Issue Date: June 26, 2006
Riding On Flat Panels
When will the music stop? suppliers of materials to the flat-panel display industry know it's an important question, but they can't afford to spend too much time on it. Demand is growing so fast that figuring out how to supply customers is a more immediate concern. And competition is so ruthless that it's critical to continually come up with the new materials that display manufacturers expect from their suppliers.
"We're constantly moving to develop new products, new functions, and, in fact, completely new display technologies," says Steven C. Freilich, director of materials science and engineering for the display industry at DuPont. "I have never been involved in an industry like displays where, every six months, the sales projections go higher."
Flat displays are made for a variety of applications, including car navigation systems, mobile phones, and computer monitors. But "the real driver is large-size televisions," says Roman Maisch, vice president of liquid-crystal marketing and sales at Merck KGaA. In TVs, the dominant technology is thin-film transistor liquid-crystal displays (TFT-LCDs). This year, California-based market research firm iSuppli estimates that the number of flat-panel TV sets made with TFT technology will be five times the number made with competing plasma display technology.
There were 40 million LCD television sets sold worldwide last year, says Masami Nakamoto, the senior managing director at Sumitomo Chemical who heads the company's electronic materials business. By 2010, annual sales will more than double to 100 million sets, he expects. But as the average size of the TV sets keeps increasing, the growth for materials suppliers is larger than these numbers suggest. Counted in terms of square meters of screens produced, the market in 2009 will have tripled what it was last year.
Materials suppliers keep shoveling money into capacity expansions to keep up. Nakamoto estimates that Sumitomo has spent $2.7 billion over the past four years to build new plants in Japan, South Korea, Taiwan, and China. South Korea is where the company has spent most, about $1.8 billion, he says. In that country alone, Sumitomo's sales of LCD materials last year reached $1.6 billion. The company supplies color resists, color filters, and various other materials. It enjoys a 25% share—measured in square meters—of the market for LCD polarizers.
Supplying materials to display manufacturers is an odd business. The companies that dare to ramp up enough production capacity and can keep up with the fast pace of new product introductions end up dominating the business they're in. They normally enjoy rising profits, but the quantities of material they must supply to secure those profits keep rising as well.
Fuji Photo Film supplies most of the triacetylcellulose (TAC) film used by polarizer makers. JSR believes it supplies about 60% of the alignment layers that flat-panel display makers use. Merck KGaA is essentially the only source of liquid crystals for TFT-LCD television sets featuring vertical alignment, which is the dominant technology, according to marketing executive Maisch.
Dean O'Connor, business development manager for BOC Edwards' flat-panel sector, reckons that the flat-panel display industry is one where "those who got in early and kept up with the extraordinarily fast pace of change have now distanced themselves from the competition." He adds that it's in some ways a conservative industry. Display manufacturers tend to go with established raw material suppliers when they make the multi-billion-dollar decisions to set up new production facilities. BOC Edwards supplies most of the vacuum equipment present in LCD plants.
Adding to capacity and better equipping research labs are expensive propositions that must be carefully timed. In a business where even the sales forecasts prepared by insiders and top analysts need to be revised every few months, it can be difficult for managers to decide when and how much to spend on building up their capabilities.
Spending funds to build new plants too far ahead of demand may reduce one's ability to offer customers materials at the best prices. But not being able to constantly supply customers with improved grades of materials or not having the plant capacity to supply their growing orders could turn today's healthy 50% market share into tomorrow's shrunken 30%.
Seiichi Hasegawa, managing director for fine chemicals at JSR, says his firm typically plans its capacity expansion programs in two phases. It acquires land that is too big for the first phase alone and builds the second phase only if market conditions warrant. In recent years, JSR has built second-phase expansions in Yokkaichi, Japan, and in South Korea.
Display materials producers differ in their approaches to estimating their products' market prospects. At JSR, Hasegawa says he looks at final demand for finished television sets, computer monitors, and other flat displays to decide how big JSR facilities need to be. Corning, the main supplier of glass used by the flat-panel display industry, also relies on final consumer demand projections.
