BOSTON With the new year the LCD industry expects to transition from oversupply to shortages, and vendors are putting plans in place to help weather whatever storms 1999 brings. Despite continued unit growth last year, the LCD market's dollar value suffered its first-ever decline, the result of what one analyst called "catastrophic" cuts in prices.
Supply and pricing are just the latest phase of a recurring cycle that has afflicted the market for the past few years, but they are further complicated by a number of factors. These include the maturity of established markets and the uncertainty of new ones, the potential entry of new suppliers and the lack of investment capital for new factories and equipment. There's little agreement, though, on what sizes and types of LCDs will be in short supply, how long the shortages will last, and how long vendors can lose money hand over fist just to stay in the game.
Omid Milani, senior marketing manager for flat-panel products at NEC Electronics (Santa Clara, Calif.), surveying the situation at Stanford Resources Inc.'s Flat Information Display conference last month in Monterey, said,. "The FPD [flat-panel display] industry is not profitable." After six to seven years of losses, he said, "we're still in that situation. Price is dominated by rapid demand/supply fluctuations," he said, "target markets are diverse and their requirements are constantly changing."
Paul Semenza, director of market analysis at Stanford, predicted that LCDs will return to their historic dollar growth in 1999, climbing to more than $12 billion, with the biggest rise attributable to the growth in desktop LCD monitors. Sharp pricing decreases in LCD panels for notebook computers started leveling off last year in the second quarter, Semenza said, and by the third had entered a fairly steady pricing state that he predicted will last through at least the first half of 1999.
Milani predicted that the portable PC market and, thus, the market for the LCDs used in these products "will be fairly flat for the next two to three years." He predicted only a 2 percent compound annual growth rate (CAGR) in units from 1998 to 2000, with 14.1 million portables sold in 1998 and 14.6 million in 2000.
"There isn't great growth potential here," he said, "and profitability has been a problem." And yet, he said, LCD makers feel that they "have to play" in commodity LCD markets like notebook computers, a market where pricing "is defined by demand/supply conditions, there's limited control by any single supplier, and which has historically been volatile and unprofitable."
The mix of LCD sizes in notebooks is in flux, Milani noted, with 12.1-inch SVGA panels representing 44 percent of the market today and 14.1-inch XGA panels only 7 percent. By the end of 2000, 12.1 inchers will represent only 20 percent of the portable-PC LCDs, he predicted, with 14.1 inchers growing to a 32 percent share. The larger sizes, of course, will take up more of the available worldwide capacity. Milani also predicted a possible resurgence in "mini-notebooks" with sub-10.4-inch LCDs over the next 18 months.
Pricing on LCD panels for desktop monitors also leveled off somewhat this year after sharp declines, Semenza said, but he predicted that a shallow decline in pricing will continue over the next six years for most sizes. The 13.x- and 14.x-inch monitor LCDs, now priced at about $600, will drop below $500 next year, he said; with 15.x-inch panels, now priced at about $750, hitting $500 in the year 2000; and 16.x- to 17.x-inch panels, now a little under $1,000, hitting $500 in 2001. The 18.x- to 19.x-inch panels, now priced at about $1,500, will approach $500 by 2004, he predicted. And panels in the 20.x-inch realm, costing $3,500 in 1997 and about $2,700 today, will drop to under $1,000 by 2004.
Milani pointed to a sharp contrast in the growth picture for monitor-grade LCDs compared with notebook-grade panels. The LCD monitor market will grow, with 2.1 million monitors sold in 1998, 5.3 million in 1999 and 7.8 million in 2000. "Fifteen-inch XGA is the sweet spot," he said, "and, a surprise, 14-inch will stick around for two to three years."
Rhoda Alexander, senior market analyst at Stanford Resources, said that "we anticipate a much gentler slide" in LCD monitor pricing in 1999 compared to 1998, which brought "a real shock in vendor expectations vs. reality" as a "huge clog in the distribution channel" developed and vendors had to sell product below cost to keep them moving. She noted "50 percent or more price erosion over the year" for LCD monitors. "Last year's price drops were catastrophic to the industry as a whole," she said.
Tom Paterniti, director of product marketing at monitor vendor Viewsonic Corp. (Walnut Creek, Calif.), labeled the situation "a wild ride" as "prices fell through the floor." The 14- and 15-inch LCD monitors "can't get much cheaper," he said. "There's no more room for cost reduction."
