US embassy cable - 04TAIPEI3464

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003464 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PASS AIT/W 
 
E.O. 12958: DECL: 11/01/2014 
TAGS: ECON, EIND, ETRD, TW 
SUBJECT: TAIWAN - TFT-LCDS, NOT THE NEXT SEMICONDUCTORS 
 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.4 (B/D) 
 
Summary and Comment 
------------------- 
 
1.  (U) TFT-LCD (thin-film transistor liquid crystal display) 
manufacturing is a key industry in Taiwan with high 
expectations for future expansion.  TFT-LCDs and other 
flat-panel displays, which are used in all laptop computers, 
most desktop monitors and increasingly in televisions, earned 
USD 12.4 billion for Taiwan in 2003.  Taiwan firms accounted 
for 34.9 percent of large-size panels.  The government has a 
plan to further develop the industry, placing it on a par 
with semiconductor manufacturing.  However, the industry is 
currently experiencing severe oversupply due to excessive 
investment.  A turnaround is unlikely before the second half 
of next year.  Analysts argue that Taiwan's five major 
manufacturers need to merge to compete successfully in the 
long term, but despite current excess supply problems, no 
financial pressure to merge exists at this time.  As in 
Taiwan's other high-tech industries, Taiwan produces high 
tech components, which are primarily exported to the PRC for 
assembly into finished consumer electronic goods and then 
re-exported to the U.S., Europe and Japan. 
 
2.  (C) Despite the current downturn and fierce price 
competition, TFT-LCD manufacturing will continue to be an 
important engine for growth in Taiwan's economy.  However, 
the industry will not have the same kind of impact as 
semiconductor manufacturing.  Even the most optimistic 
predictions of TFT-LCD applications cannot match the 
versatility and widespread need for semiconductors. 
Moreover, TFT-LCDs will also not have the strategic 
implications of semiconductors that have raised Taiwan's 
profile politically as well as economically.  (End summary 
and comment.) 
 
Aiming for Number One 
--------------------- 
 
3.  (U) The role of TFT-LCD manufacturing in the Taiwan 
economy is important and growing.  In 2003, the flat-panel 
display industry's total output value for Taiwan was NT$ 
416.2 billion (USD 12.4 billion).  TFT-LCD panels are the 
largest component of Taiwan's flat-panel display industry. 
Taiwan produced 34.9 percent of the world's large-size (10 
inches or larger) TFT-LCD panels last year.  TFT-LCD export 
revenues totaled USD 3.9 billion in the second quarter of 
2004, an increase of 129 percent from the same period the 
previous year.  TFT-LCDs account for approximately six 
percent of Taiwan's export revenue.  TFT-LCD manufacturers 
currently account for some 60 to 70 percent of revenue 
generated in the Southern Taiwan Science-based Industrial 
Park (STSIP). 
 
4.  (U) Taiwan has identified the display industry as one of 
the "Two Trillions" in the Ministry of Economic Affairs' "Two 
Trillions, Twin Stars" plan.  This plan aims to strengthen 
what the Taiwan government sees as four of the most important 
industries for Taiwan's future: the two potential NT$ 1 
trillion revenue industries of semiconductors and displays 
and the two potential stars of the future, biotechnology and 
digital content.  TFT-LCDs are the key component in the 
display manufacturing industry.  The plan aims for Taiwan's 
display production to reach NT$ 1.37 trillion in 2006.  The 
government has also set the goal of overtaking South Korea to 
become the number one producer of TFT-LCD products in the 
world.  It appears set to do that this year.  Towards these 
ends, the government has encouraged joint research and 
development among TFT-LCD producers, vertical industry 
integration into upstream and downstream manufacturing 
processes, and education and training to meet the industry's 
needs. 
 