But at Nitto Denko, board member and Deputy Chief Operating Officer Yoshiyasu Kamiyama says the company to a large extent relies on its customers to tell it what future demand is likely to be. "If panel makers are planning to increase their own production capacity, they need to tell us so that we can be ready to supply them," he says.
Nitto believes it's the dominant supplier of polarizers to the LCD industry, with an overall market share of 55%, rising to 65% for LCD-based TV sets. At its site in Onomichi, Japan, the firm is ramping up a fifth production unit featuring an improved process that boosts productivity.
Polarizers are made by stretching and combining layers of polyvinyl alcohol (PVOH) and TAC films. The films come in huge rolls. The productivity of a polarizer plant can be increased by widening the size of the rolls that a plant handles or by having the rolls turn faster, among other means.
In the case of Nitto Denko, Kamiyama says, there are limited risks in sharply raising capacity. First, it's done after consultation with customers. Second, Nitto pays for the new plants out of its own cash flow, eliminating the risks of a bank loan. And then, if it turns out that Nitto has built ahead of market needs, he says, it takes no more than six months for orders from customers to become large enough to justify the new investment.
Not being able to meet customers' orders is, by contrast, much more costly than investing too early. This has happened only three times in the 30 years that Nitto has been in the polarizer business, according to Akihiko Yamauchi, general manager of planning for optical-related products. "That is very expensive," he says, because when it happens, customers have little choice but to try another supplier.
One factor complicating investment decisions for suppliers to the flat-panel display industry is that the display business is highly cyclical, alternating every year or two between periods of profit and loss.
Sweta Dash, director of LCD & projection research at iSuppli, says display producers are in a bad way now. Margins have shriveled to nothing, and inventories are building up. For the next few months, she says, producers will cut utilization rates and thus reduce their materials purchases. By the end of the year, however, she expects profitability to return to the industry.
One reason for the sluggish conditions may be that display manufacturers have been expanding too quickly. Earlier this year, Samsung Electronics started up a seventh-generation LCD plant, a facility that processes sheets of glass measuring 1.9 – 2.2 meters. A single seventh-generation plant can produce nearly 500,000 40-inch television panels per month.
Late last year, a joint venture between Samsung and Sharp also started up its own seventh-generation plant. And earlier this year, LG.Philips Displays started up a so-called 7.5-generation plant, which processes even larger glass sheets.
It's a basic industry dynamic that display manufacturers are constantly pressing their materials suppliers to cut their prices. Recently, display manufacturers have even been threatening to start in-house production of key components if suppliers don't bend to their will. Meanwhile, prices for oil and other commodities have done nothing but rise, affecting electronic material producers on the cost side.
"Everything in photoresists comes from crude oil," says Koichi Takahashi, a marketing manager for display materials at Tokyo Ohka Kogyo. In spite of this fact, he says TOK's own prices are heading downward. The company is one of two major players in photoresists for TFT-LCDs, the other being AZ Electronic Materials.
TOK has adopted various means of meeting demands for lower prices. One simple strategy has been to increase the size of the bottles in which it sells its valuable products. In addition, Takahashi says TOK has set up a bottling plant in South Korea, where it is LG.Philips' exclusive supplier. It ships Japan-made photoresist concentrate to Korea by the ton, and then bottles locally made formulations in that country. The high-tech bottles are recyclable, and it costs less to have them circulate between LG.Philips and TOK if the empties don't have to go back and forth between South Korea and Japan.
Beyond the rise in commodity prices, materials suppliers also have to cope with the more problematic issue of shortages. For the past few months, TOK has had difficulty sourcing the solvent high-purity propylene glycol monomethyl ether acetate (PGMEA).
It uses the solvent to make its photoresists and also sells it filtered and further purified to display manufacturers, who in turn use it as a thinner. PGMEA is also used in the paint industry, Takahashi says, and it's recently been a tug of war for supplies between electronics and paints. "We actually can get it but at a higher price than before," he says.
