LCD Panel 10 Years: Dignity and Misunderstandings

2015-06-23

Introduction: Over the past decade, the liquid crystal panel industry on the Chinese mainland has endured huge losses while laying a foundation for its expansion and winning dignity. At the same time, doubts about the industry's massive losses and overcapacity have been persistent among investors. Companies caught in misunderstandings have struggled forward amidst the embarrassment of self-defense. 

On August 12, 2013, BOE's largest financing in the history of the liquid crystal panel industry—a private placement of 46 billion yuan—was questioned for "raising funds." Chen Yanshun, president of BOE who returned from a business trip in Ordos, told China Economic and Informationization that this is a profound misunderstanding of the development of liquid crystal panels.

Ten years ago, BOE acquired the TFT-LCD business from Samsung Electronics of South Korea, marking the first time that a mainland Chinese company had mastered the core technology of liquid crystal panels. A industry with a scale of several hundred billion yuan also began from this point.

The liquid crystal panel industry in mainland China has played the role of a contradictory entity over the past decade—in order to enhance the country's industrialization and technological equipment level, they had to continue investing and expanding on a large scale despite heavy losses. As a company, they also had to be accountable to investors. Moreover, while bearing huge losses, this industry had to explain the 'overcapacity theory' and the 'OLED replacement theory'.

Looking back over the past decade, those who were eliminated have long since moved on, and the landscape has been completely transformed. Is the development model of China's mainland panel industry, characterized by "government support and market-oriented operations," a Chinese specialty or an international practice? In the surging tide of the industry, how should we define the historical significance of these ten years?

　　2003: A Wake from a Dream

After decades of the wish to exchange markets for technology being dashed, the Chinese mainland panel industry suddenly realized that dignity cannot be waited for; it must be earned. In February 2003, BOE acquired the liquid crystal business of South Korean Hyundai Electronics for $380 million, investing $1.2 billion in Yizhuang, Beijing to build a 5th-generation line, which went into mass production in May 2005, ending the era of zero-production of liquid crystal displays in China. This was a day that would surely be written into the history of the Chinese mainland's liquid crystal panel industry. Ten years after Japanese and Korean flat-screen TV manufacturers and Taiwanese companies monopolized the market, arrogantly eroding China's color TV market share, and imposing a tight technological blockade on Chinese enterprises, Chinese companies for the first time tore through the strict lines of technical isolation. At that time, the world television industry was transitioning from traditional CRT (Cathode Ray Tube) displays to new types of flat-screen displays such as liquid crystals and plasma, with liquid crystal panels accounting for two-thirds of the total cost of LCD TVs. Chinese color TV manufacturers were forced to spend huge amounts of money purchasing liquid crystal panels and other key components from South Korean, Japanese, and Taiwanese manufacturers. In fact, a year before BOE raised its acquisition sword in April 2002, the Shanghai Radio & TV Group (hereinafter referred to as SR&TG) signed a letter of intent for a liquid crystal project cooperation with NEC of Japan, investing nearly 10 billion yuan to introduce a 5th-generation line from NEC. But this cooperation still failed to break out of the traditional model of "obtaining technology use through joint ventures" from the CRT era. BOE was quite familiar with this model. As early as 1987, BOE's predecessor, the Beijing Electronic Tube Factory, established a joint venture with Panasonic of Japan—Beijing Panasonic Color TV Tube Factory, in which the Beijing factory held a 25% stake and Panasonic held the majority. However, until CRT TVs were almost squeezed off the historical stage and Panasonic's color tube factory was about to close down in 2009, China did not obtain any core technology from it. The trajectory of the display industry's evolution seemed like the fate of history, always unable to escape the pattern that originated in Europe and America, matured in Japan and South Korea, industrialized in Taiwan, and eventually flowed to China. During the CRT display era that began in the 1960s, China was under a tight technological blockade for decades without any growth. When CRT TVs came to an end, Chinese industry professionals suddenly realized that sacrificing the market could not bring about technology, and a barren land could not grow fruit out of nowhere. Zhang Baizhe, deputy director of Tsinghua University's Liquid Crystal Technology Research Center, also said that unlike the automotive industry, history has proven that the path of "exchanging markets for technology" in the liquid crystal panel industry is not viable. If we continue to follow the joint venture route, this industry might still be stuck in a dead end today. Chen Yanshun, president of BOE, also believes that the acquisition of South Korean Hyundai Electronics completely changed the trajectory of the display industry's evolution, and the development of China's liquid crystal panel industry was advanced by at least five years. In 2003, the price of 15-inch liquid crystal panels once soared to $230 per piece, resulting in BOE's revenue reaching an all-time high of 11.18 billion yuan for the year, a sharp increase of 133.7%; net profit reached 403 million yuan, a whopping increase of 386.7% compared to the previous year. SR&TG also began its best moment in history. BOE started to ramp up production, expanding from an initial monthly output of 30,000 pieces to 60,000 pieces in August 2006, reaching 80,000 pieces in September 2007, and already achieving a monthly output of 100,000 pieces in July 2008. BOE began to develop explosively, with the 5th-generation line becoming one of the most efficient and profitable production lines internationally. However, BOE's fate was completely changed by the recession of the liquid crystal cycle in the second half of 2004, which also laid the groundwork for BOE's subsequent passivity in the marketization process.

