ANALYSIS: Rise of Chinese LCD firms threatens local makers

By Lisa Wang  /  Staff reporter

Mon, Nov 12, 2012 - Page 13

The rise of China’s LCD panel makers is posing a growing threat to Taiwanese panel suppliers and may narrow the once wide gap between the two nations’ display industries as local firms struggle to upgrade their technologies to safeguard their technological lead.

AU Optronics Corp (AUO, 友達光電) recently sounded the alarm over this change in the industry’s competitive landscape. Aside from being worried about the swift catch-up of Chinese rivals, AUO is also concerned about the protection of trade secrets.

The electronics giant filed a lawsuit with the Hsinchu District Court in the middle of last month against two former high-ranking executives in charge of developing advanced technologies, alleging that they leaked company secrets to their current Chinese employer, China Star Optoelectronics Technology Co (華星光電).

China Star was formed three year ago by major Chinese television brand TCL Group, the Shenzhen government and Samsung Electronics Co. TCL was once one of AUO’s biggest Chinese clients.

China Star is the second-biggest LCD panel maker in China and is the only Chinese firm operating an advanced 8.5-generation factory like its bigger Taiwanese rivals.

If true, the allegations of intellectual property theft “could have an adverse impact on AUO as the accused executives are very familiar the company’s most advanced and important technologies … The company is counting on those advanced technologies to survive,” said Annabelle Hsu (徐美雯), a senior LCD industry analyst with International Data Corp (IDC).

Hsu said Taiwanese LCD panel makers are also facing pressure to extend their technological lead over their Chinese peers.

To curb the growth of corporate theft cases, the Ministry of Economic Affairs plans to impose stricter punishments on corporate spies in an effort to protect companies’ intellectual property and competitiveness. The ministry proposed introducing a maximum five-year jail term for intellectual property theft and a fine as high as NT$50 million (US$1.7 million).

The corporate spy case filed by AUO is the latest in a slew of similar cases involving former Taiwanese executives from Hon Hai Precision Industry Co (鴻海精密), Taiwan Semiconductor Manufacturing Co (台積電), Chinese automaker BYD (比亞迪) and chipmaker SMIC (中芯).

In the past, Taiwanese panel companies did not actively response to the headhunting games played by their Chinese competitors and did not take the poaching seriously because the Chinese startups were too small to pose a threat.

“It is useless to hire a bunch of engineers from Taiwan to build a factory [in China]. The real valuable knowledge is how to operate a factory efficiently, which is much more complicated than people think,” AUO president Paul Peng (彭雙浪) told reporters in July.

AUO has invested heavily in research and development, and has about 10,000 patents related to LCD panel manufacturing, Peng said. Last year, AUO accelerated its spending in research and development by 37 percent to reach NT$8.09 billion, compared with NT$5.91 billion in 2010, the company’s annual book showed.

China Star “is using its 8.5G factory to make products that AUO made at less advanced “sixth-generation plants,” Peng said last month.

Although, China Star does have at a factory as advanced as AUO’s, there is an increasing risk that the Chinese LCD firm will catch up AUO much faster than expected, especially if it is indeed taking advantage of the experience and knowledge of the high-ranking executives it hired from AUO and Chimei Innolux Corp (奇美電子).

Hsu did not see significant gap between Chinese and Taiwanese flat panel makers.

“Taiwanese companies only lead in developing new technologies,” Hsu sad.

The trade secret theft case could be a significant victory for AUO as the company is making slow progress in boosting yield rate and ramping up production on new and advanced technologies to keep pace with bigger South Korean rivals Samsung and LG Display Co in high-resolution screens.

AUO has pushed back the mass production of 4.3-inch high-resolution displays — used primarily in smartphones — using AMOLED technology. Originally, the company planned to ramp up production of such displays at the end of last year, but then rescheduled to the second quarter of this year.

Wu Tai-kang (吳大剛), a vice president in charge of AUO’s mobile display business group, said the company “has sent the displays to customers for qualification.”

However, there is still a time lag between qualification procedures and shipping, meaning it will take longer for the company to see revenue contribution from the display.

By contrast, LG Display and Japan’s Sharp Corp are already supplying AMOLED panels for Apple Inc’s popular iPhones and iPads. AMOLED displays are now considered a must-have for high-end smartphones since Apple began using them in its mobile devices.

In addition, both AUO and Chimei are generating slow cash flow, which restricts them from spending big money on expensive equipment for the production of new ultra-high-definition displays.

In China, a market that local panel makers rely on heavily, Chimie and AUO saw their shares of the TV panel market drop to 28 percent and 16 percent respectively, while Chinese rivals BOE Technology Group Co (京東方) and China Star climbed to 15 percent and 8 percent respectively, market researcher NPD DisplaySearch said.

However, NPD DisplaySearch vice president David Hsieh (謝勤益) did not expect local firms to lose more market share to their Chinese rivals.

“We are hearing some noise about pricing [strategies taken by Chinese and Taiwanese panel suppliers] once China Star enters the market, but no material effect is happening now,” Hsieh said.

He did not consider China Star an imminent threat to AUO and Chimei.

“This will not happen in the next two or three years,” Hsieh said on Thursday last week.

That is because China Star only makes 32-inch TV panels at its 8.5G plant and does not plan to make 42-inch TV panels within a year, making it unable to directly compete with AUO and Chimei on this front, Hsieh said.