September 28, 2017 10:00 am JST

Company in focus: China's BOE aims to become the new king of displays

Beijing-backed tech giant challenges rival Samsung as leader in OLED innovation

SHUNSUKE TABETA, Nikkei staff writer

BOE's prototype flexible OLED panel (Courtesy of BOE)

CHENGDU, China Inside a five-story factory the size of 14 soccer fields, known simply as B7, the race is on to dominate the lucrative market for next-generation smartphone display panels.

Motivational posters and signs adorn the clean white hallways and toilets of the factory in Chengdu, capital of China's Sichuan Province: "Let's put all our strength together to bring success to our clients"; "Change & Challenge"; "Study, improve and take responsibility"; and "Unity, speed and quality."

The owner of this supermodern factory is Chinese tech giant BOE Technology Group. Already one of the world's largest makers of liquid crystal display panels, BOE in September began mass production of display panels using organic light- emitting diodes and aims to rival Samsung Electronics as a key supplier to Apple.

BOE, a state-owned company backed by the Beijing city government, has been working on OLEDs for more than 15 years. It acquired the critical technology in 2001 when it purchased the OLED panel operations of South Korea's Hydis Technologies, which at the time was owned by Hynix Semiconductor (now SK Hynix), and later developed its own technology.

In 2011, the company built its -- and China's -- first OLED panel plant in Ordos, in the Inner Mongolia Autonomous Region. In 2014, BOE began mass-producing OLED glass panels on a production line in the city shared with LCD panels. The following year it focused on OLED panels for its new plant in Chengdu, and two years later it established the B7 factory.

"We're expediting our final push for our first shipment in late October," a BOE executive at the B7 factory said. While China celebrates its National Day holiday week in early October, engineers at the factory will continue working to ship panels to smartphone makers in China.

The OLED panel market is expanding rapidly. U.K. research company IHS Markit projects that the value of global OLED panel shipments will hit $21.6 billion this year, up 53% from 2016. It says the market for OLED panels for smartphones will roughly triple over the next five years, while the market for LCD panels will fall 14%.

"SCREEN OF CHOICE" Analysts say OLED will be one of the main drivers of display panel growth in the coming years.

Neil Campling, global head of technology, media, and telecom research at Northern Trust, said in a recent note that "significant growth in the consumer electronics market is being driven by Apple and their adoption of OLED technology." He believes that "OLED screens should become the screen of choice for smartphones in coming years," due to their superiority in color saturation, thinness and power consumption over existing LCD panels. He said that as smartphones continue to evolve, they will become "fully immersive gaming devices" in the coming years and that OLED screens will be one of the "three key hardware requirements," along with sensors and central processing units.

Samsung currently is the only company in the world that can reliably supply OLED panels. The iPhone X, Apple's new flagship model that was unveiled on Sept. 12, will feature a Samsung OLED panel. While the South Korean company enjoys a dominant position in the OLED market -- it has mass-produced them for its own smartphones since 2010 -- its home-country rival LG Display mass-produces tiny OLED panels for wearable devices, such as watches, and plans to enter the smartphone panel market next year.

Just behind the two South Korean panel makers is BOE, which is drawing interest from major international companies. The B7 factory "is equipped with technologies on a par with Samsung Electronics," said a foreign engineer employed by a Chinese company who is versed in OLED technology.

"Our challenge has only just begun," the BOE executive in Chengdu said. The company is building another plant for OLED panels in Mianyang, an hour by high-speed rail from Chengdu, where the B7 factory is located. Construction began last year, with mass production expected to start in 2019. The Mianyang plant is preparing to supply future iPhones, according to people familiar with the company's plans.

"BOE and Apple are already negotiating," said an executive at one technology parts maker. Apple appears to be studying BOE's technology, the executive said, for possible application in its products -- first for wearables, such as the Apple Watch, and then for iPhones. In order to make itself less dependent on Samsung, Apple is diversifying its supplier base and sharing its technologies with BOE, LG Display and Japan Display.

"The Mianyang factory is still under construction, and it is more than one year before mass production at the plant begins," Philip Yuan, vice president and chief marketing officer at BOE, said. "We have no further information to disclose at this time."

Apple could not be reached for comment.

PRESSURE TO PERFORM BOE, which was founded in 1993, began as a state-run manufacturer of vacuum tubes in Beijing that was on the brink of bankruptcy. Chairman Wang Dongsheng, who had risen from accountant to general manager, rebuilt the company with an extra emphasis on technology development.

On the B7 plant's upper floors, vapor deposition machines and transport robots operate smoothly along the production line. Large sheets of glass are coated with polyimide, a high-performance resin, to produce a substrate for forming electronic circuits. This substrate, measuring 1,850 by 1,500 millimeters, is then removed from the glass and cut into smartphone sizes. This process is more difficult than cutting the glass first and then removing the substrate and is similar to the process used by Samsung.