 

　The 2005 Dragon Gathering Difficulty

Shenzhen's dream of becoming the "third city" was difficult to realize, and why did Sharp abandon the "Dragon Gathering Plan" in the end? How did it indirectly achieve the success of CSOT? Entering the liquid crystal panel industry was like mounting a tiger's back; uncomfortable to ride, but even more dangerous to dismount. This meant that as long as one was in it, they had to continue investing and expanding their scale. The panels cut from the 5th generation line could not supply the market for large-screen LCD TVs, and mainland China is the world's largest LCD TV market, yet all large-size LCD panels rely on imports.In the second half of 2005, with the support of the Ministry of Information Industry and the Shenzhen Municipal Government, four major color TV giants—Skyworth, TCL, Konka, and Changhong—suffering from the constraints of imported panels planned to jointly invest in building a 6th generation LCD panel production line in Shenzhen. When seeking technical sources from foreign companies, they either received no transfer of technology or were offered too high a transfer fee. After hitting a wall with foreign technical support, the "Dragon Gathering Plan" extended an olive branch to BOE, which had its own proprietary LCD panel technology. After incorporating Modern Electronics into its fold, BOE was not content to build only one 5th generation line in Beijing. The "Dragon Gathering Plan," which emerged at this time, also coincided with BOE's expansion strategy of "moving south." In early 2006, Shenzhen Superlight, which is under the jurisdiction of the Shenzhen State-owned Assets Supervision and Administration Commission, along with Skyworth, TCL, Konka, and Changhong, each contributed 2 million yuan to establish Dragon Company. BOE invested technology for a 40% stake, while the four color TV companies held a 40% stake, and Shenzhen Superlight had a 20% stake.At the critical moment of signing the agreement in late July 2007, Japan's Sharp took the initiative to propose to the Shenzhen Municipal Government that it was willing to invest technology to build a 7.5th generation line, which made the city and the four color TV companies begin to waver. Changhong simply withdrew to focus on plasma (PDP), and the cooperation between the "Dragon Gathering Plan" and BOE came to a halt. Meanwhile, in Japan itself, Sharp had already decided to invest in building an 10th generation line LCD panel industrial park, with a total investment of 64.2 billion yuan. The members of the "Dragon Gathering Plan," immersed in joy, did not notice that at the moment when preparations for the 10th generation line were underway and the capital chain was tight, Sharp's initiative to show goodwill was either sincere or insincere. Soon after, the Guangdong Provincial Department of Information Industry revealed that the project for Sharp's investment in building a factory was basically suspended, with the specific reason related to some conditions that Sharp had originally promised, including investment and patents. Sharp's unexpected disruption led to the shelving of Shenzhen's vision of becoming the third LCD panel city in mainland China, following Beijing and Shanghai, and also completely derailed BOE's plan to expand southward. However, Shenzhen did not give up its efforts. After the "Dragon Gathering Plan" failed, the city has been seeking to enter the LCD panel industry with TCL as the main body by purchasing technology from foreign companies, but faced numerous difficulties. After sending away Sharp in 2007, TCL signed a technology cooperation agreement with South Korean Samsung, and with Samsung's technical support (including Samsung providing personnel training and guidance, and paying for technology transfer fees), built a liquid crystal module factory (with 4 production lines). The project went into mass production in February 2009 and turned profitable that year. TCL's module factory was originally set up for Samsung's OEM production, but the implementation of the project gradually enabled TCL to develop its own factory-building capabilities. It is worth mentioning that through this project, TCL established its own R&D team and gained the ability to independently build liquid crystal module production lines through practice. Three years later, this team developed into an important force in the mainland China LCD industry, and CSOT was born. Looking back at the history of the mainland China LCD panel industry, Shenzhen's story remains an extremely important turning point. It led to the birth of CSOT, a future LCD panel giant in South China, but also delayed the development pace of mainland China's high-generation LCD panel production lines by at least 2-3 years.

