Research house warns on glut in flat-panel supplies

Liquid-crystal-display (LCD) panel makers may face a severe glut in the second quarter of next year due to the growing output and inventory digestion, the Taipei-based Topology Research Institute (拓墣產業研究所) said in its latest report.

Topology joined other cautious research houses, led by DisplaySearch, which gave a gloomy outlook for the first half of next year for the highly-cyclical industry. The industry is, however, expected to recover from the trough in the second half of next year.

"We are afraid that new production lines will generate huge capacity and cause serious oversupply in the typically [slow] season in the second quarter of 2006," said Aldirich Lai (賴文漢), a Topology researcher, in his latest report scheduled to be released tomorrow.

In addition, there were inventories that still need to level off, he said.

Chi Mei Optoelectronics Corp (奇美電子), Taiwan's No.2 maker of LCD screens, said last week that it planned to nearly double monthly production at its new plant to 90,000 glass substrates by the end of this year, and double that again to 180,000 by the end of next year.

Bigger local rival AU Optronics Corp (友達光電) also plans to boost its new factory's output to 120,000 glass substrates a month by the end of next year, from the current 60,000.

Supply will exceed demand by 5.3 percent in the first quarter next year, and by around 9 percent during the second quarter, Lai predicted.

DisplaySearch, which is based in Dallas, Texas, predicted that oversupply would be more drastic, with supply exceeding demand by 10 percent already in the first quarter next year.

The anticipated glut will squeeze the profitability of flat panel players as prices for mainstream 19-inch flat panels for computers will fall roughly 20 percent to US$175 apiece in the second quarter of next year, from US$218 during the third quarter of this year, Lai forecast.

But he also said a potential spike in demand for LCD-TVs in the leadup to the World Cup next summer, as well as falling prices making notebook computers more appealing, could could ease the supply glut.

In the best scenario, supply will exceed demand by a manageable 5.3 percent, if demand from the two segments booms as expected, Lai said.

Demand for laptop computers and LCD-TVs could rise to 72 million units and 33 million unit next year, from this year's estimated 58 million units and 23 million, according to the Topology researcher.

Despite widespread pessimism from analysts, both AU Optronics and Chi Mei Optoelectronics told investors that the situation will not be as bad as the research houses believe.

"They are too pessimistic about the first quarter ... Notebook demand will be brisk in the first quarter based on messages from our customers," said Hsiung Hui (熊暉), a vice president of AU Optronics, adding that supply would only slightly exceed demand by 2 or 3 percent in the first half of next year.

The two companies have also said they will lower factory usage to avoid severe oversupply, as they did during the last glut.

Unlike major players which have the ability to ride out nasty troughs in the market cycle, small players face great pressure to merge when the industry is trending down, Lai said.

"Topology believes Taiwanese flat-panel makers are facing an urgent need for consolidation now, or they will lose their competitive edge to Korean rivals," Lai said.