Identifier
Created
Classification
Origin
04TAIPEI3464
2004-11-03 07:37:00
CONFIDENTIAL
American Institute Taiwan, Taipei
Cable title:  

TAIWAN - TFT-LCDS, NOT THE NEXT SEMICONDUCTORS

Tags:  ECON EIND ETRD TW 
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C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003464 

SIPDIS

DEPT FOR EAP/TC
DEPT PASS AIT/W

E.O. 12958: DECL: 11/01/2014
TAGS: ECON EIND ETRD TW
SUBJECT: TAIWAN - TFT-LCDS, NOT THE NEXT SEMICONDUCTORS


Classified By: AIT Director Douglas H. Paal, Reason 1.4 (B/D)

Summary and Comment
-------------------

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003464

SIPDIS

DEPT FOR EAP/TC
DEPT PASS AIT/W

E.O. 12958: DECL: 11/01/2014
TAGS: ECON EIND ETRD TW
SUBJECT: TAIWAN - TFT-LCDS, NOT THE NEXT SEMICONDUCTORS


Classified By: AIT Director Douglas H. Paal, Reason 1.4 (B/D)

Summary and Comment
--------------


1. (U) TFT-LCD (thin-film transistor liquid crystal display)
manufacturing is a key industry in Taiwan with high
expectations for future expansion. TFT-LCDs and other
flat-panel displays, which are used in all laptop computers,
most desktop monitors and increasingly in televisions, earned
USD 12.4 billion for Taiwan in 2003. Taiwan firms accounted
for 34.9 percent of large-size panels. The government has a
plan to further develop the industry, placing it on a par
with semiconductor manufacturing. However, the industry is
currently experiencing severe oversupply due to excessive
investment. A turnaround is unlikely before the second half
of next year. Analysts argue that Taiwan's five major
manufacturers need to merge to compete successfully in the
long term, but despite current excess supply problems, no
financial pressure to merge exists at this time. As in
Taiwan's other high-tech industries, Taiwan produces high
tech components, which are primarily exported to the PRC for
assembly into finished consumer electronic goods and then
re-exported to the U.S., Europe and Japan.


2. (C) Despite the current downturn and fierce price
competition, TFT-LCD manufacturing will continue to be an
important engine for growth in Taiwan's economy. However,
the industry will not have the same kind of impact as
semiconductor manufacturing. Even the most optimistic
predictions of TFT-LCD applications cannot match the
versatility and widespread need for semiconductors.
Moreover, TFT-LCDs will also not have the strategic
implications of semiconductors that have raised Taiwan's
profile politically as well as economically. (End summary
and comment.)

Aiming for Number One
--------------


3. (U) The role of TFT-LCD manufacturing in the Taiwan
economy is important and growing. In 2003, the flat-panel
display industry's total output value for Taiwan was NT$
416.2 billion (USD 12.4 billion). TFT-LCD panels are the
largest component of Taiwan's flat-panel display industry.

Taiwan produced 34.9 percent of the world's large-size (10
inches or larger) TFT-LCD panels last year. TFT-LCD export
revenues totaled USD 3.9 billion in the second quarter of
2004, an increase of 129 percent from the same period the
previous year. TFT-LCDs account for approximately six
percent of Taiwan's export revenue. TFT-LCD manufacturers
currently account for some 60 to 70 percent of revenue
generated in the Southern Taiwan Science-based Industrial
Park (STSIP).


4. (U) Taiwan has identified the display industry as one of
the "Two Trillions" in the Ministry of Economic Affairs' "Two
Trillions, Twin Stars" plan. This plan aims to strengthen
what the Taiwan government sees as four of the most important
industries for Taiwan's future: the two potential NT$ 1
trillion revenue industries of semiconductors and displays
and the two potential stars of the future, biotechnology and
digital content. TFT-LCDs are the key component in the
display manufacturing industry. The plan aims for Taiwan's
display production to reach NT$ 1.37 trillion in 2006. The
government has also set the goal of overtaking South Korea to
become the number one producer of TFT-LCD products in the
world. It appears set to do that this year. Towards these
ends, the government has encouraged joint research and
development among TFT-LCD producers, vertical industry
integration into upstream and downstream manufacturing
processes, and education and training to meet the industry's
needs.

Market Glut
--------------


5. (U) However, the TFT-LCD industry's outlook is not at all
promising in the near term. According to industry observers,
the TFT-LCDs industry is very cyclical and is currently
experiencing a serious downturn. Heavy investment in recent
years, especially in Taiwan, is bringing more factories
online. A report by the government's Industrial Technology
Research Institute (ITRI) indicated that spending on TFT-LCD
manufacturing equipment worldwide has surged 43 percent this
year. Supply is currently outpacing demand. Inventories are
rising, and prices are falling. ITRI reported that supply
would exceed demand by 20 percent in the first quarter of

2005. About half of the current oversupply is made up of
larger panels designed for televisions. AU Optronics and Chi
Mei, Taiwan's largest producers, last week announced earnings
for the third quarter of 2004 were down 70 and 63 percent
respectively. Both are reportedly considering deferring
construction of the next generation of factories due to
excess supply.


6. (C) Analysts have differing views on when the industry
will turn around. Some predict that a turnaround could begin
by the end of this year or in the first quarter of the next.
However, most foresee a longer slump. Abel Wang, research
director at the Market Intelligence Center (MIC),an IT
industry analysis and consulting firm, told AIT/T that the
turnaround won't come until the fourth quarter of 2005.
According to Wang, by that point, the cost of TFT-LCD
television sets will have dropped to half of current prices
and will reach a point where a critical mass of consumers
will choose TFT-LCD televisions over cathode ray tube (CRT)
ones. TFT-LCD panels already account for 100 percent of
laptop computers and 75 percent of desktop monitors. Most
producers now look toward televisions as the main area for
expansion over the next five years. During a visit to
Tainan's STSIP by AIT/T and AIT/K on October 13, Chi Mei
representatives confirmed Wang's prediction by openly
predicting that flat-panel television sets will drop sharply
in price by the second half of 2005. They recommended that
if you are in the market for a TV, wait a while and save a
lot.

