Asia's Next Tech Wreck?
Here we go again. First, Asia's tech industry was hammered because it had so many makers of DRAMs, a type of memory chip. The DRAMs used in computers may be cutting-edge, but they've become commoditized, with their prices rising and falling on the spot market like pork bellies or Brent crude oil. (Have a look at DRAMeXchange.com.)
With almost nothing to distinguish one company's product from anothers, the makers are forced to compete on price in a business that's notoriously volatile. Outfits that spent billions to build semiconductor fabrication plants are now often bleeding money -- South Korea's Hynix is Exhibit A.
TAIWAN'S TROUBLES. Now another industry looks like it's slouching down the same sorry path. Some of Asia's biggest tech names have invested gigantic sums in factories that make flat-panel displays. Known as TFT-LCDs (for thin-film-transistor, liquid-crystal displays), these glass panels are used in such products as thin-screen computer monitors, cell phones, and personal digital assistants. Once again, the makers are commoditizing their wares. And once again, they risk losing their shirts.
The past few weeks have been especially bad for Taiwanese makers of TFT-LCDs. Several high-profile initial public offerings have flopped amid concern of slumping demand in the U.S. as the American economy loses steam (see BW, 9/16/02, "Taiwan's Fierce Fight to Stay in the Flat-Panel Game").
Some industry executives insist that investors fret too much. The TFT-LCD business is different, their reasoning goes, and it isn't looking at a repeat of the DRAM disaster.
IMBALANCES. Yes, unsettling similarities exist between the flat-panel and memory-chip businesses, says K.Y. Lee, chairman of Taiwan's biggest TFT-LCD maker, AU Optronics. Both are capital-intensive industries in which the demand curve rises sequentially, looking like a smooth line on a graph, but the supply curve jumps exponentially, looking more like a set of steps. It's easy for supply to fall far behind -- or jump ahead -- of demand, especially because companies tend to invest in new capacity around the same time.
However, Lee says, the price swings in his business aren't as severe as in DRAMs. While benchmark DRAM prices can easily slide from a $4 peak to just $1, "the swing is much smaller" for flat panels, he says -- about 20% from top to bottom.
Tai-Kang Wu, general manager of the flat-panel business at HannStar Display, a Taiwanese rival of AU, agrees with Lee, contending that TFT-LCDs are far more specialized than DRAMs. According to Wu, it's harder for customers to switch from one panel supplier to another.
LOCKED-IN? "DRAM is a commodity business, but TFT-LCD is essentially a design business," Wu says. "The better comparison is to CPUs [central processing units, the brains of a computer]. Once you have a CPU, you have to find people to design the motherboard that makes it functional. And once someone designs in your [TFT-LCD], he can't replace it overnight. He needs six months." That discourages customers from switching TFT-LCD makers just because of price.
Yet C.Y. Lin, chairman and president of Chunghwa Picture Tubes -- one of Taiwan's biggest TFT-LCD makers -- admits that the similarities are clear for all to see. "I met some analysts who said panels are commodities," says Lin, who felt "terrible" as he listened. "Here I am spending so much on investment, so much on manpower, and people call it a commodity," he sighs.
Still, he's sanguine about his industry's prospects: "Everybody is looking for more output, more capacity. We will make the pie much bigger -- and sell our product just like a commodity."
GO-GO, STOP-STOP. Times have been especially rough for Lin, who until recently had been happily transforming his Taiwanese company from a producer of clunky, old-fashioned cathode-ray tubes into a top manufacturer of superhot flat panels. With consumers and companies quickly switching from clunky CRT monitors to sleek LCDs, Chunghwa's sales and profits soared in the first half of 2002 compared to the same period a year ago. But with demand weakening in the second half, sales are slumping, and the stock price is wilting.
The first week of September, things got even worse: Rival Korean-based LG. Philips LCD, filed a lawsuit in the U.S. alleging that Chunghwa Picture Tubes infringed on its intellectual property rights. So far, the Taiwanese company hasn't issued a response. "We have to wait and watch," a Chunghwa spokesman says. "We don't have all the details."
The lawsuit brings one bit of good news. If the companies are fighting over intellectual property, maybe AU's Lee and Hanstar's Wu are right when they say the business isn't so commoditized after all.
