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Editorial: LCD merger the shape of the future

The Taiwanese are coming, and are expected to keep coming in the liquid crystal display (LCD) business. That's the message the nation's top LCD panel manufacturer, AU Optronics Corp, sent last Friday by announcing its planned acquisition of smaller rival Quanta Display Inc through a share swap.

Normally high-profile mergers like this are hard to come by because companies won't rush into a decision, given concerns on conditions such as purchase price, human resources and growth prospects. Now that the deal is announced, no one is about to underestimate the impact it will have -- AU Optronics was originally born through a marriage of Acer Display Technology Inc and Unipac Optoelectronics Corp in 2001.

The deal has received praise as the two partners complement each other, especially in technology, product mix, customer portfolio and different generations of manufacturing facilities. Apart from building larger scale economies and market share in the LCD business, the deal will also help woo fresh foreign investment into AU Optronics for capacity expansion and the construction of next generation fabrication plants. After the deal is completed on Oct. 1, AU Optronics will be better positioned to purchase key LCD components at lower costs and to join Samsung and LG.Philips as one of the industry's price setters. In the past, South Korean companies tended to adopt predatory pricing and continuous investment strategies to weaken Taiwanese makers.

The newly announced merger is also likely to force the nation's second-largest flat panel display producer Chi Mei Optoelectronics Corp and other second-tier flat panel manufacturers to rethink their business strategies. In the foreseeable future, some of them may need to cut costs, pursue supply chain consolidation, establish alliances or even start merger talks in order to stay competitive.

Competition is fierce in this line of business as more than two dozen major flat-panel display producers already exist in Taiwan, South Korea, Japan and China. Therefore, in late 2004, the government began to call for industrial consolidation by offering low-interest loans, tax breaks and other incentives. This was a follow-up to the "Two Trillion, Two Star" program unveiled in 2002, which encompassed the goal of increasing the production value of Taiwan's semiconductor and flat-panel display industries to US$30 billion per year in four years. Last year, total industry revenue reached US$25 billion, and this year sales are likely to exceed the goal.

The new AU Optronics-led entity will face plenty of challenges. Personnel and corporate culture adjustments are likely to be major issues after the merger. Then there is the continued decline in panel prices, as some producers increase capacity in fifth and sixth generation lines, resulting in more panels being produced at cheaper cost.

The government may feel relieved to hear about the merger of a major Taiwanese panel maker. Taiwan's capacity to compete with Korean firms will be greatly enhanced by the move.

But to help free the local LCD industry from technological dependence and its shortage of skilled labor, the government has more work to do. While it is both undesirable and impractical for the government to provide direct subsidies to panel makers for new production lines, it can offer indirect support to the industry by settling land-acquisition problems and improving infrastructure. The government can also work to amend finance laws to help facilitate the establishment of more mega LCD panel makers like the new AU Optronics entity. The regulatory limit on bank loans has left some institutions close to their loan caps, and lifting this ceiling would encourage more of the mergers and acquisitions the LCD industry needs.
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