Japanese display makers strain to regain footing

Japanese display makers strain to regain footing
TOKYO — Matsushita Electric Industrial Co. Ltd. and Toshiba Corp. said this week they will combine their flat-panel businesses into a joint-venture company, in a move that analysts see as a needed first step if Japan's once-vaunted display industry is to compete against lower-cost rivals in South Korea and Taiwan.

The combined company, which is to be incorporated next April, will rank third in the world market, following Sharp Corp. (Osaka, Japan) and Samsung Electronics Co. Ltd. (Seoul, South Korea). But the merger still leaves a dozen Japanese display companies competing in a roughly $10 billion market. The pressure has been particularly intense this year, as panel prices have dropped by half. Japan's virtual monopoly five years ago in thin-film-transistor (TFT) LCDs has eroded to a roughly 50 percent share now, and market research firm DisplaySearch (Austin, Texas) predicts that by 2005 Japan's share will shrink further, to about 32 percent.

Sam Matsuno, senior vice president of DisplaySearch, recommended further consolidation. "If the current Japanese TFT manufacturers could be integrated into three operations, then each of those would be larger than their Korean rivals in 2005," Matsuno said.

Japanese companies have suffered from high labor costs and relatively stingy investments in the state-of-the-art production facilities that new entrants in Korea and Taiwan have built.

With the exception of Hitachi Ltd., Japanese LCD manufacturers have yet to shift to the largest available substrates — those measuring more than 1 meter on a side. Hitachi, which has invested heavily in large-substrate manufacturing, built a line that uses 650 x 830-mm substrates about two years ago. Now it is building a fourth-generation line using 730 x 920-mm substrates. The latter line will go into operation this year.

Masahiro Ono, senior analyst at USB Warburg (Japan) Ltd., said Hitachi is an example of a Japanese company moving "in the right direction. When other manufacturers were reluctant to invest two years ago, Hitachi dared to invest in the large-substrate line."

Nevertheless, Hitachi's display division is bleeding red ink, with a projected $258 million operating loss this fiscal year. Hitachi has not allied with any other company in displays, but Hitachi president Etsuhiko Shoyama said, "If M&A is the best solution to rationalize the display business, we would consider it affirmatively. We have to cut our fixed costs and increase competitiveness."

Technology ladder

Beyond consolidation, Japan's display makers are working hard to climb the technology ladder. Matsushita, for example, has been developing quick-response LCDs, using an optically self-compensated birefringence crystal material that boasts response times a tenth of those of conventional twisted-nematic crystals.

Matsushita recently demonstrated a 13-inch prototype with a 5-millisecond response time, driven by a field-sequential method. Some believe the approach could revolutionize the LCD industry because it does not require color filters.

The new joint-venture company, owned 60 percent by Toshiba and 40 percent by Matsushita, will have a built-in advantage in being able to supply Matsushita's huge consumer electronics business. The LCD TV, for televisions of up to 30 inches on the diagonal, is seen as a growing opportunity, and a market that could leverage Toshiba's expertise in system-on-glass displays.

Toshiba started making low-temperature polysilicon (LTPS) displays several years ago, at first integrating the driver circuits and now including SRAM on the display glass as well.

The advantage of LTPS-based system-on-glass LCDs could be applied to LCD TVs, said Hiroyuki Yoshida, research analyst at Meiji Dresdner Asset Managing Co. Ltd. LCD TVs have longer product lives than other LCD applications such as PCs and cell phones.

"The market size of ICs that are used with panels, from drivers and controllers to microprocessors, is more than double that of the LCD panel market," Yoshida said. "System-on-glass LCDs will enable panel manufacturers to reap the sales of these ICs as well."

The joint-venture company will take over all of Toshiba's and Matsushita's manufacturing sites for LCDs. It will also take over as a 100 percent subsidiary AFPD Pte. Ltd., the Singapore-based joint venture Toshiba and Matsushita announced in February to manufacture LTPS LCDs. Scheduled to start production in July 2002, this fab will have a maximum monthly capacity at full operation of 55,000 substrates, measuring 730 x 920 mm.

Going forward, Japan's display engineers are likely to protect whatever technical edge they can gain. Many in the industry believe that Japanese companies shared their amorphous-silicon LCD technology too freely, with scant consideration to protecting intellectual property. Production know-how transferred easily from the flat-panel equipment makers to their customers, for example.