Still, Taipei-based Deutsche Bank analyst Frank Lee isn't optimistic. "These guys all try to [get] across that there's some difference in terms of their panels," he says. "But the differences aren't that great. The industry isn't quite as commoditized as DRAMs, but it's heading in that direction." Where DRAMs have gone, flat panels will likely follow
With almost nothing to distinguish one company's product from anothers, the makers are forced to compete on price in a business that's notoriously volatile. Outfits that spent billions to build semiconductor fabrication plants are now often bleeding money -- South Korea's Hynix is Exhibit A.
TAIWAN'S TROUBLES. Now another industry looks like it's slouching down the same sorry path. Some of Asia's biggest tech names have invested gigantic sums in factories that make flat-panel displays. Known as TFT-LCDs (for thin-film-transistor, liquid-crystal displays), these glass panels are used in such products as thin-screen computer monitors, cell phones, and personal digital assistants. Once again, the makers are commoditizing their wares. And once again, they risk losing their shirts.
The past few weeks have been especially bad for Taiwanese makers of TFT-LCDs. Several high-profile initial public offerings have flopped amid concern of slumping demand in the U.S. as the American economy loses steam (see BW, 9/16/02, "Taiwan's Fierce Fight to Stay in the Flat-Panel Game").
Some industry executives insist that investors fret too much. The TFT-LCD business is different, their reasoning goes, and it isn't looking at a repeat of the DRAM disaster.
IMBALANCES. Yes, unsettling similarities exist between the flat-panel and memory-chip businesses, says K.Y. Lee, chairman of Taiwan's biggest TFT-LCD maker, AU Optronics. Both are capital-intensive industries in which the demand curve rises sequentially, looking like a smooth line on a graph, but the supply curve jumps exponentially, looking more like a set of steps. It's easy for supply to fall far behind -- or jump ahead -- of demand, especially because companies tend to invest in new capacity around the same time.
However, Lee says, the price swings in his business aren't as severe as in DRAMs. While benchmark DRAM prices can easily slide from a $4 peak to just $1, "the swing is much smaller" for flat panels, he says -- about 20% from top to bottom.
Tai-Kang Wu, general manager of the flat-panel business at HannStar Display, a Taiwanese rival of AU, agrees with Lee, contending that TFT-LCDs are far more specialized than DRAMs. According to Wu, it's harder for customers to switch from one panel supplier to another.
LOCKED-IN? "DRAM is a commodity business, but TFT-LCD is essentially a design business," Wu says. "The better comparison is to CPUs [central processing units, the brains of a computer]. Once you have a CPU, you have to find people to design the motherboard that makes it functional. And once someone designs in your [TFT-LCD], he can't replace it overnight. He needs six months." That discourages customers from switching TFT-LCD makers just because of price.
Yet C.Y. Lin, chairman and president of Chunghwa Picture Tubes -- one of Taiwan's biggest TFT-LCD makers -- admits that the similarities are clear for all to see. "I met some analysts who said panels are commodities," says Lin, who felt "terrible" as he listened. "Here I am spending so much on investment, so much on manpower, and people call it a commodity," he sighs.
Still, he's sanguine about his industry's prospects: "Everybody is looking for more output, more capacity. We will make the pie much bigger -- and sell our product just like a commodity."
GO-GO, STOP-STOP. Times have been especially rough for Lin, who until recently had been happily transforming his Taiwanese company from a producer of clunky, old-fashioned cathode-ray tubes into a top manufacturer of superhot flat panels. With consumers and companies quickly switching from clunky CRT monitors to sleek LCDs, Chunghwa's sales and profits soared in the first half of 2002 compared to the same period a year ago. But with demand weakening in the second half, sales are slumping, and the stock price is wilting.
The first week of September, things got even worse: Rival Korean-based LG. Philips LCD, filed a lawsuit in the U.S. alleging that Chunghwa Picture Tubes infringed on its intellectual property rights. So far, the Taiwanese company hasn't issued a response. "We have to wait and watch," a Chunghwa spokesman says. "We don't have all the details."
The lawsuit brings one bit of good news. If the companies are fighting over intellectual property, maybe AU's Lee and Hanstar's Wu are right when they say the business isn't so commoditized after all.
Still, Taipei-based Deutsche Bank analyst Frank Lee isn't optimistic. "These guys all try to [get] across that there's some difference in terms of their panels," he says. "But the differences aren't that great. The industry isn't quite as commoditized as DRAMs, but it's heading in that direction." Where DRAMs have gone, flat panels will likely follow
