

LG.Philips’s plan to build a 7G plant with focus on 42- and 47-inch TV models shows that the company is optimistic about the market for screen sizes larger than 37 inches, in contrast to the general opinion that LCD TVs with screens larger than 37 inches may not be competitive. It seems a usual LG.Philips strategy to try to lead the trend. It also seems reasonable to think that low prices resulting from oversupply should eventually stimulate demand and makers should invest more before demand picks up.

The strategy worked for LG.Philips at the 2002 ebb in the LCD demand cycle, as it had made a headstart in 2001 with the plan to build the world’s first 5G plant. However, at that time, the 5G line chiefly catered to LCD monitors, and 23- and 26-inch LCD TVs. There was significant room for growth in LCD monitors, which in 2002 only accounted for 25% of the entire monitor market. In addition, reduced production costs boosted LCD monitor sales, starting a wave of short supply in the third quarter of 2003.

The 7G development may be a different story: 37-inch-and-larger LCD TVs have a lot of competition, the strongest being PDP TVs and rear-projection TVs. In contrast, in 2002, LCD monitors had only one competitor, the incumbent and elderly CRT monitor. Whether LG.Philips can repeat its 2002 success remains to be seen.

Market uncertainties

LG.Philips predicts that demand for LCD TVs will grow faster than demand from either monitors or notebook PCs this year. Samsung is more conservative about growth in demand in both the TV and monitor markets. Compared to LG.Philips predictions of 120% growth to 19.3 million TVs and 45% growth to 101.5 million monitors, Samsung is predicting 78% growth to 16 million TVs and 29% growth to 90 million monitors.

Chart 4: LG.Philips predictions for TFT LCD applications in 2005 (million units)

Source: Calculated from data provided in an LG.Philips’s analyst presentation from November 2004 and an investors’ presentation from December 2004, compiled by DigiTimes Research, February 2005

Chart 5: Samsung predictions for TFT LCD applications in 2005 (million units)

Source: Samsung, January 2005; compiled by DigiTimes Research, February 2005.

LG.Philips has positioned its 7G fab as offering efficient production of 42- and 47-inch TV-use panels. If initial production is focused solely on this, the company may be disappointed by the results since demand for such large-size LCD TVs may not grow very fast. DigiTimes Research predicts that the market share of 40-inch-and-larger TVs of all kinds will remain low at less than 12% of the entire TV market until 2007. Of course, LG.Philips may initially focus production on other panel sizes, for example, 23-inch wide screen TV panels.

Chart 6: TV market demand by screen size

Source: DigiTimes Research, December 2004

LCD TVs have strong competitors from other flat panel display technologies in the 40-inch-and-larger TV market. Yet the competition and comparison between the two types could be baffling for consumers who may not know the differences between the technologies, and may be unclear about what they are getting for the money they pay.

Samsung SDI and some other PDP TV OEM makers predict that prices for 42-inch standard definition (480p) PDP TV should drop to about US$2,000 in 2005, and may be further halved to US$1,000 in 2006. However, 40-inch LCD TVs are expected to be priced between US$2,000-2,500 in the first half of 2006, staying much more expensive than PDP TVs.

The comparison by sheer screen size may be misleading. LCD TV’s higher prices bring high definition (HD, at least 1,280x768p) resolutions that 42-inch PDP TVs cannot offer. Industry sources indicate that the high-end market over the next two to three years is expected to see 55-inch PDP TVs competing against 42-inch LCD TVs, both of which offer high-definition resolution within a similar price range.

Yet it remains to be seen whether consumers will feel the need to get a flat panel TV. And if they do, it is uncertain whether they will opt for the cheaper 42-inch PDP TVs or the HD models. Many factors, apart from prices, may influence their decisions.

While the current DVD format for home movie entertainment is just 480p, full HD 1920 x1080 (not 1280 x 720) standards are expected to hit the market with the release of devices supporting blu-ray technology next year. With sporting events seen as a major boost for large-size, high-resolution TVs, the 2006 World Cup and the 2008 Beijing Olympics may be two other factors spurring consumers to buy large-size TVs or replace their conventional TVs with HD TVs.

The 2004 European Cup and the Athens Olympics did not boost the market as flat panel TV makers had expected, because prices were too high. It may be a different story next year, when prices should be more affordable. The 37-inch class LCD TVs with HD resolution may be more attractive than 42-inch PDP TVs, which cannot offer such high resolutions, if the price gap between the two can be bridged. So while LG.Philips’s 7G substrates are best for 42- and 47-inch panels, the company is also eyeing 37-inch TV and other applications, sources say.

Industry standards

Although the LCD TV market is shrouded in uncertainty, LG.Philips’s 7G project represents yet another attempt to defeat its long-standing fellow Korea-based rival, Samsung Electronics, in their competition to set industry standards.

LG.Philips and Samsung have been rivals in determining the standards of panel size for many years. In 2000, LG.Philips was the first to open a 4G line with specifications at 680x880mm. Samsung’s 4.5G plant came online shortly afterwards, processing 730x920mm substrates.

In 2001, LG.Philips announced its plan to build the world’s first 5G fab processing 1,000x1,200mm substrates mainly for 15-and-18-inch desktop monitor-use, 15-inch notebook panels and other larger LCD TV screens. Samsung also announced its 5G specifications at 1,100x1,250mm substrates chiefly for 17-inch monitor-use panels, which has now become the industry standard. In the second half of 2002, LG.Philips announced plans for a second 5G line adopting Samsung’s specifications. LG.Philips’s substrates from its first 5G plant, which now does not process 18-inch panels, can be cut into nine 19-inch, or 15 15-inch panels, both seen as efficient cuts compared to the larger Samsung substrate.

Source:Companies; compiled by DigiTimes Research, February 2005

LG.Philips retook the lead in 6G specifications after losing out to Samsung in terms of setting the 5G standards. LG.Philips’s 1,500x1,850mm specifications have now become the TFT LCD sector’s 6G standard, while Samsung does not have a 6G plant. LG.Philips’s 6G plant started volume production in September last year, with focus on 32-, 37- and 42-inch wide screens for TV applications.

Towards the end of last year, LG.Philips mounted a new campaign against its archrival. After much delay, LG.Philips announced in October the specifications for its 7G plant, a size larger than S-LCD’s phase-one substrates produced at its 7G plant. S-LCD’s phase-one 1,870x2,200mm substrate is for eight 40-inch or six 46-inch panels, while LG.Philips’s 1,950x2,250mm substrate is for eight 42-inch or six 47-inch panels. LG.Philips is again vying with the Samsung joint venture for the mainstream status.

In February, Samsung announced details of its second 7G plant project. It will invest US$2.1 billion in constructing the clean room and purchasing production equipment. Interestingly, Samsung has not been attracted by the larger substrate used by LG.Philips and the plant will process 1,870x2,200mm substrates dedicated to 32-, 40-, and 46-inch TV-use panels. With Samsung demonstrating strong ambition by earmarking a 96% increase in 2005 LCD business capex, chiefly for building its second 7G plant, the competition between the two Korea-based rivals can be expected to heat up.

Note: this report was originally prepared at the end of 2004, but extensively updated in March 2005 and published for the first time in June 2005.