It is worth noting that in 2007, mainland China's panel import volume exceeded

　2006's Bottom of the Valley: Enduring Hardships

The sudden warming trend led to the collapse of the "national team" in the liquid crystal panel industry, inadvertently prompting the emergence of a preliminary model for the independent development of the Chinese mainland panel industry.

Just as they were defeated in Shenzhen that year, the prices of liquid crystal panels began to plummet, and the industry situation fell sharply. BOE's financial report at the end of the year showed that the company had a loss of 1.6 billion yuan in 2005, marking the first annual loss since its establishment in 1993. Shanghai-based panel giant Shanghai Radio & TV also suffered under the threat of losses. Although it did not incur a loss, its net profit had fallen by more than 90%.

In December 2006, with the push from the National Development Bank, the Ministry of Information Industry, and others, BOE, Shanghai Radio & TV, and Longteng Optoelectronics, located in Kunshan, Jiangsu, announced that they would divest their 5th-generation lines and merge to form a joint venture for unified operation. The "trilogy" plan was widely rumored, and the "national team" of liquid crystal panels seemed imminent. Ouyang Zhongcan, an academician of the Chinese Academy of Engineering, recalled to reporters from "China Economic and Informationization" that during the industry's low period with a precarious capital chain, all three companies had great expectations for the merger. There were rumors that after the completion of the BOE, Shanghai Radio & TV, and Longteng Optoelectronics "trilogy" plan, policy banks such as the National Development Bank and state-owned asset management departments would provide no less than 1 billion US dollars in financial support to the merged company.