No Urge to Merge
--------------


7. (U) While the number one producer, South Korea, has two
dominant TFT-LCD manufacturers, Samsung and LG Phillips,
Taiwan's industry is more fractured. Some say that Taiwan's
TFT-LCD industry has "two tigers," AU Optronics and Chi Mei,
and "three kittens," HannStar, Quanta, and Chunghwa Picture
Tube (CPT). Many experts have argued that Taiwan's
manufacturers need to merge in order to be able to compete
with the big South Korean firms in the long run. As a
result, media reports indicate that the government is
considering offering low-interest loans, tax breaks and other
incentives to encourage consolidation.


8. (C) TFT-LCD manufacturers have responded negatively to
suggestions that they need to merge. As MIC's Wang explained
to AIT, the need to develop new technologies and finance new
investment as well as manufacturing economies of scale offer
important advantages to larger TFT-LCD producers. However,
Taiwan's producers do not feel that these factors necessitate
industry mergers at this time. They claim that because they
each use different manufacturing processes, mergers would not
improve their research and development potential. They also
claim different technologies would impede integration between
existing firms. The technology differs because the various
Taiwan firms import their manufacturing equipment from
different Japanese firms. For example, AU Optronics buys its
equipment from Toshiba and Panasonic; Chi Mei buys from
Fujitsu; Quanta buys from Sharp, etc. Wang also pointed out
that despite recent troubling signs for the industry,
especially in the near term, none of the Taiwan producers has
had difficulty raising capital. Without any real financial
pressure, mergers are unlikely.

Another Cross-Strait Supply Chain
--------------


9. (C) TFT-LCD manufacturing is another industry in which
increasing investment in Mainland China is driving Taiwan's
exports of components. Taiwan TFT-LCD producers do not
generally manufacture finished consumer electronic goods.
Their main product is the TFT-LCD module, which is used as a
component in laptop computers, desktop monitors, television
sets and other products. The finished products are not
manufactured in Taiwan in large amounts. Most are assembled
in the PRC. In addition, Taiwan's TFT-LCD manufacturers have
moved some of the downstream, labor-intensive processes in
manufacturing TFT-LCD modules, particularly the final module
assembly, to factories in the Mainland. The most capital and
technology-intensive processes are still entirely performed
in Taiwan. These include manufacturing of the panel array
and the cell. The Taiwan government currently forbids Taiwan
firms from investing in cell and array manufacturing plants
in the PRC. MIC's Wang believes that Taiwan still holds an
advantage in these capital-intensive processes. He predicted
that it would not be economically advantageous to move array
and cell manufacturing to the Mainland for the next five to
ten years. However, Wu Tai-kang, President of HannStar, one
of Taiwan's three second-tier producers, told AIT that his
firm would be interested in investing in array and cell
manufacturing in the Mainland if it were legal now.


10. (U) As is the case with most of Taiwan's information
technology and other high-tech industries, high-tech
components are manufactured in Taiwan, exported to the
Mainland for assembly into consumer goods, which are in turn
exported to the United States, Europe and Japan. In the case
of TFT-LCDs, another important link in the supply chain
involves the modules' inputs, which historically have been
imported primarily from Japan. One key input is the
manufacturing machinery produced by Japanese firms like
Toshiba, Fujitsu and Sharp. Japanese producers also dominate
the production of TFT-LCD manufacturing materials, such as
glass, chemicals, and color filters. While Taiwan does not
yet have the industrial capacity to produce the manufacturing
machinery, the other inputs are increasingly produced in
Taiwan. U.S. firms are also taking part in this trend.
Corning Glass is building a new LCD glass manufacturing plant
in Taichung's new science and technology park. In early
October, it announced it would expand its investment in the
plant by USD 326 million. In mid-October, 3M broke ground on
a new brightness-enhancement film (BEF) plant in Tainan's
STSIP.

TFT-LCD Role In Taiwan's Economic Future
--------------


11. (U) The Taiwan government and TFT-LCD producers
increasingly see TFT-LCD manufacturing as a pillar for
Taiwan's economy, much as semiconductors were in the 1980s
and 1990s. There are clear disadvantages in relying heavily
on the TFT-LCD industry. First, like semiconductors, the
TFT-LCD industry is very cyclical. Profitability for
manufacturers has risen and fallen sharply as TFT-LCD
displays have penetrated new product markets and then
successfully saturated the market. In one sense, the cycle
is even more hazardous than the semiconductor cycle. While
semiconductor prices go up and down, prices usually return to
previous levels driven by new technology with more
capabilities. TFT-LCD prices, on the other hand, are likely
to trend downward over time because of limited potential for
improving the product's capability.


12. (C) Some observers also note that TFT-LCDs do not have
as many applications as semiconductors or the strategic value
of semiconductors. They are currently used in a much
narrower range of products than semiconductors and can be
replaced by other display technologies. Nevertheless, some
inside the industry have high expectations for the expansion
of TFT-LCD use in a wide variety of goods. HannStar's Wu
told us that while many are focused on television sets as the
source of the industry's future growth, he believes that
televisions are not the best fit for TFT-LCD technology. He
points out that the technology's greatest advantages are its
low weight and low power consumption. He sees vast potential
in all forms of consumer electronics, especially portable and
mobile electronics. He predicts that TFT-LCDs can be part of
a revolution in how people interface with technology.
PAAL