I was pretty bearish on the LCD market last year, but as the overcapacity problem started to subside I have been fairly silent of late. Given the positive article about Corning (GLW - Annual Report) in this week’s Barron’s, I thought it a timely opportunity to look back at the recent LCD supply chain conference calls to see if there are any significant trends. I’ll start with the subject of the Barron’s article.
Starting with display, sales were $610 million in the second quarter, a 16% increase compared to the first quarter sales of $524 million. Glass demand was stronger than we anticipated. Glass volume increased 20% sequentially in the second quarter versus our guidance of 8% to 12%.
(Excerpt from full GLW conference call transcript)
That sounds pretty supportive of bullishness. However, the company was quick to throw a little cold water on the situation.
We believe this was mostly supply chain driven and not resulting from a change in end market demand, although we don’t have final end market statistics yet, and we have seen some reports of stronger IT demand.
We believe the supply chain’s approach to meeting the impact of television seasonality on the overall LCD industry is continuing to evolve. Clearly the panel makers’ decisions to run at lower utilizations in the first quarter and maintain smaller amounts of panel inventory was a refreshing change from last year. Our customer checks in May and June indicate the aggregate panel inventory is currently within acceptable levels. Further evidence of this can be found in the panel makers’ decisions to maintain, or actually slightly raise, panel prices in the second quarter.
We have a hypothesis that the supply chain has built some inventory at the set assembly level. As we have stated in the past, the set assembly level is the more opaque portion of the supply chain to us.
(Excerpt from full GLW conference call transcript)
In other words, consumers aren’t buying more TV sets than expected – but TV makers are buying more components just in case. As we saw last year, if they are wrong the excess inventory will hurt pricing and at any rate Corning’s long-term sales can only be in line with the end market. If they sold extra this quarter they will sell less in some future quarter.
LG Philips (LPL) saw a similar trend, but doesn’t seem concerned.
Ron H. Wirahadiraksa
We feel that the inventory levels throughout the channel are still quite healthy. There’s been some increase but please bear in mind that previously, the previous quarter and also the beginning of this quarter, inventory levels were quite low. We think that by and large, TV inventories is around two months, which is very normal for this time in the season.
(Excerpt from full LPL conference call transcript)
Neither does AU Optronics (AUO).
Dr. Hui Hsiung
This is Hui Hsiung. I think, in general, other than notebook panels, I think both TV and monitor panels, the OEM in the channels are higher inventory compared to Q1, of course. However, in general, those are not very high numbers, at most two weeks is about normal, mostly around one to two weeks is about normal. So it’s a very manageable inventory level.
Earlier, maybe a month ago, there appeared to be higher inventory in the TV 40 plus inch range, but recently, the sale through is improving, so that is getting better as well. So, by and large, I think that building up inventory is what is intentioned during the Q2 period. For a simple reason, I think Q3 we still have a high single digit percentage in terms of shortage between supply and demand. So that bit of inventory will easily be digested during Q3.
(Excerpt from full AUO conference call transcript)
At this point, the capital investments have subsided enough that quarterly inventory fluctuations shouldn’t be too much of a concern. Obviously if the market disruptions continue and, more importantly, begin to affect consumer spending then obviously demand could fall off temporarily. But most down cycles aren’t caused by demand but by supply. And on that basis, I’m inclined to agree with the managment teams that right now the channel inventory build shouldn’t be a big concern.