Tom LaRocca, manager of product marketing at Compaq Computer Corp. (Houston, Texas), predicted moderate pricing declines for 15-inch LCD monitors over the next two years, "driven by lower integration costs, manufacturing efficiencies and competitive pressure." The 14-inch monitor is "not cost-justified vs. 15-inch," he said, since their pricing is so similar.
Alexander noted a "tightening supply" in LCDs, "particularly for 14-inch and especially 15-inch" sizes, "with pricing up or stable on most panels, though not necessarily on monitors. New monitor vendors may buy market share with lower prices," she said. NEC's Milani agreed. While the notebook-panel market will see "competitive pricing" in LCDs, he predicted, "certain vendors will certainly be aggressive" in their monitor-LCD pricing in an attempt to buy market share.
The one exception to stable or rising LCD prices, said Alexander, will be in the 18-inch size, which may decline in price "as more and more vendors come into the market." There were "supply constraints" in the first half of 1998 for 18 inchers, she said, forcing "a major reality adjustment" in the third quarter. Paterniti noted that LCD makers "experienced yield and production problems" with these large displays. If pricing were to drop to the point where high demand were generated, he said, current factory capacity could not keep up.
How future LCD pricing pans out depends, of course, on supply and demand. In 1998, Semenza said, LCD supply exceeded demand for computer applications across the board up to sizes in the 15.x-inch range, contributing to price wars and steady pricing declines. He predicted that 1999 will be a different, with demand exceeding supply for 13.x- and 14.x-inch sizes and near parity in supply and demand for sizes between 15.x and 17.x inches. Jeffrey Hart, a professor of political science at Indiana University who has written on the global flat-panel-display industry, said, "Some firms intend to skip 14-inch and 15-inch screens and jump to 17-inch or larger because of the very low prices on smaller CRTs."
How the supply picture pans out, in turn, will depend on whether established manufacturers expand capacity and what sizes they choose to crank out, as well as what strategies new suppliersparticularly the Taiwanesechoose to pursue.
Said Bill Lee, vice president of marketing at Symmorphix Inc. (Sunnyvale, Calif.), "For Gen 4, everybody is in a race to be second. Declining prices provide insufficient profitability, and we're at a crossroads where cost reductions are not keeping pace with price reductions. A step function improvement is needed." Symmorphix, which specializes in low-temperature-polysilicon active-matrices, believes that polysilicon will provide that step function over traditional amorphous silicon (a-Si) for LCDs. "A-Si is pretty mature," he said, "and investment has dried up.
Hart said the Taiwanese are ramping AM LCD production more quickly and less expensively than the Koreans did, which several analysts attributed to technology transfer from Japan as well as the ability to purchase old equipment from Japanese partners at a relatively inexpensive rate. Independent consultant Rob Harrison, however, noted extreme caution on the part of the Taiwanese in ramping up, given the chaotic market conditions.
"Investment in future capacity is the ante to be in the game," said Steve Franzese, vice president of marketing at Philips Components' Flat Display Systems operation (San Jose, Calif.) "The question is how to do that and be profitable."
Staking out niches
LCD makers at the conference discussed ways to sustain the growth of LCDs, value-added strategies that depart from the cookie-cutter, one-size-fits-all mentality. Kraig Kawada, senior product marketing manager at Sharp Electronics (Camas, Wash.), called diversification the key. LCD makers need to "look beyond current high-profile markets to new markets such as electronic books and Web browsers," as well as vigorously addressing two "influential markets, automotive and [port-able] telecommunications," and pushing "dynamic expansion" in early-adopter markets like medical electronics, the financial industry, ATMs and kiosks.
"Diversification into new markets is key," said Kawada, adding that "key enablers need to be addressed to sustain long-term growth." These enablers, he said, include providing new sizes and formats geared for particular application segments, improved image quality, "continuity of supply" for markets that don't change as rapidly as the portable PC market and items that address "total cost of ownership" issues.
"The obvious alternative" to the perturbations of high-volume mass markets for LCDs are "niche markets," said Alexander. She noted, however, that these markets are not only relatively low-volume, but also are "traditionally not served by the distribution channel."