Global LCD Inventories Up As Panel Makers Slow Production

LCD panel manufacturers are slowing production after global LCD inventory grew to 18.5 weeks in Q2 from 16 weeks the previous quarter, AU Optronics and Corning executives told analysts Wednesday in separate conference calls. The inventory bulge was fueled a decline in U.S. TV sales and a build up of inventory in China, company officials said.

The inventory build is expected to level off at less than 20 weeks in Q3 as panel manufacturers throttle back production, company officials said. AU Optronics will operate its panel plants at 90-93 percent of capacity in Q3, down from 97-98 percent the previous quarter, said Chief Financial Officer Andrew Yang. AU’s Q3 panel shipments will come from existing inventory rather then new production, he said. LG Display last week also said it may reduce capacity and slow plans for adding a second 8th-generation LCD line.

The move to slow manufacturing follows a seven percent decline in U.S. TV sales in May and another 10 percent drop in June, Corning Vice Chairman James Flaws said. China also was saddled with an additional 2.5 weeks on inventory in Q2, much of which is expected to be burned off by Q3 sales, Corning and AU Optronics officials said. The China market is expected to start restocking inventory in the second half of Q3, said Paul Peng, general manager of AU’s TV business group. Global TV inventories of 15-20 weeks is within a “reasonable range” to meet demand, Corning officials said.

Despite the build up of inventory, LCD TV retail sales grew in most global markets, but the rate of increase slowed as Q2 progressed in some regions, AU and Corning officials said. In China, a 72 rise in sales in April was tempered by a 35 percent increase in June. The Japan market posted a 44 percent increase in April, but slowed to 29 percent gains in May and 35 percent in June, Flaws said. Global TV sales are expected to hit 183-185 million units this year, up from earlier forecasts for 171 million units, industry officials said. TV panel shipments will increase 10 percent in Q3, AU officials said.

"It’s very appropriate to pull back a little” on production in light of what is happening in the market,” Flaws said. “Clearly we haven’t seen that much promotion” of LCD TVs in the U.S. markets and that “continued to slow demand.” While retail sales declined in Q2, Corning continued “to see good demand for TV glass” led by TVs, Flaws said. Corning’s glass factories operated at 100 percent of capacity in Q2 and “we would desperately like to build some inventory,” he said.

While it’s reducing capacity, AU Optronics is continuing with plans to add a second 7.5G panel line in September with monthly capacity for 15,000 substrates, company officials said. AU will add a second 8G line that will hit full monthly capacity by March with 40,000 substrates, Avian Securities analyst Andrew Abrams said. Corning also expects to break ground in China this fall on a new 8G glass factory near Beijing that will hit volume capacity by 2012, a company spokesman said. While Corning declined to identify potential customers for the plant, China’s BOE recently started 8G panel production using substrate glass from Corning factories in Taiwan, industry officials said. Other Corning customers, including AU Optronics and Chi Mei Innolux have production licenses pending with the Chinese government, industry officials said. Corning will spend $2 billion on capital projects in 2011, including $800 million for the China plant, up from $1.2 billion this year, company officials said.

Corning’s capital budget also includes a ramp up of manufacturing for Gorilla glass at a former Sharp 6G panel plant in Shizuoka, Japan. When the Japan facility comes on line 2011, Corning will continue making Gorilla glass for handheld products and notebook PCs along a 4G production line in Harrodsburg, Ky., while focusing the Shizuoka plant on TVs, said a company spokesman, who declined to disclose manufacturing capacity. The 1-mm-thick glass -- which stretches across a TV’s LCD panel, replacing the bezel -- will likely find its way into models by early 2011, company officials have said. The thickness of the 2-2.5-pound glass will gradually be reduced by half, company officials have said. The added cost for Gorilla glass could be negated by dispensing with the need for bezels, company officials said.

Corning’s Gorilla glass will generate sales of $250 million this year, increasing to $1 billion in 2011, Flaws said. The sharp rise in Gorilla sales will be driven by “several hundred million dollars” in sales to an unidentified Japanese customer that will use Gorilla for 32-inch and up LCD TVs, analysts said. Corning expects to land additional customers, Flaws said. Gorilla TV glass will sell for $30-$60 depending on its composition. It initially will have gross margins below the corporate average because it requires additional components including anti-glare film, company officials said. Corning’s Q2 gross margin was 48 percent, up from 41 percent a year ago, the company said.

In addition to increasing capacity for 7.5G and 8G LCD panels, AU included money for OLED displays in its $3.12 billion capital budget, AU Chief Financial Officer Andrew Yang said. AU will use part of the former Toshiba Mobile Display low-temperature polysilicon (LTPS) LCD plant it acquired to install 3.5G OLED manufacturing equipment with monthly capacity for 7,000 substrates by year-end, he said. It will add a 4.5G OLED line with monthly capacity of 13,000 substrates by late 2011, Yang said. AU shut down OLED production in 2006, but revived plans earlier this year. AU completed July 1 the purchase of the LTPS facility.

Corning’s Q2 profit improved to $913 million from $611 million a year ago as revenue rose to $1.7 billion from $1.39 billion. The display business’ Q2 net income jumped to $756 million from $555 million as sales increased to $834 million from $673 million. Equity earnings from Corning’s LCD joint venture glass with Samsung rose to $353 million from $284 million as sales increased to $1.11 billion from $960 million. Glass volume at Corning factories increased 10 percent and was up five percent at the Samsung joint venture, Corning said. Corning’s glass volume shipments in Q3 are expected to be flat with the previous quarter. Ticonderoga Securities projected a four percent gain in Q3 volume, said Andriana Piltz, a marketing and research principal.

"This is well below typical seasonality and speaks to the challenges starting to emerge in the LCD supply chain that we believe will worsen over the next 3-6 months given excess inventories, production cuts at LCD panel makers and an increasingly challenged consumer around the world,” Piltz said.

Corning’ specialty materials, which includes Gorilla glass, posted a $17 million net loss, against a $10 million loss a year ago as Corning incurred $25 million in costs in connection with the Shizuoka plant, the company said. Specialty materials revenue rose to $126 million from $71 million last year. Corning’s cable business’ profit grew to $30 million from $18 million. Cables sales increased to $441 million from $437 million despite a 34 percent decline fiber-to-the-home due largely to Verizon slowing its broadband deployment.

AU Optronics swung to a $384 million Q2 profit from a $206 million loss a year earlier as revenue jumped $4 billion from $2.57 billion. The average selling price for TV panels rose to $247 from $199 a year ago, while monitor prices increased to $68 from $61.