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LCD panel glut in China spurring changes across industry

BEIJING -- China is facing a serious glut of large LCD panels as manufacturers keep boosting output capacity despite the lackluster market, a trend likely to have far-reaching repercussions for related businesses in East Asia.

     Local liquid crystal display panel producer BOE, now operating a cutting-edge plant in Beijing that can make panels using 8.5-generation (2,200mm-by-2,500mm) glass substrates, is moving to open similar facilities in Hefei, Anhui Province, and Chongqing, by summer 2015.

     Setting up this type of panel plant costs more than 400 billion yen ($3.82 billion). Speaking in Beijing at the end of November, BOE Chairman Wang Dongsheng expressed enthusiasm about making China the manufacturing stronghold of the world.

     Electronics giant TCL's LCD subsidiary is also building the same type of panel plant in Shenzhen, Guangdong Province, where its first factory opened in August 2011. Construction of the second facility is taking place next to the existing one, which spans 240 meters in width and stretches 400 meters in length.

     Up to nine such giant plants will likely go online within two years in the country, including construction by South Korean and Taiwanese manufacturers. U.S. market research firm NPD DisplaySearch forecasts that Chinese production will account for 38.6% of global output using 8.5-generation substrates in the October-December period of 2015, coming close to South Korea's top share.

     The problem is that the market for large LCD panels has been chronically sluggish. Taiwanese manufacturer AUO, for instance, logged its first net profit in 11 quarters in the April-June period of 2013, but will now likely bleed red ink again in the January-March period of 2014, due largely to the glut in China. But local manufacturers are still raising capacity for large LCD panels as they expect strong demand for TVs going forward.

     Meanwhile, Japanese panel makers have effectively given up competing against Chinese rivals with volume advantages in large LCD panels. They are instead focusing on small to midsize ones.

     Incentives introduced by authorities are encouraging panel makers to boost output capacity in China. In April of 2012, the government raised the import tariff on LCD panels back to 5% from the reduced rate of 3%, aiming to cut imports -- which amount to $50 billion per year. Rumors have it that the rate may be increased to 8% in 2014.

     South Korean and Taiwanese LCD panel makers, which once enjoyed a strong presence in the field, are now having to play defense. To avoid paying higher tariffs, they are moving production to China and working to grow other business operations such as next-generation display panels, OLED displays.

     These changes are spreading across the supply chain and being felt by companies that deliver machinery and materials, many of which are Japanese firms. For instance, Tokyo Electron is shipping etching equipment for drawing circuits onto panel substrates from its first overseas plant in Kunshan, Jiangsu Province.

     Previously, the firm was reluctant to launch Chinese production, out of concern about technology leakage. But the firm decided to change its tack "because demand grows only in China," says Tetsuro Higashi, the company's chairman and president. The firm now plans to transfer most production operations under a Yamanashi Prefecture subsidiary to China, over the next few years.

     Mitsubishi Plastics opened a polyester film plant in July, in Suzhou, Jiangsu Province. The films are used for backlighting and other panel functions.

     In the market for small and midsize LCD panels, Japanese firms still control about 30% of the market. But Yasuo Nakane, senior analyst at Deutsche Securities, warns that Chinese manufacturers could loom as a major threat in this area too, when their technologies catch up with those of Japanese firms.

Ken Kuwahara in Guangzhou, Kazunari Yamashita in Taipei, Kentaro Ogura in Seoul, and Maki Sagami in Tokyo contributed to this article.

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