Just as they were about to sign the contract, signs of a recovery in liquid crystal prices appeared in the first half of 2007. "Everyone slowed down, and it was hard for the company to make money, so of course, we made the money first," recalled Liang Xinching, secretary-general of the Liquid Crystal Branch of the China Optical Electronics Industry Association. Afterward, the "trilogy" plan came to nothing. The failure to establish the "national team" of liquid crystal panels forced BOE and Shanghai Radio & TV to reconsider their strategies. BOE believed that the risk of rashly investing in high-generation lines was too great, so it decided to build smaller investment scale low-generation lines to become the strongest in the mid-to-small size liquid crystal panel market before expanding to high-generation lines. Their first step was to build a 4.5-generation line in Chengdu. Meanwhile, Shanghai Radio & TV continued to focus on its joint venture strategy. In September 2006, Zhou Jiahun, the former general manager of NEC Shanghai Radio & TV, retired, and Shi Yuezhi (a Taiwanese from China), who was the former general manager of Optoelectronics at Shanghai Radio & TV, took over. After Shi Yuezhi was appointed to the company, he brought a large number of employees from Taiwan and made significant changes to the suppliers from Taiwan. Although it was not building high-generation production lines, the financing model adopted by the Chengdu 4.5-generation line was a significant breakthrough for the development of China's liquid crystal panel industry, opening up a financing channel for BOE's subsequent construction of 6th and 8.5th generation lines, as well as the liquid crystal panel production line of Huaxing Optoelectronics. Previously, the Beijing Municipal Government (through the Beijing Industrial Investment Company subordinate to the Beijing State-owned Assets Supervision and Administration Commission) borrowed 2.8 billion yuan from BOE to support the construction of the 5th-generation line. When later facing financial difficulties, BOE proposed to convert the loan into shares of the BOE Group. On one hand, this could help BOE overcome its difficulties, and on the other hand, the government could still recover the funds through the capital market. The Beijing Municipal Government agreed to BOE's proposal. This method showed BOE a new financing avenue: issuing additional shares to the government or specific "strategic investors" to obtain sufficient capital. This debt-to-equity conversion strategy seems very common today, but its appearance in the tumultuous Chinese mainland liquid crystal panel industry in 2006 saved BOE from crisis

 

　The 2008 Scale War

As Shanghai-based enterprises fell, the scale war in the liquid crystal panel industry began to unfold, with the rise of the "overcapacity theory." After a brief period of good fortune in the first half of 2007, the roller coaster effect of the liquid crystal cycle continued to ferment, leading to a global collapse in liquid crystal panel prices. Starting from the second half of 2007, the panel industry entered a downward spiral of losses, which lasted nearly five years in a row. At the end of that year, the senior management of Shanghai Radio & TV Group underwent a collective turnover, with Shi Yuezhi resigning and being succeeded by Gu Weimin, the president of Shanghai Radio & TV Electronic Co., Ltd. The resulting personnel turmoil and management chaos caused the 5th generation line, which had just started production three years earlier, to struggle through heavy losses. Ultimately, under the combined blows of high equipment depreciation, expensive imported raw materials, lack of competitiveness in products, personnel instability, and reliance on NEC from Japan (high technology licensing fees accounting for 3% of annual sales), the "introduction-joint venture" model of Shanghai Radio & TV NEC reached its end, with only the Mitsui Group in Japan benefiting as the ultimate winner, and Korean and Taiwanese manufacturers losing a potential competitor. Also in 2007, TCL, which had been defeated by the "Julong Plan," was not about to give up. After the breakdown of its partnership with Sharp, it sought to cooperate with Korean panel manufacturers. That year, TCL signed a technology cooperation agreement with Samsung, building a liquid crystal module factory with Samsung's support. In April of the same year, after the failure of the "three-in-one" strategy, the only panel giant that had not gone public, Longteng Optoelectronics, received approval from the National Development and Reform Commission for an expansion plan that would increase its capital by 870 million US dollars. There were also rumors in the market that Longteng Optoelectronics was considering going public through a shell company. However, as the international financial crisis erupted, the Chinese mainland's liquid crystal panel industry, which had just begun to rise, was hit hard again. In 2008, companies like Chi Mei, AU Optronics, Huaying Optoelectronics, and LGD successively scaled back their operations to prepare for the cold winter. In 2008, BOE unexpectedly launched a scale war at a critical moment when the international financial crisis broke out and exports were difficult. In March of that year, BOE's Chengdu TFT-LCD 4.5 generation line construction began, and over the next five years, BOE invested more than 50 billion yuan in the expansion plan in the field of TFT-LCD. Chen Yanshun, who explained the logic behind the expansion, said that BOE wanted to turn the industry's downturn into an opportunity for corporate growth. Starting from 2009, the demand for liquid crystal panels in the Chinese mainland market grew sharply. In the first half of 2009, the Ministry of Industry and Information Technology and the Taiwan Affairs Office of the State Council organized nine major Chinese TV manufacturers to purchase liquid crystal panels from Taiwan for two consecutive times, with a total amount of 4.4 billion US dollars and a total volume exceeding 12 million pieces. This move was even once praised as "pulling Taiwanese companies out of the financial crisis

 

　　The Great Reversal in 2010

The production capacity of large-size LCD panels in mainland China began to be released, completely tearing open the industrial blockade and laying the groundwork for future global industrial restructuring.

