LCD panel and monitor vendors are suffering from a lack of visibility of true end-user demand levels, a handicap that already has led to inventory overruns in the past and that could spur another glut and round of price cuts in the near future, iSuppli/Stanford Resources believes.
Branded vendors of both standalone LCD monitors and of complete PC systems bundled with LCD monitors experienced a dramatic sales surge in the fourth quarter of 2002 as end users responded to previous price cuts. A number of vendors were caught by surprise and had to borrow from January stock to fill December's orders.
By Jan. 1, the cupboard was bare for many systems and monitor vendors -- or filled with the wrong products. Many vendors suffered shortages of the 17-inch, low-priced monitors their customers were most eager to buy. Purchasing teams went into overdrive, anxious to fill the cupboards with extra stock for hungry customers.
Caught short in the fourth quarter, vendors in the first quarter increased their orders to correct for past supply/demand imbalances and to prepare for continuing demand growth. Vendors worked hard to avoid a recurrence of the their fourth-quarter shortfalls in the first quarter of 2003.
However, even as the system and monitor vendors crank up their orders in the first quarter, actual end-user demand is plateauing, according to iSuppli/Stanford Resources channel research.
Demand perception gap
In terms of end-user demand, there is a sharp difference between what factories are seeing and what channel participants closer to consumers and corporate customers are seeing. Distributors and resellers in the United States and Europe report that interest in LCD monitors remains strong, but they aren't detecting a substantial uptick in first-quarter demand. A number of the channel participants even have reported declines.
System and monitor vendors continue to discuss scarce inventories on selected models, but the occurrences are lessening and a number of vendors are reporting full-to-overflowing warehouses. Even the vendors still running lean are unsure how the demand/supply situation will play out when their stock that now is in transit arrives. That stock was ordered in anticipation of demand that may not be there when it comes.
Vendors are rapidly reconfiguring anticipated price decreases as panel and monitor manufacturers pass on price increases due to the supply shortage. Meanwhile, end users are playing wait and see, having learned that prices will decline over time if they're patient.
Further complicating this scenario is the double- and triple-ordering that always accompanies supply shortages. Double- and triple-ordering occurs at several stages through the ordering process, as vendors that are unable to get product from their preferred suppliers send orders out to alternative suppliers in an effort to meet demand.
All of the suppliers then count the lost business as an actual order, exponentially increasing the hypothetical demand figures. By the end of the chain, an initial order of 50,000 17-inch monitors is perceived by panel manufacturers as an order for 150,000, 200,000 or more. Repeat this pattern with 50 or 100 orders and the gap between reality and perception becomes ludicrous.
Meanwhile, prices stabilize or increase in the end-user segment, just as fears of war and economic jitters combine with normal quarterly purchasing cycles to slow growth. The normal cycle is even further skewed this year, as system and monitor vendors report that the bulk of the fourth quarter sales increase originated from the consumer segment, as business demand remains sluggish.
The seeds of the present market conditions were sowed during the fall of 2002, when panel and monitor manufacturers engaged in a race to see who could leave the most money on the table. OEM customers reported price offers that defied financial sense, as manufacturers sought to pump new interest into a sluggish market by using drastic price cuts.
Lo and behold, the strategy worked. System and monitor vendors quickly passed the savings on to end-users and demand for flat panel monitors surged in the fourth quarter, particularly in the largest markets, North America and Europe.
The steepest demand spike centered on aggressively priced 17-inch displays, but the other screen sizes were not left behind as demand increased across all size sectors.
The largest sales increase was on the systems side, as system vendors grabbed a larger share of the LCD monitor market with attractively-priced bundles and well-targeted marketing campaigns. Branded monitor vendors also saw sales increase significantly, although less steeply than some of their systems competitors.
Dj vu all over again
The market situation in the first quarter of 2003 is eerily similar to that in the first quarter of 2002. The fourth quarter demand spike in 2002 was larger than the similar spike in the fourth quarter of 2001, but the overall pattern is nearly identical.
Then, as now, panel and monitor manufacturers did not have visibility of true end-demand levels. Then, as now, they engaged in excessive ordering to fulfill demand that isn't there. Then, as now, they sowed the seeds for a new round of oversupply, excess inventories and price cuts in the future.
Rhoda Alexander is the director, Monitor Research at iSuppli/Stanford Resources. Contact her at email@example.com