WitsView: In 1Q10, despite lower-than-expected decline of material costs, panel makers’ profitability will improve substantially

Based on the past experience, the first quarter is a time of traditionally slow season for the panel industry, as well as a time of the most dramatic price decline in component prices. However, market conditions are quite different this quarter.

According to WitsView Research Manager, Eric Chiou, the two major conditions that trigger panel makers to ask material suppliers for lower prices are reduced orders and declining profits. These two factors also offer favorable backing during price negotiation. However, amid the stronger down cycle, panel shipments have been hovering at a high level, and the panel price rally boosted panel makers’ profitability. These conditions greatly weakened panel makers’ bargaining power, and also indirectly impacted material suppliers’ willingness to lower prices. In addition, the supply chain reshuffle expected after the ChiMei-Innolux merger has not taken effect yet, and very few component makers are offering competitive pricing to secure orders. Therefore, in 1Q10, material cost decline is lower than expected.

According to WitsView’s survey, the actual price change in key components are as follows: Front-end materials such as glass substrates, color filters, and polarizers, decreased by 2~4%; while back-end materials such as driver IC and backlight modules, declined by 4~5%. Such decline is moderate compared to the 5% or higher decline in 1Q09. On the whole, several major panel makers will be able to achieve material cost reduction of 3~4%.

As indicated in the latest panel cost report by WitsView, under the impact of panel price increase and panel cost decrease, panel material cost to ASP ratios for the three applications are in the 55% range during 1Q10. The overall performance is comparable to that of 2Q08, when the four major panel makers achieved operating margin of 15% or higher. Furthermore, Korea and Taiwan makers are completing their depreciation of the 6th and 7th generation fabs. Without the depreciation costs (about nearly 20%) of several products, panel makers may be able to escape the operation gloom from 2009, and achieve positive earnings.