October 2010 marked the turning point for the LCD panel industry in mainland China. The situation where large and medium-size (32 inches or larger) LCD TV panels were completely dependent on imports became a thing of the past.

In October of that year, Hefei Flat Panel Display Industry Base—the first 6th generation TFT-LCD production line in mainland China—officially went into mass production. This was the first high-generation line built independently by mainland China, with BOE taking just 18 months to construct, setting a new record for the fastest construction period for a 6th generation line globally.

That year, the field of LCD panel production saw a second peak of massive capacity expansion, which was also the highest point for the expansion of large-size LCD panel products. The 8.5th generation TFT-LCD project of Shenzhen CSOT officially commenced in Guangming New District, Shenzhen, and the 8.5th generation lines of Samsung and LGD were approved.

In fact, since BOE's Hefei 6th generation line started production, the halted 10th generation line of Sharp, as well as the 8th generation lines of Samsung and LG, and the 8.5th generation lines of AUO and Chimei, all resumed construction. At the same time, Sharp, LG, Samsung, AUO, and Chimei began actively contacting governments at all levels in mainland China to explore the possibility of building lines there.

In 2010, global LCD panel shipments reached 665 million units, achieving a 26% year-on-year growth rate. According to DisplaySearch statistics, LG overtook Samsung as the king of global large-size LCD panels in 2010, with a total market share of 25.9%, followed by Samsung with 22.9% and AUO with 16.8% ranking third, Chimei with 16.5% ranking fourth, and Sharp as the fifth in the world. BOE ranked tenth globally in terms of scale.

Before 2010, the LCD panel industry in mainland China was still unable to break out of the "newbie training camp" and participate in high-level competition. South Korea has always been the largest producer of large-size TFT-LCD panels, with production close to half of the global total, followed by Taiwan Province of China, accounting for 40% of the global total output, while Japan had a strong advantage on 6th, 8th, and 10th generation lines.

The rapid mass production of the Hefei 6th generation line gave BOE the capital to compete on an equal footing with global LCD panel giants, and its expansion stepped onto a fast track. Two years later, BOE replaced Sharp's position and jumped into the top five globally.

The situation of the TFT-LCD panel industry between China and Japan reversed. In the second quarter of 2011, Japan's monthly output of large-size TFT-LCD panels decreased from 3.2 million to 2.3 million units, while that of mainland China increased from 2.7 million to 3.4 million units. Starting from the third quarter, mainland China's large-size TFT-LCD production capacity surpassed Japan, becoming the third largest TFT-LCD producer in the world. The international status of mainland China's LCD panels began to overtake at this point in time.

It is evident that mainland China is a huge market. The global annual demand for small and medium-size LCD panels is about 2.4 billion units, with demand for display panels exceeding 200 million units and demand for LCD TV panels exceeding 100 million units, with mainland China accounting for 20% of the market share. Mainland China is the world's largest electronics manufacturing base, producing about 70% of mobile phones and laptops, 80% of monitors, and 60% of televisions globally.

 

     2013 Image Misalignment

Should we endure the losses in the liquid crystal panel industry? How to find a balance between industrial mission and capital markets?

In the five years since BOE launched its scale war, doubts have arisen around it, especially in the capital markets. Since its listing on the A-share market at the end of 2000, BOE has accumulated losses of over 8 billion yuan, with only 118 million yuan in cumulative dividends, the last dividend being seven years ago.