Polarizer producers are experiencing shortages as well. Sumitomo's Nakamoto says he has more trouble securing the PVOH and TAC needed to make polarizing film than he does deciding how much Sumitomo should spend to ramp up production. Kuraray, the leading producer of PVOH, and Fuji Photo Film, the major producer of TAC, are both building new plants, but Nakamoto is not convinced they're expanding enough to resolve the shortages.
At Nikko Materials, a shortage of indium is turning into a major problem. Morikazu Ohno, general manager of the firm's flat-panel display target division, says the metal is key to making indium tin oxide, one of the first layers of materials deposited on the glass sheet when making an LCD screen. Indium is a minor by-product of zinc mining, and the growth of the LCD industry is outstripping zinc producers' ability to supply it.
Ohno says indium that could be had for $100 per kilogram four years ago now costs $800, and recently peaked at $1,000. Prices may surge again, he worries, especially if the Chinese zinc mines that are major suppliers of indium are shut down for environmental reasons. He expects that indium could become so precious that recyclers will start scraping discarded LCD glass sheets for the metal. And he expects LCD manufacturers to design ways to lower their usage of indium tin oxide, or even to try using alternatives like zinc oxide.
iSuppli's Dash says the component that display manufacturers have most difficulty securing these days is the LCD backlight, which is basically a thin fluorescent light bulb. She notes that a computer notebook display may use only one backlight, whereas a 32-inch TV has 16. Louis J. Y. Lu, director of R&D at Taiwanese backlight manufacturer Wellypower Optronics, says the current generation of backlights favored by the display industry requires the use of a red phosphor that is available only from a single Japanese supplier and is in short supply.
Corning F. Painter, Air Products & Chemicals' regional vice president for electronics, suggests that the display material shortages may be symptoms of an industry that is straining under its breakneck growth. He notes that even sulfur hexafluoride is in tight supply these days. "If SF6 is tight, that's amazing; anything could be tight," he exclaims. This chemical vapor deposition chamber-cleaning gas, increasingly shunned because of its greenhouse effect on the environment, is normally easy to find.
"If the industry keeps growing like this, the shortages will get much bigger," Painter adds. But he fears that the growth will stall. He says the current environment reminds him of the late 1990s, when the electronics industry, led by semiconductors, was booming. "There was supply tightness, companies were raiding each other for engineers, there were constant announcements of new semiconductor fabrication plants, and all this was immediately followed by a major downturn," he recalls.
Air Products is the world's dominant supplier of nitrogen trifluoride, a specialty gas also used by the display industry for chamber cleaning. Unlike many other materials, though, it is currently in oversupply.
Painter recalls that Air Products completed a major NF3 capacity expansion in 2000 based on what customers indicated they would buy. In the years that followed, Air Products added to its NF3 capacity on the basis of additional customer orders, but broke with its tradition of announcing all its additions. Painter muses that the lack of announcements may have encouraged the emergence of new competitors in South Korea and Taiwan.
When customers buy NF3, it's to get the highly reactive fluorine that the compound releases upon decomposition. Last year, BOC Edwards launched an on-site fluorine generator that it says provides a cost-effective alternative to NF3. The company claims to have resolved any safety issues associated with handling fluorine.
Noel Leeson, BOC Edwards' president of electronic materials for Asia, maintains that global NF3 capacity exceeds current demand by 40%. Air Products' Painter counters that Air Products' NF3 plants are operating at 80 to 85% of capacity and that the 15-20% extra provides customers with security of supply. Like Painter, however, Leeson is skeptical about the continued fast growth of the LCD industry. The fluorine generator, he says, allows BOC Edwards to be a market player without having to commit to building a NF3 plant.
At DuPont, Freilich says managers must always keep an eye on costs, particularly when launching a new product. Because prices for electronics only go down over time, companies run the risk of never recovering the investment required to ramp up production of a high-cost material.
At the same time, Freilich points to a little-acknowledged truth about the flat-panel display industry. Prices may be coming down even as TVs become more sophisticated, but this may not be enough to motivate customers to buy all the sets that manufacturers are eager to make. "I discovered that even with a 60-inch plasma panel, I don't get any better quality TV," he says. "It's still the same channels."
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