Market Glut 
----------- 
 
5.  (U) However, the TFT-LCD industry's outlook is not at all 
promising in the near term.  According to industry observers, 
the TFT-LCDs industry is very cyclical and is currently 
experiencing a serious downturn.  Heavy investment in recent 
years, especially in Taiwan, is bringing more factories 
online.  A report by the government's Industrial Technology 
Research Institute (ITRI) indicated that spending on TFT-LCD 
manufacturing equipment worldwide has surged 43 percent this 
year.  Supply is currently outpacing demand.  Inventories are 
rising, and prices are falling.  ITRI reported that supply 
would exceed demand by 20 percent in the first quarter of 
2005.  About half of the current oversupply is made up of 
larger panels designed for televisions.  AU Optronics and Chi 
Mei, Taiwan's largest producers, last week announced earnings 
for the third quarter of 2004 were down 70 and 63 percent 
respectively.  Both are reportedly considering deferring 
construction of the next generation of factories due to 
excess supply. 
 
6.  (C) Analysts have differing views on when the industry 
will turn around.  Some predict that a turnaround could begin 
by the end of this year or in the first quarter of the next. 
However, most foresee a longer slump.  Abel Wang, research 
director at the Market Intelligence Center (MIC), an IT 
industry analysis and consulting firm, told AIT/T that the 
turnaround won't come until the fourth quarter of 2005. 
According to Wang, by that point, the cost of TFT-LCD 
television sets will have dropped to half of current prices 
and will reach a point where a critical mass of consumers 
will choose TFT-LCD televisions over cathode ray tube (CRT) 
ones.  TFT-LCD panels already account for 100 percent of 
laptop computers and 75 percent of desktop monitors.  Most 
producers now look toward televisions as the main area for 
expansion over the next five years.  During a visit to 
Tainan's STSIP by AIT/T and AIT/K on October 13, Chi Mei 
representatives confirmed Wang's prediction by openly 
predicting that flat-panel television sets will drop sharply 
in price by the second half of 2005.  They recommended that 
if you are in the market for a TV, wait a while and save a 
lot. 
 
No Urge to Merge 
---------------- 
 
7.  (U) While the number one producer, South Korea, has two 
dominant TFT-LCD manufacturers, Samsung and LG Phillips, 
Taiwan's industry is more fractured.  Some say that Taiwan's 
TFT-LCD industry has "two tigers," AU Optronics and Chi Mei, 
and "three kittens," HannStar, Quanta, and Chunghwa Picture 
Tube (CPT).  Many experts have argued that Taiwan's 
manufacturers need to merge in order to be able to compete 
with the big South Korean firms in the long run.  As a 
result, media reports indicate that the government is 
considering offering low-interest loans, tax breaks and other 
incentives to encourage consolidation. 
 
8.  (C) TFT-LCD manufacturers have responded negatively to 
suggestions that they need to merge.  As MIC's Wang explained 
to AIT, the need to develop new technologies and finance new 
investment as well as manufacturing economies of scale offer 
important advantages to larger TFT-LCD producers.  However, 
Taiwan's producers do not feel that these factors necessitate 
industry mergers at this time.  They claim that because they 
each use different manufacturing processes, mergers would not 
improve their research and development potential.  They also 
claim different technologies would impede integration between 
existing firms.  The technology differs because the various 
Taiwan firms import their manufacturing equipment from 
different Japanese firms.  For example, AU Optronics buys its 
equipment from Toshiba and Panasonic; Chi Mei buys from 
Fujitsu; Quanta buys from Sharp, etc.  Wang also pointed out 
that despite recent troubling signs for the industry, 
especially in the near term, none of the Taiwan producers has 
had difficulty raising capital.  Without any real financial 
pressure, mergers are unlikely. 
 