The pressure on employees carrying out this exacting process is palpable. Workers in white uniforms emblazoned with the BOE logo talk with production device makers and clients about how to improve the plant's no-defect rate. The factory employs 3,000 to 4,000 people, half of whom are young engineers and recent recruits to the company. And security is tight. Visitors have the camera lenses on their smartphones covered up to prevent them from taking photos inside the factory.

BOE has so far invested 93 billion yuan ($14.1 billion) in the plants at Chengdu and Mianyang, and it remains aggressive in research and development. Hanging on a wall at the B7 plant is a company road map for OLED production that sets out the goals of developing a foldable display in 2019 and a rollable one in 2021.

"BOE is more lively than our neighboring Hon Hai Precision Industry [Foxconn] plant, which produces the iPad," a Chengdu government official said.

A prominent sign hanging just inside the entrance to B7 attests to that: "We will become a great corporation, the most respected on earth."

Chen Yanshun, BOE's chief executive, said at a company forum last year that it would "increase annual sales to over 180 billion yuan in 2020," more than two and a half times its sales of 68.8 billion yuan in 2016.

In aiming to cement its leading position in the global market for LCD and OLED panels, the company plans to expand into new operations, such as smart systems, mainly for televisions, and health care.

Chen is pushing hard for diversification with a plan to "invest 100 billion yuan in new business over the coming five years." The company has already completed construction of a plant in Suzhou, Jiangsu Province, and has other facilities currently under construction in Chongqing and in Hefei, Anhui Province (in addition to the one being built in Mianyang).

In addition to its LCD TV operations, the company has begun making high-definition displays for fine-art presentations, onboard displays for self-driving vehicles, and smart-grid systems.

INVESTING IN HEALTH CARE BOE also is committed to its new health care operations. It recently acquired a general hospital in Beijing and invested in a medical venture in Israel, and it is seeking new opportunities in the so-called internet of things, artificial intelligence, integrated health care services and regenerative medicine. It is building an internet-of-things enhanced hospital in Hefei.

The company is also aggressively pursuing technology development. It invested 5.3 billion yuan in 2016, up 30% from 2015 and double since 2014. The World Intellectual Property Organization reported in March that as of last year, BOE ranked eighth worldwide in the number of new patent applications -- with a total of 1,673 -- up from 14th place in 2015 and ahead of Samsung and Sony.

Last year, BOE was second in global shipments of LCD panels for personal computers and TV sets 9.1 inches and larger, and the third in shipments for small and midsize smartphones of 9 inches or smaller, IHS Markit reported.

According to an executive in China's panel industry, BOE invests far more than its Japanese competitors, driving rapid growth on a par with South Korean companies. As a Beijing-backed state-owned company, it has the advantage of reducing financial exposure by having local governments help with fundraising, joint investment in plants and other expenditures.

"BOE only needs to cover 20% to 30% of its financial obligations itself," said a source at a Japanese device maker.

Amid concerns about oversupply, the Chinese government recently announced plans to reduce financial assistance for the construction of LCD panel factories, and it remains unclear whether BOE can continue to rely on subsidies to build production facilities for OLED panels. That means its investment drive is riskier than it has been previously. BOE declined to comment on that matter.

Government subsidies for research and development, moreover, are a big reason BOE has been able to pursue new business so aggressively. "Government assistance is the source of BOE's strength, but it could lead to a lack of the kind of spontaneity that corporations need to build earnings," said a specialist in China's display industry. "This could negatively affect it as it competes globally in the future."

Nikkei staff writer Kotaro Hosokawa contributed to this report.

Asia300

BOE Technology Group Co., Ltd.

China

Market(Ticker): SHE(000725)
Sector:
Industry:
Electronic Technology
Electronic Equipment/Instruments
Market cap(USD): 26,388.3M
Shares: 34,798.4M
Asia300

SK hynix, Inc.

South Korea

Market(Ticker): KRX(000660)
Sector:
Industry:
Electronic Technology
Semiconductors
Market cap(USD): 52,262.2M
Shares: 728.00M
Asia300

Samsung Electronics Co., Ltd.

South Korea

Market(Ticker): KRX(005930)
Sector:
Industry:
Electronic Technology
Telecommunications Equipment
Market cap(USD): 343,710M
Shares: 148.18M
Asia300

LG Display Co., Ltd.

South Korea

Market(Ticker): KRX(034220)
Sector:
Industry:
Distribution Services
Electronics Distributors
Market cap(USD): 9,648.46M
Shares: 357.81M
Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
Sector:
Industry:
Electronic Technology
Computer Peripherals
Market cap(USD): 62,782.17M
Shares: 17,328.73M
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