Chen Yanshun admits that 10 years ago, BOE opened up the situation with an acquisition, and the Chinese mainland's liquid crystal panel industry thus gained dignity. Currently, the Chinese mainland's liquid crystal panel industry has complete technology and has surpassed Japan in both scale and innovation strength, closely following South Korea and Taiwan. "These achievements are understood by the industry, but the capital market clearly has many misunderstandings about BOE," Chen Yanshun says.

BOE Vice President Zhang Yu also acknowledges that BOE indeed did not bring more returns to investors in the short term, "but any industry must follow its development laws. The instant noodle culture prevalent in the Chinese mainland's investment community still exists, and it is very anxious if there is no immediate effect. This can be understood at the initial stage of capital market development. However, to cultivate strategic industries and give them a place in the global market, it requires the support of industrial funds. Such funds should not focus on short-term investment behavior but should look at returns over 10-15 years or even longer, echoing the national strategy of cultivating large companies."

At its core, this "misalignment of industrial and capital images" is caused by the business model of the development of China's mainland liquid crystal panel industry—the investment return cycle of the industry is long, so it usually adopts a government-led investment model focused on long-term development, while at the same time, it must raise funds in the capital market for market-oriented operations in the short term.

"Having strong government investment and operating according to market rules is the key to BOE's success and also the source of its doubts; we are dancers on a tightrope," Chen Yanshun says.

In the first half of 2011, the Ordos municipal government promised to allocate a coal mine with a reserve of no less than 1 billion tons to BOE, mainly for investing in a 5.5-generation AM-OLED organic light-emitting display device production line in Ordos. The practice of allocating the coal mine directly pointed the criticism at BOE—that year, BOE lost 1.215 billion yuan.

"Losses are definitely abnormal, no matter whose money it is, but this industry is too important to China. If there were no Chinese companies making panels, with an annual import of over 50 billion dollars, what would the state of China's electronics industry be? We started late, when BOE was making the 5th-generation line, the production capacity was less than 1%, and it's no wonder we lost money. Now that we have stronger control, we had profits in 2012," Zhang Baizhe believes.

Wang Jianqiang, vice president of Dongxu Group, thinks that the reason why the panel industry has been losing money in recent years is due to the high cost of core equipment (such as exposure machines, sputtering machines, etc.) and core materials. For example, the glass used for 8.5-generation panels cannot be produced in China, and the production of small sizes is also very limited. "In the display equipment industry, the state supports enterprises in innovation manufacturing with funds, but this requires a process, and the investment amount in the panel industry is quite large," Wang Jianqiang says.

Another set of data is equally striking. As of last year, BOE completed four rounds of financing in 10 years of listing, with a total financing amount of 17.1 billion yuan, while the rest of the funds were mainly bank loans and government support: In Hefei's 6th-generation line, 3 billion yuan was directly invested by the investment company under Hefei's municipal government; in Beijing's 8th-generation line, the Beijing municipal government invested 8.5 billion yuan as start-up capital, and later invested another 4.5 billion yuan through a targeted issuance. Is this model a phase-specific choice or the optimal one for the liquid crystal panel industry? Liang Xinching, secretary-general of the Liquid Crystal Branch of the China Optical Electronics Industry Association, believes that this is a phase-specific choice. The special circumstances of China's mainland have led local governments to have their own development plans, and support should be given in terms of policy, land, and infrastructure construction. Even if domestic companies are not introduced, foreign companies will be brought in, as Nanjing is cooperating with Sharp.

"Industries such as mobile internet and cloud computing are developing rapidly, and information consumption has been elevated to a national strategy. Various signals indicate that the liquid crystal panel industry, which is the underlying support for information consumption, has reached the harvest time. This industry will gradually increase its marketization level, shifting from quantity competition to quality competition," Liang Xinching says. "This industry has proven itself in ten years and should not always be in a position of self-justification."

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