Written by Lisa Ann Cairns, Ph.D.
TVs are hot again after significant slump in 2013, but the market shift has left many companies in shortage situations. The market imbalance and shift to 4K SmarTVs are driving component prices up, all while the effects of 2013 price slashing linger in the minds (and pockets) of consumers. The supply chain imbalance is hurting TV OEMs' and retailers' profitability, while component manufacturers are competing to provide the right supply and balance the panel and driver IC market in 2015.
TVs, in particular, had a rough time in 2013 and into early 2014, until a large-area LCD panel shortage hit mid-2014 (2H14). The shortage gave a much-needed boost to demand-side market momentum, and, in turn, the shortages led to some retail unavailability. While product unavailability is not a positive market situation, it seems to have supported other market drivers to invigorate the TV supply chain and consumer interest, though not without introducing challenges. Demand continues to outpace capacity presently; there are still shortage issues, particularly for large-area driver ICs, due to utilization competition at foundries focused on higher-value semiconductors for smartphones, as IHS DisplaySearch reports. Challenges aside, price drops have put 4K front and center as the main demand driver for TVs in most regions. Notably, 4K TV demand drove total global shipments to 6.4 million units in 2014, representing a 500% year-over-year jump for 3Q14.
Through mid-2015, analysts agree that large-area panels for TVs will continue to hold onto current demand momentum, although supply still may not quite meet demand. The demand and sales slump in 2013 drove TV OEMs into a downward price war to entice consumers, and TV OEMs are not willing to increase prices and deter consumers. This reluctance to increase prices to offset rising component costs is now creating profitability problems. As IHS DisplaySearch forecasted:
Since the price lows of March, mainstream panel prices (like 32") have increased 25%, which has definitely been a heavy cost burden to TV brands and retailers. Profitability has been badly eroded for TV makers, and extremely low seasonal prices [for Winter holidays] will not make things better for them.
Also weighing on the current market situation is the competition for lines at foundries because smartphone OEMs are demanding volume runs to compete in that hot commodity market globally. TV OEMs are now competing for the same lines because both market sectors need to support slimmer displays with higher resolutions that require similar source driver ICs, argues IHS DisplaySearch. For smartphone display panels, the compound annual growth (CAGR) in revenue is expected to more than double between 2012-2018, "from [US] $139 million in 2012 to $325 million in 2018. Semiconductor makers are increasingly adding functions previously located in the processor to small and medium panel driver ICs." These smartphone display driver ICs are higher-value than those for TV display driver ICs, and "timing controller (TCON) chips are priced comparatively lower, [so] they are given lower priority than semiconductor chips."
Shortages along the supply chain still exist for panels and display driver ICs, contributing to the ongoing shortage of large-area LCD TVs globally. In 2Q14 and 3Q14, LCD TV panel shipments reached historic highs of 64 million and 65 million, respectively. These were records for LCDs, and similar momentum is forecasted for OLED panels, as well, particularly for tablet PCs, according to IHS DisplaySearch. Size and end-device does matter for display demand opportunities. For example, while high-resolution tablet PCs and large-area TVs hold consumer interest now, there is concern that notebook PC and LCD monitors "are […] shifting to over-supply." While that display market slowdown could actually be positive in freeing up capacity for TVs and other panels in demand, it could lead to a possible over-supply problem due to size and feature differences (e.g., TFT or not) by mid-2015, if not managed well by TV and display manufacturers, many of whom are adding capacity to gain market share.
Global or isolated growth?
The market strategy to address the current balancing act also comes down to the questions: Where is demand geographically? How long is demand likely to continue? We see that growth rebound is taking place in a few key regions. For example, in North America TV demand increased due to 4Q14 holiday sales that put large-area, 4K ultra high-definition (UHD) and "Smart" TVs front and center for larger tech purchases, thanks to deep discounts at retailers – again, we see the downward pricing pressure challenge. Adding to current demand drivers in North America is the length of time since the initial LCD shift away from large, heavy CRT TVs. Taken together with significantly improved resolution (best experienced at large-area sizes of 50"+) and increased on-screen SmartTV functionality for streaming services, the time (and price points) hit a positive note with consumers. LCD TV growth in North America hit double-digits in 3Q14, with 12% growth year-over-year, according to another quarterly report by IHS DisplaySearch.
Similarly, the Asia-Pacific region, including China, saw growth for LCD TVs, but India lead the growth in the region. Moreover, India is forecasted to be the demand leader regionally because the lower, more favorable pricing and currency exchange rates are opening the market to a new, wider set of Indian consumers. In India, which is somewhat behind APAC in the switch from CRT to LCD, "the overall TV market […] grew 7% Y/Y in Q2'14, reaching 2.9 million units; three-quarters of all shipments were flat panels." One Indian market differentiator is that local brands make up more than 60% of market share. Policies like "Make in India" (see the companion piece in this MarketWatch Quarterly) result in increased competition that disfavors non-domestic brands while simultaneously increasing opportunities for Indian TV manufacturers and OEMs.
