Suppliers of large flat-panel displays (FPDs) and their OEM customers are finding themselves unable or unwilling in many cases to sign pricing agreements that extend beyond 30 days.
The unusually short terms are causing companies to forge as many as a dozen separate agreements in a single year, even when volumes and panel specifications remain relatively stable. And few industry observers expect the trend to subside, as contracting TFT-LCD business cycles continue to complicate procurement functions within the market.
"It has become more difficult for display manufacturers to enter into long-term contracts, because guarantees can't be provided from the manufacturing side," said Chris Connery, director of product planning and development at NEC-Mitsubishi Electronics Display of America Inc., Itasca, Ill., which makes desktop-PC monitors and other large displays.
"Our biggest concerns are long-term supply stability and price fluctuations. If we can work together to provide ideas of volume production at given price points, then this will lead to a mutually beneficial relationship. But if things like that can't be guaranteed, then that makes it a little bit more difficult," Connery said.
Suppliers admit they are often unable to provide pricing guarantees beyond 30 to 60 days, a situation that in some cases is testing supplier-OEM relationships.
"We can't predict the pricing any better than our customers can predict the forecast," said Carl Steudle, vice president of marketing at LGPhilips LCD Co. Ltd. "Trying to be flexible through continuous communication is essential to maintaining harmony."
To bring more stability into the system, LGPhilips has extended its market research well into the supply chain by trying to independently determine the accuracy of OEM forecasts, a task Steudle admits is difficult but increasingly necessary.
"The key challenge for us is to forecast our customers demand better than the customer, and sometimes we're lucky enough to achieve this," Steudle said. "As far as commitment to pricing, anything farther out than 30 days is primarily budgetary."
A new report from research firm iSuppli/Stanford Resources indicates component suppliers and OEMs in the market for large FPDs should prepare for even more acrimonious relations ahead. Price swings will continue to dominate the market with OEMs and their suppliers unwilling or unable to commit to long-term contracts due to concerns about end-market demand.
"It doesn't really favor systems suppliers to have long-term contracts because this can work against them if prices go down," said Sweta Dash, an analyst at iSuppli/Stanford Resources, El Segundo, Calif. "At the same time, OEMs don't have that much leverage in the large-panel market because it's not that easy to switch suppliers."
Business cycles in the display market used to last nine to 12 months during which suppliers and OEMs could plan demand and supply needs while basing contracts on sustainable prices. Those days are gone. The cycles have contracted to between three and six months, leaving suppliers vulnerable to pricing pressures and unable to justify huge fab capacity expansions, according to Dash.
"Pricing swings for large-size LCD panels are occurring at a more rapid pace, reflecting major changes in the structure and strategies of the supplier base," she said. "In the new, more unstable LCD market, suppliers must walk a tightrope, balancing their need to facilitate higher demand while retaining their capability to invest in new-generation fabs."
How did OEMs and LCD suppliers find themselves at this juncture, where enduring relationships are sometimes de-emphasized in the race for profits? According to analysts, the situation arose out of a demand and supply imbalance that drove prices sharply lower over the last few years. The industry in 2001 overestimated demand for displays, leaving a capacity glut that drove many suppliers out of the market and others into face-saving alliances.
Also, many Taiwanese LCD suppliers were hurt by the sharp pricing declines of as much as 50% that took place in 2002, which left them unable to add new fabs due to investor apathy.
"Not only does the irregular cycle affect what people are willing to buy, it also slows down the ability to invest in new fabs," said Joel Pollack, vice president of the display business unit at Sharp Microelectronics of the Americas Inc., Camas, Wash. "There's a tremendous cost to adding these fabs, and it's very difficult for suppliers to recover their costs, so they will do it whenever they can."
The timing and severity of the cost-recovery process can be devastating to equipment makers. In the desktop monitor market, prices have firmed since the beginning of this year after weakening in the last two quarters of 2002, and are beginning to rise again despite poor end-market demand. Average selling prices for 14- and 15in. LCDs started climbing in January and are seen maintaining that pace.
"We saw a precipitous decline in pricing on 15in. panels last year, but now we're seeing good demand for desktop monitors," Pollack said. "The industry is coming back to parity and this is allowing people to level out and increase pricing."
Some OEMs contend that pricing in the 15in. LCD market is being artificially propped up by suppliers' decision to switch production to even larger panels, where demand is expected to pick up for flat-screen TVs. The abrupt move led to a correction of the supply and demand imbalance in the 15in. market and helped suppliers begin raising prices, they said.
"We're seeing some less aggressive pricing in the 15in. LCD monitor category, and we've actually seen some price increases from some manufacturers over the past two months, mostly for desktop monitors," said NEC-Mitsubishi's Connery. "This is due to their shifting capacity toward larger displays."