Another Cross-Strait Supply Chain 
--------------------------------- 
 
9.  (C) TFT-LCD manufacturing is another industry in which 
increasing investment in Mainland China is driving Taiwan's 
exports of components.  Taiwan TFT-LCD producers do not 
generally manufacture finished consumer electronic goods. 
Their main product is the TFT-LCD module, which is used as a 
component in laptop computers, desktop monitors, television 
sets and other products.  The finished products are not 
manufactured in Taiwan in large amounts.  Most are assembled 
in the PRC.  In addition, Taiwan's TFT-LCD manufacturers have 
moved some of the downstream, labor-intensive processes in 
manufacturing TFT-LCD modules, particularly the final module 
assembly, to factories in the Mainland.  The most capital and 
technology-intensive processes are still entirely performed 
in Taiwan.  These include manufacturing of the panel array 
and the cell.  The Taiwan government currently forbids Taiwan 
firms from investing in cell and array manufacturing plants 
in the PRC.  MIC's Wang believes that Taiwan still holds an 
advantage in these capital-intensive processes.  He predicted 
that it would not be economically advantageous to move array 
and cell manufacturing to the Mainland for the next five to 
ten years.  However, Wu Tai-kang, President of HannStar, one 
of Taiwan's three second-tier producers, told AIT that his 
firm would be interested in investing in array and cell 
manufacturing in the Mainland if it were legal now. 
 
10.  (U) As is the case with most of Taiwan's information 
technology and other high-tech industries, high-tech 
components are manufactured in Taiwan, exported to the 
Mainland for assembly into consumer goods, which are in turn 
exported to the United States, Europe and Japan.  In the case 
of TFT-LCDs, another important link in the supply chain 
involves the modules' inputs, which historically have been 
imported primarily from Japan.  One key input is the 
manufacturing machinery produced by Japanese firms like 
Toshiba, Fujitsu and Sharp.  Japanese producers also dominate 
the production of TFT-LCD manufacturing materials, such as 
glass, chemicals, and color filters.  While Taiwan does not 
yet have the industrial capacity to produce the manufacturing 
machinery, the other inputs are increasingly produced in 
Taiwan.  U.S. firms are also taking part in this trend. 
Corning Glass is building a new LCD glass manufacturing plant 
in Taichung's new science and technology park.  In early 
October, it announced it would expand its investment in the 
plant by USD 326 million.  In mid-October, 3M broke ground on 
a new brightness-enhancement film (BEF) plant in Tainan's 
STSIP. 
 
TFT-LCD Role In Taiwan's Economic Future 
---------------------------------------- 
 
11.  (U) The Taiwan government and TFT-LCD producers 
increasingly see TFT-LCD manufacturing as a pillar for 
Taiwan's economy, much as semiconductors were in the 1980s 
and 1990s.  There are clear disadvantages in relying heavily 
on the TFT-LCD industry.  First, like semiconductors, the 
TFT-LCD industry is very cyclical.  Profitability for 
manufacturers has risen and fallen sharply as TFT-LCD 
displays have penetrated new product markets and then 
successfully saturated the market.  In one sense, the cycle 
is even more hazardous than the semiconductor cycle.  While 
semiconductor prices go up and down, prices usually return to 
previous levels driven by new technology with more 
capabilities.  TFT-LCD prices, on the other hand, are likely 
to trend downward over time because of limited potential for 
improving the product's capability. 
 
12.  (C) Some observers also note that TFT-LCDs do not have 
as many applications as semiconductors or the strategic value 
of semiconductors.  They are currently used in a much 
narrower range of products than semiconductors and can be 
replaced by other display technologies.  Nevertheless, some 
inside the industry have high expectations for the expansion 
of TFT-LCD use in a wide variety of goods.  HannStar's Wu 
told us that while many are focused on television sets as the 
source of the industry's future growth, he believes that 
televisions are not the best fit for TFT-LCD technology.  He 
points out that the technology's greatest advantages are its 
low weight and low power consumption.  He sees vast potential 
in all forms of consumer electronics, especially portable and 
mobile electronics.  He predicts that TFT-LCDs can be part of 
a revolution in how people interface with technology. 
PAAL