Risky Business

IF YOU HAD wandered into an electronics store at the beginning of the year, you might have noticed that some of the newest flat-panel televisions were on offer at heavily discounted prices. It was a great time to buy a flat-panel TV. The industry was going through one of its periodical downturns because production capacity had expanded too fast.

But now, a few short months after several display producers announced a slowdown of their expansion plans, a rebound is under way. Prices are stabilizing, and production shop floors are starting to buzz with new activity. Samsung Electronics, the world's largest maker of liquid-crystal displays (LCDs), has even speeded up construction of a new plant in South Korea.

"Capacity utilization was quite weak until about March this year," says Nobu Koshiba, general manager of fine chemicals at JSR Corp., a supplier of a wide range of electronic materials to both the semiconductor and display industries. "But it's an upward trend now. There are more sheets of glass passing through the plants to be transformed into displays." The display industry's up-and-down cycles follow each other so quickly, Koshiba observes, that they make the notoriously cyclical semiconductor industry look staid in comparison.

The downturn in the flat-panel industry got under way late last year, according to Sweta Dash, director of LCD and projection research at the electronics market research firm iSuppli. Last fall, she explains, a spurt of LCD plant start-ups in Taiwan created a glut of displays. Making matters worse, the chain stores and other companies that distribute TVs to consumers sharply curtailed-more than usual-their purchases late last year in order not to be stuck with unsold goods after Christmas.

This reduction in orders from big buyers was a painful surprise for manufacturers of flat displays and the companies that supply them. But according to Dash, distributors and chain stores were wrong to be pessimistic about consumers' hunger for flat-panel TVs. Relatively strong buying after Christmas depleted the thin inventories held by distributors and set the stage for a strong rebound.

Because of unexpectedly poor sales earlier this year, Dash recalls, several Asian display manufacturers postponed some of their expansion plans. Conditions have now completely turned around. "If these companies don't resume their expansion and no one else picks up the slack, we're rapidly headed for a shortage of displays," she says.

Dash observes that Samsung will likely begin production this month at a new display plant in South Korea that was originally scheduled to come on-line in October. The plant will make LCDs from sheets of glass measuring 97 by 85 inches. These plants are called eighth-generation fabs in the industry.

Although the winter's downturn was short, it seriously impacted companies that supply the flat-panel display industry. Sumitomo Chemical, which in recent years has invested more than $1 billion in plants making display materials, reported an 84% drop in operating income in its electronic materials business in the fiscal year that ended March 31. Sales of electronic materials grew, the company said, but selling prices fell. Similarly, operating income for electronic materials dropped 47% in the latest fiscal year at Nitto Denko, the world's leading manufacturer of LCD polarizers.

"I know people who have gotten out of the flat-display industry because they could no longer withstand its rapid cycles," says Corning F. Painter, an Air Products & Chemicals vice president who manages the company's global electronics business from Taipei. "It's not for the fainthearted." Air Products supplies high-purity industrial gases and other chemicals critical to display manufacturing.

Painter says the biggest problem he encounters with the flat-panel display industry is rushing to meet the gas supply expectations of a customer that can't wait to expand, only to have the customer suddenly postpone its plans. In these situations, he says, it's usually too late for Air Products to halt work, so the company ends up with a gas plant that sits idle until the display plant it was meant to supply comes on-line next door. "If you want a reputation for being reliable, you have to make your investments and be ready," he reasons.

Despite such challenges, Painter says, Air Products' electronics business has on the whole been going rather well recently. This is primarily because the company also serves customers in the semiconductor industry and those that make polysilicon for solar cells. "If you just look at our liquid-crystal display segment, we've been hurt," he says. "But memory chips are having a very strong year, and photovoltaics are just going nuts."

The semiconductor industry has also picked up the slack at JSR. During the display downturn, Koshiba says, JSR converted some display photoresist production lines to make semiconductor photoresists instead. "It's not that easy to do, but we've done it," he says. The conversion of a line takes about three months, he adds.

Whether times are good or bad, display manufacturers are constantly demanding lower prices for the raw materials they buy. JSR may be the dominant supplier of components such as photosensitive column spacers, but its ability to control prices is limited. "We have so much market knowledge that it may be difficult for a newcomer to seriously compete with us, and yet we cannot dominate our customers," Koshiba acknowledges.

EVERY YEAR, he says, a senior JSR executive sets a cost-cutting target that the company's plant managers have to comply with. This exercise provides JSR with the ability to lower its prices year after year. Koshiba claims that it would cost $160 million less today to produce the same quantity of material that JSR made in 2003.

One company that appears to be coasting through the ups and downs of the LCD industry is Fujifilm. The company makes about 80% of the triacetate cellulose (TAC) films that are a key component in polarizers. In addition, Fujifilm uses TAC to make a film that widens the viewing angles of LCDs, allowing viewers to watch their TVs from a position off to the side of the display.

Katsumi Makino, general manager of Fujifilm's flat-display materials division, says the company has been successful in resisting demands for price cuts for its indispensable films. One reason, he contends, is that the films represent a small proportion of the total cost of making a display.

In addition, Makino insists that Fujifilm needs cash to expand its TAC plants. The company is investing $200 million to expand facilities in Japan. "If the industry levels off and we don't need to expand anymore, then we'll be able to cut prices," he says.

This seems unlikely. The flat-panel display materials market has been growing about 35% annually since 2003, Fujifilm estimates. And there is little doubt that sales will continue to rise in coming years as consumers in developed countries replace their bulky television sets.

The major problem for players in this industry is coping with its roller-coaster cycles. Dash, the iSuppli market analyst, explains that the display industry is ruthless, with room only for winners. "You have to be one of the top players to make money and survive," she says.

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