While the switch from CRT to LCD TVs cannot be overlooked when considering the geography of current TV demand, clearly the market drivers in India are different from those in China and APAC, as well as from North America – regions where the initial switch away from bulky CRT has already occurred and government subsidies have ended. The leading, global demand driver is squarely rooted in the visual advantages of 4K TVs (including UHD and SmartTV).
Forecasts for China hold in the double-digits, followed by Europe and North America. It is important to recognize in this growth momentum that, in China and APAC more widely (just as within India), we are seeing significant and real competition from local manufacturers providing quality, high-end products and local brand recognition with lower pricing. These local brands, like their market brethren in smartphones (see the companion article in this MarketWatch Quarterly volume), are seeing the global market as their next step. As such, these new local and regional leaders are taking their local success and local supply chain advantages to produce high-quality products at lower prices, and are then challenging global OEMs, not just locally, but now regionally and globally.
It is no longer the case that global smartphone or TV OEMs will "bring" their devices to emerging markets; rather, these global leaders must now recognize that their real challengers come not from each other, but from these new, local brands who have their eyes on their global market share. This type of competition, which can provide similar-level quality product, but at a lower cost basis, adds to the challenges facing the global TV market. The added challenges come in additional downward price pressure at a time which, traditionally, would give an upward pricing opportunity, due to rising component prices and shortage situations. How TV OEM leadership plays out in 2015+ is going to be interesting to track, just as it will be for smartphone OEMs that face very similar competition challenges, but without the same component shortage issues.
Component manufacturers increase competitive scope
Meanwhile, on the component manufacturers' side, we see some similar market and supply chain shifts. There are significant ramp-ups, as well as stiffening competition, much like for OEMs. Chinese manufacturers, especially, are increasingly offering high-quality, competitive components at lower prices. As a result, these manufacturers (of panels and ICs, especially) are now not only competing for Chinese-brand OEMs, but are taking their capabilities globally and competing outside of China. Initially, we see this competition challenging Taiwan-based manufacturers in 2015, as DigiTimes reports.
In part, the increased competition from China-based manufacturers of various components, from panels to ICs, is intertwined with the larger economic shifts put into action and supported by national governments. This is most evident in the case of China's government, with its focus on being an IC manufacturer as opposed to IC importer, and India's with its "Make in India" campaign. Importantly, there is not just a synergy, but also a foundry utilization moment shared between the smartphone and TV market changes currently. Not only are the high-resolution, slim display driver ICs shared, but also some of the lines for the displays themselves, although panel size does play an important role among suppliers. The supply chain events in both TV and smartphone markets are very much on similar paths, and are likely to result in significant industry changes in 2015 and beyond.
As discussed in the companion piece in this MarketWatch Quarterly, the leading emerging markets of China and India, in particular, but also Indonesia and other Asia-Pacific markets, are strategically moving their industrial bases away from low-cost production hubs to focus on supporting and developing high-quality, technology-based, globally competitive industries. The goal is that these industries will drive and support long-term, sustainable economic growth for their countries and their growing labor base. What these economic changes mean is that not only are the economic forecasts that measure GDP and growth in need of revision, but the global supply chain is experiencing and will continue to experience increased competition from these countries.
Competition is good, generally, and the increased global competition across market sectors is shaking up the global semiconductor and electronics industry. This competition is challenging long-time market leaders and introducing new, innovative strategies and manufacturing opportunities, while preserving quality and reducing price. However, the cautionary note that must be tossed out is the question of over-supply and over-saturation. There are consumer demand slowdowns in China, notably, and mature markets have been on a slower growth path for a few years (though the US is expected to see stronger growth in 2015, but this will likely dampen in 2016). These slowdowns can lead to over-supply and inventory issues – issues the industry has done a great job of keeping in check since the 2008 global recession reminded everyone of the risks involved with holding too much inventory.
The risk of over-supply, therefore, comes not only from the constant concern of potential consumer demand weakness, but also in the form of an increased number of quality manufacturers competing and producing. It is not that this competition is a negative market situation; certainly not. We have been in need of revitalized innovation and supply chain opportunities; the tricky question is whether the new, once-local, now global-aspiring competitors are able to succeed in the larger, complex, global marketplace. Some of these competitors are not new to their respective global markets, and it will be interesting to see how old meets new and results in possibly a very different supply chain and OEM leader lineup at the close of 2015.