Managing Changing LCD Industry Dynamics
The past 12 months have tested the resolve of anyone involved in the display business, with the largest market disruption in the history of the LCD industry and subsequent upturn leading to a shortage of key components, including glass. With demand currently rebounding beyond expectation, the question now is how to adjust to new patterns of volatility, which are likely to persist, due to increased seasonality, lower growth and significant panel overcapacity.
The disruption began in 2008, when the onset of the financial crisis in mid-September sent a wave of fear around the world. Retail demand for TV abated briefly, and the supply chain reacted, sending panel prices down sharply. As panel prices approached or in some cases dropped below cash cost, many panel makers stopped production and sold from inventory in an attempt to recover what cash they could. Given the level of uncertainty, set makers and even retailers also sold from inventory and were cautious about placing new orders. The result was a supply chain inventory contraction of unprecedented scale.
Lisa Ferrero, vice president and deputy general manager of Corning Display Technologies, put it into perspective: “Even though retail demand for LCD TVs soon recovered and actually grew year over year, the supply chain shed about 30 percent of its total inventory—well beyond anything the industry had experienced in the past.”
As a result, Corning and other glassmakers responded to the reduced customer demand, aligning capacity and cost structure to a lower level of volume. When demand picked back up to a level beyond expectations, glass was in short supply, a situation expected to persist at least through the third quarter of 2009.
“When the value chain operates ‘just in time,’ the effects of seasonality are felt almost immediately because there is no buffer in the system,” said Ferrero. “And the most pressure is placed on the least flexible parts of the supply chain.”
So what lessons can be learned from this large and disruptive swing in supply and demand?
“It is clear that parts of the supply chain, particularly panel makers, will not purposely build inventory buffers,” said Jim Clappin, president, Corning Display Technologies. “With the TV application maturing and IT markets already at maturity, supply chain corrections or contractions will come in the form of big swings in glass demand. We must learn to manage effectively in this new era of high volatility."
In considering the new reality, it’s useful to draw a distinction between end market seasonality and volatility driven by the supply chain. The former is caused by innate factors within the LCD industry, such as seasonal buying patterns and lead times, while the latter can be attributed to external factors such as the worldwide financial crisis.
Much of the end market seasonality comes from LCD TV. As TV becomes a larger part of the market, seasonality increases. Consumers already purchase LCD TV according to seasonal patterns, based in part on the holiday season in the West. As big-ticket consumer products, TVs are typically purchased during the Q4 holiday season when they are heavily promoted by retailers. However, increased penetration of LCD TV is changing that pattern, as is the strength of emerging markets, such as China. Chinese consumers are more likely to purchase LCD TVs around the Chinese New Year in Q1, Labor Day in May, and October National Day. As regions such as China become a bigger portion of the overall market, their impact will tend to smooth out TV market seasonality to some degree.
Still, two factors mean that the industry is likely to see more volatility overall: lower growth rates, which allow seasonality to be more pronounced; and excess panel capacity, which allows manufacturers to produce panels as demand occurs.
“As glassmakers, we will need to manage both expected and unexpected variation by being more flexible with capacity and viewing inventory differently than we have in the past.” said Clappin. “And while market patterns are clearly continuing to evolve, the long-term prospects for the industry remain favorable.”