TAIWAN'S FLAT-PANEL DISPLAY INDUSTRY - MILESTONES

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 000493

SIPDIS

SIPDIS

STATE PASS USTR
STATE FOR EAP/TC
COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/LMOGHTADER
USTR FOR STRATFORD, ALTBACH

E.O. 12958: DECL: 03/02/2017
TAGS: ECON EINV ETRD TW
SUBJECT: TAIWAN'S FLAT-PANEL DISPLAY INDUSTRY - MILESTONES
AND CONSOLIDATION FOR A MATURING INDUSTRY

REF: A. 06 TAIPEI 4083


B. 06 TAIPIE 4029

C. 04 TAIPEI 3464

Classified By: AIT Economic Section Chief Daniel K. Moore, Reason 1.4 d


1. (SBU) Summary: In 2006, Taiwan's flat-panel display
industry earned more than NT$1 trillion (US$30 billion)
in revenue for the first time and surpassed South Korea
in value of large-size TFT-LCD panels. The industry has
seen consolidation, most notably last year's acquisition
of Quanta Display Inc. by AU Optronics. However,
industry leaders say that further consolidation is
unlikely and five large players from Taiwan, South Korea
and Japan will dominate the global market for the
foreseeable future. Investment by foreign suppliers,
expansion upstream by panel makers and gains by Taiwan's
panel-manufacturing equipment makers have all contributed
to a more robust industry cluster in Taiwan. With the
emergence of a more mature industry, Taiwan's TFT-LCD
industry may see slower growth, but it will continue to
provide opportunities for U.S. suppliers like Corning and
Applied Materials. End summary.

Reaching Milestones
--------------


2. (U) Taiwan's TFT-LCD industry achieved two goals in

2006. According to the government-funded Industrial
Technology Research Institute (ITRI),Taiwan's flat-panel
display industry earned more than NT$1 trillion (US$30
billion) in revenue in the first 10 months of 2006, thus
reaching one of the targets of Taiwan's "Two Trillions,
Twin Stars" plan. (Note: Taiwan's other "trillion"
industry, semiconductors reached the NT$1 trillion mark
in 2004. End note.) By the end of the year Taiwan's
flat panel revenues had nearly reached NT$1.3 trillion
(US$40 billion). TFT-LCD displays account for the vast
majority of Taiwan's flat-panel display output. ITRI
reported that Taiwan's production value for large-size
TFT-LCD panels exceeded that of South Korea for the first
time in 2006 marking another milestone. (Note: According
to ITRI's data Taiwan's TFT-LCD panel output volume
exceeded Korea's in 2005 but not the output value. End
note.)

Consolidating
--------------


3. (U) Many analysts had previously identified a need for
consolidation among Taiwan's TFT'LCD producers. While
the industry in South Korea has been dominated by two
major players, Samsung and LG Philips, the field in
Taiwan has been more crowded. Taiwan's two largest panel
makers are AU Optronics (AUO) and Chi Mei Optronics (CMO)
with scales comparable to Samsung and LG Philips. Until
recently, Taiwan had three second-tier players with
Chunghwa Picture Tubes (CPT),Hannstar and Quanta Display
Inc. (QDI) in addition to several smaller players.
However, in October 2006, AUO acquired QDI. The combined
company could be the largest supplier of TFT-LCD panels
in 2007. In addition, Hannstar recently downsized,
selling one of its third generation TFT-LCD panel
factories to mobile-phone panel maker Wintek. The sale
left Hannstar with a single third generation and a fifth
generation factory. In its press release announcing the
sale, Hannstar said the move would reposition it as a
"niche player" in the industry.


4. (C) AUO Chairman K.Y. Lee recently told the AIT
Director that there would be no more consolidation in the
industry, arguing that shareholding structures controlled
by families would prevent further mergers. CMO Vice
President for Finance and Accounting Eddie Chen echoed
Lee in comments to econoff. He said that the TFT-LCD
industry was reaching the end of a ten-year stage of
early development marked by many competitors and rapid
expansion. For the next ten year, Chen believes the
global industry will be dominated by five leaders,

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Samsung, LG Philips, AUO, CMO and Sharp, controlling 80
to 85 percent of total panel capacity.


5. (C) The industry has also seen consolidation in
Mainland China. In January, three of China's largest
TFT-LCD manufacturers, Shanghai SVA-NEC Liquid Crystal
Display, BOE Optoelectronics Technology, and Info Vision
Optronics, announced they would merge into one in late

2007. The Chinese government will be the largest
shareholder in the combined firm with a 36-percent stake.
CMO's Chen commented that the merger will hurt Taiwan's
CPT, which has struggled recently. Last year, CPT
suspended plans to build a seventh generation plant and
slowed investment in a sixth generation plant.

Strengthening Local Supply Chains
--------------


6. (U) In addition to consolidating, the industry in
Taiwan has also seen the development of more closely
integrated supply chains within Taiwan, creating a robust
TFT-LCD industry cluster. Foreign firms have invested
heavily in Taiwan facilities to supply local panel makers.
The most striking example is Corning Display Technologies,
which has invested more than US$2.5 billion in large
glass substrate facilities in Taichung and Tainan. It is
the largest U.S. investor in Taiwan and its facilities
here are Corning's largest investment in the world.
Corning and Japanese glass makers like Asahi dominate the
substrate market in Taiwan and around the world. The
last Taiwan substrate maker Picvue Optoelectronics
International announced in November 2006 that it was
closing down.


7. (C) Taiwan panel makers have also moved farther
upstream in acquiring and forming partnerships with
suppliers. CMO's Chen described his firm's ambitious
plans to strengthen its supply chains. He pointed out
that CMO had recently acquired a 15-percent stake in
Himax, an integrated circuit design firm that is the
world's second largest maker of LCD drivers. He said CMO
used to rely on Optimax and Sumitomo for polarizers used
in panel production, now it buys more polarizers from its
own subsidiary, Chi Mei Materials. Another affiliate,
Chi Lin, supplies CMO with back light modules, protective
films and other inputs. Chen said that expanding further
upstream allows CMO to ensure a sece.JpQ^Technology was skeptical of the plan.
Contrel is an
equipment manufacturer 30-percent owned by CMO, but it is
not a participant in the consortium. Lee told AIT that
Taiwan panel-manufacturing equipment makers still face
difficulties because panel manufacturers lack confidence
in local firms. He said it is difficult for small firms
to compete in the field dominated by Applied Materials of
the U.S. and Japan's Nikon.

Comment - A Maturing Industry
--------------


9. (SBU) After years of fierce competition and rapid
expansion, it appears that the TFT-LCD panel

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manufacturing industry in Taiwan is entering a period of
slower growth that favors big players. AUO and CMO have
announced capital expenditure plans for the next three
years that represent a drop in investment by up to 60
percent. More small Taiwan players may disappear from
the scene over the next few years, but Taiwan's big
companies should be able to maintain their prominent
position in the global market. Even with slower
expansion and Taiwan firms strengthening their position
in upstream manufacturing, Taiwan will continue to
provide opportunities for U.S. firms like Corning and
Applied Materials.
YOUNG