Engineers said they would guard the design and process technology more closely for emerging fields such as low-temperature or continuous-grain silicon. "Those who want to use these technologies will have to pay for them," said one engineer in the LTPS field.

"We have been working on LTPS technology for long time," said Masanori Sakamoto, chief specialist at the Toshiba LCD research and development center. "Our array technology, especially, would not allow newcomers to catch up with us so easily, in one year or so."

Essential elements

Avoiding direct competition based on cost, and moving to "system LCDs" that integrate ICs on the glass, are the essential elements of Japan's strategy.

"Japan should create new businesses outside of the existing applications for displays," said Fumiaki Funada, group deputy general manager of Sharp's display technology development group. "We want to target and establish technology advantages that might require five to 10 years for our competitors to catch up [to]."

The system-on-LCD, based on high-mobility substrates such as LTPS and continuous-grain silicon, is viewed as the basis for a resurgence by Japan's display industry. And it is key to developing organic light-emitting displays (OLEDs), which are expected to become increasingly important from now on. "If Japanese companies lost in the amorphous TFT competition, they have no choice but to go in this direction," said Yoshida, the Meiji Dresdner analyst. "But it is too early to tell whether this decision is appropriate, or if it will enable them to survive."

Pooling R&D

However, the R&D costs for these basic technology may be too large for any one company to bear. Japan's major display manufacturers in February launched a joint research company, Advanced LCD Technologies Development Center Co. Ltd., to lower R&D cost and reduce risks.

Backers Dai Nippon, Hitachi, Matsushita, NEC, Sharp and Toshiba are banking on Altedec, as the R&D operation is known, to develop fundamental LCD technologies. The stated goal is to help member companies maintain international competitiveness. Shortly after the consortium was set up, one of the founding companies, Mitsubishi Electric Corp., dropped out and Dai Nippon Printing Co. Ltd. joined.

Altedec will develop energy-saving production process technology intended to halve the amount of energy needed to produce LCDs. And it will work on fundamental technologies for LCDs that are expected to hit the market four or five years from now. The future-generation project will mainly focus on low-temperature polysilicon displays with high-speed mobility — better than 500 cm²/Vs, according to a source close to Altedec.

However, many analysts expect that even as new types of screens, such as plasma displays and OLEDs, come into widespread use, the TFT flat panel will continue to occupy about a 70 percent share of the flat-panel market in 2005. The total production of the mainstream TFT display will more than quadruple from the current 40 million units to more than 160 million units by 2005, according to research reports. In such a rapidly growing market, the output by Japanese manufacturers is expected to hit 50 million units by 2005, a 2.5-times growth rate.

"In one word, Japan lost in the cost competition," said Meiji Dresdner analyst Yoshida. "Japanese display companies had not drastically rationalized their organizations, retaining a high-cost employment system, and they started competing with Korea in the late '90s. Korean and Taiwanese companies created well-focused display businesses, but Japanese vendors were not strategic enough to compete with them."

Big losses

Plummeting prices since the end of last year have resulted in big losses for Japanese display manufacturers. Toshiba expects an overall loss of about $1 billion this year, roughly $133 million of that coming from displays and about $780 million from the company's much larger semiconductor operation.

Sharp, the largest LCD manufacturer in Japan, has also announced that its first-half results would drop from the year before, by 8 percent in sales and 13.5 percent in operating profit on a consolidated basis. The decline was attributed to price erosion in its LCD and flash memory businesses.

"Unless we cut costs drastically, we cannot survive, said Toshihiro Ueki, director of LCD development at IBM Japan.

As Japanese manufacturers turn to high-value-added products, they cannot ignore the need to improve production efficiencies to prepare for the increase in the LCD monitor market. "It is the time that they should think about investments on large-substrate lines," said Ono, the senior analyst at USB Warburg.

In fact, the sharp drop in panel prices is expected to stimulate growth in the large-panel market for monitors of 15 inches and over. "That market could expand potentially to 100 million units per year," Ono said, adding that "even if Korean and Taiwanese companies increase their production, the shortage will occur in several years. Investment should be done now."

"Currently, we are having a really tough time, but we believe that the display is a growing business," said IBM Japan's Ueki.