The upstream in the LCD industry chain includes panel equipment manufacturers and material suppliers, which are almost monopolized by foreign manufacturers; the midstream of the industry is panel manufacturers, which is characterized by a high degree of industry concentration; the downstream is terminal suppliers, with a relatively wide range of applications, Mainly in traditional fields such as televisions, notebooks and monitors, and mobile phones, as well as emerging applications such as wearables.
The gross profit rate of the upper, middle and downstream industries in the LCD industry chain constitutes the "smile curve of the profit margin of the traditional LCD industry. The upstream glass substrates, optical films, chemicals, and other supply chain links have high technical content and high added value; the whole machine in the downstream link has brand and channel advantages, the gross profit margin is relatively higher. The panel manufacturing capital investment in the midstream is the largest, and the profitability is also greatly affected by the price and the relationship between supply and demand. The overall gross profit margin fluctuates greatly.
The Higher the Generation Line Algebra, The Higher the Production Efficiency and the Obvious Advantage as A Latecomer
The LCD panel industry has the characteristic that the scale effect of the high-generation line is significant. Generally speaking, the higher the generation line algebra of the display, the larger the maximum size of the display can be economically cut, and the higher the production efficiency. Generally speaking, the number of economical cutting slices recognized in the industry is generally at least 6 slices, and a glass substrate must be cut into 6 slices or more of the display screen, in which the production line has the least economic effect. The 8.5-generation line can cut 6 55-inch screens, and the economically cut maximum screen size is 55 inches. For the same number of displays, the 10-generation line can cut up to 70 inches, while the 10.5-generation line can cut up to 75 Inches, so the higher the generation line algebra of the display, the larger the maximum size that can economically cut the display. In terms of cutting efficiency, compared with the 8.5 generation line, the 10.5 generation line can reach a cutting efficiency of more than 90% for 43-inch, 65-inch, and 75-inch, so the panel industry has a late-mover advantage. First, the maximum economic cutting size of the high-generation line is higher than that of the low-generation line, and it can get involved in the large-size field that the low-generation line cannot. Second, the high-generation line can shift from producing large sizes to small sizes with higher cutting efficiency, thereby affecting the market share of low-generation lines.
Mainland Chinese companies have the world's highest proportion of LCD high-generation lines and production capacity. There are currently 5 Gen 10.5 lines in the world, including two for BOE and China Star Optoelectronics. BOE's production lines are the Hefei B9 line and the Wuhan B17 line. The production line of China Star Optoelectronics is Shenzhen T6 and T7 lines. The 10.5 generation line of Sharp/Hon Hai in Guangzhou is mainly based on Oxide substrates. Compared with a-si, Oxide substrates have higher cost, lower production efficiency, and more complicated processes. They are generally only used for resolutions above 8K. High-end LCD TV terminals. We believe that with the gradual closure of the high-generation lines of Samsung and LGD in South Korea, domestic manufacturers are expected to use their high-generation capacity to attack the low-generation capacity of South Korea, Japan, and Taiwan, further eroding their market share.
South Korean Companies Cut Production More Than Expected, Helping Domestic Companies to Seize More Markets
In 2019, to cope with the pressure of operating losses, the panel manufacturers shut down production to control output. Among them, Korean manufacturers suffered the most losses. LGD has decided to shut down all domestic LCD TV panel production capacity within 2020, and actively shifted to OLED large-size displays. And Samsung has also refocused its attention on large-size OLEDs. This will effectively alleviate the oversupply of LCDs, making most of the global LCD production capacity concentrated in China, creating opportunities for domestic companies represented by BOE to seize market share.
Mainland China Has Become the Global Concentration of New High-Generation Production Capacity
Domestic panel manufacturers have focused on investing in high-generation lines in the past two years. Mainland enterprises such as BOE and CSOT have invested in the panel industry since 2003. Through bold counter-cyclical investment and active R&D investment, they have begun to surpass the scale and operating efficiency of all rivals in Japan and South Kore except Samsung. At present, mainland manufacturers have occupied a favorable position in the field of high-generation lines. The number of 8.X generation lines owned by mainland panel manufacturers is already at the forefront of the world, and the 10+ generation lines to be invested in the future will also be dominated by mainland manufacturers, ahead of other regional manufacturers. In 2018, China's LCD production area reached 23.65 million square meters, surpassing South Korea to become the world's first; in 2019, based on the LCD panel shipment area, BOE shipped a total of 40.86 million square meters of large-size LCD panels, a year-on-year increase of 20.0%, to become the world's largest supplier of large-size LCD panels by area for the first time surpassing LGD; CSOT's shipment area has also increased from 17.7 million square meters in 2018 to 21.5 million square meters in 2019, a year-on-year increase of 21.4%. Other enterprises such as CLP Panda, Huike, and Rainbow Optoelectronics also achieved great growth in their shipment growth rates. The global market share of mainland Chinese manufacturers has reached 42.3%, making it the world's largest panel manufacturing base. It is expected that the LCD panel market share in mainland China to reach 50% in 2020.
Accelerating the Concentration of Production Capacity and Optimizing the Competitive Landscape
With the abortion of the production capacity of Korean factories, the integration of existing production capacity is accelerating, the industry concentration will become higher and higher, and the industry's competitive landscape will continue to be optimized. And the industry's cyclicality will be further shortened. The long-period fluctuations driven by the previous demand will gradually change to the short-period fluctuations affected by the season.
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