LG Display struggles for footing after LCD forecasting error leads to crisis

SEOUL (Reuters) – The chief govt of South Korea’s LG Show (034220.KS), Han Sang-beom, was decided to ship a robust message when he appeared earlier than 1,000 workers on the agency’s major manufacturing plant final spring.

So he donned a pair of goggles, picked up a hammer, and smashed a liquid-crystal show display screen to bits.

The symbolism was unattainable to overlook: LCD panels, the corporate’s mainstay for years, have been being relegated to the economic dustbin. The corporate’s future would depend upon a more moderen know-how, natural light-emitting diode, or OLED.

“I’ve by no means seen him do such a factor,” stated one firm official who was current. “His efficiency confirmed a grim willpower to climate this disaster.”

But LG Show’s predicament was in some ways considered one of its personal making. Lower than a 12 months earlier, the corporate had showered workers with perks and bonuses as income rolled in, pushed by the corporate’s management in LCD screens for TVs, pc screens and smartphones.

However LG Show had misinterpret the market: Chinese language rivals have been approaching robust, and by early this 12 months costs for LCD screens have been plummeting. The fats income of 2017 was large losses in 2018 – and the corporate abruptly introduced in July that it could slash $2.7 billion in capital spending it had deliberate by way of 2020.

It didn’t reveal its complete or earlier targets however made about $6 billion in capital expenditures in 2017, in keeping with Eikon information.

The corporate’s troubles stand as a stark instance of the dangers inherent in hotly aggressive know-how companies that require huge capital funding.

“Evidently LG Show made a serious miscalculation on its LCD enterprise, not precisely judging the timing to drag away once they may see China’s fast catch-up,” stated Lee Received-sik, an analyst at Shinyoung Securities.

“We knew from final 12 months LCD costs would go down however we didn’t anticipate this large and quick fall,” acknowledged one LG Show official, who, like others on this article, declined to be recognized as a result of he was not approved to talk to the media. “Clients had been asking for value cuts, however we didn’t act till it obtained too late.”

PRICES IN FREE-FALL

LG Show posted 5 straight years of robust income after Han took the helm in 2012, driving a tide of LCD display screen orders from Apple Inc (AAPL.O) and powerful demand for each cellphone and TV screens from LG Electronics (066570.KS), which owns greater than a 3rd of the display-maker.

LG Show additionally started to spend money on OLED shows, which in contrast to LCD screens don’t require backlighting and may ship extra natural-looking colours. OLED screens additionally eat much less vitality and may be bent and folded.

However the know-how is dear, and LG Show was incomes the overwhelming majority of its income from LCDs. Till its latest cutbacks, it was working eight LCD manufacturing traces in South Korea and one other in China.

Whereas LG Show hummed alongside, Chinese language corporations, led by BOE Expertise Group Co Ltd (000725.SZ), have been pouring enormous sums into LCD manufacturing.

By January 2017, BOE had turn out to be the No. 1 provider of LCDs bigger than 9 inches, in keeping with market tracker IHS Markit, taking 22.three % of unit shipments versus 21.6 % for LG Show. It was the primary time a Chinese language show maker had taken the highest spot.

By early 2018, costs for a lot of kinds of LCDs have been in free-fall. Costs for 50-inch LCD tv panels, for instance, slid 32 % in August versus the identical month final 12 months, in keeping with IHS Markit.

LG Show’s large South Korean rival, the show unit of Samsung Electronics (005930.KS), had begun pulling again from LCD years earlier, shutting down older LCD manufacturing traces in South Korea starting in 2010, in keeping with a Samsung Show official. The corporate now has simply two LCD factories in South Korea and one in China.

However LG Show was caught flat-footed and is now furiously slashing LCD capability. It has closed three LCD manufacturing traces since final 12 months and deserted plans for a brand new one.

The corporate in April additionally rolled out an “emergency administration system,” with workers being instructed to make use of cheaper flights and in the reduction of on group meals, firm sources instructed Reuters. Money stream has turn out to be a priority: it was adverse 838.2 billion gained ($743.93 million) within the second quarter, in keeping with Eikon information, and has been adverse for 3 straight quarters.

Three firm sources say the corporate will not be planning layoffs for concern of shedding expertise to China, however some workers are pissed off with cuts in advantages.

“Executives are attempting to maintain the morale up, telling us media stories a couple of voluntary redundancy program are false,” an organization supply with data of the matter stated.

OLED A GAME CHANGER?

LG Show is now betting the home on OLED, and says it will probably fund $17.6 billion in OLED investments over the subsequent three years. It expects the newer know-how to account for 40 % of income by 2020, up from simply 10 % immediately.

As OLED turns into extra prevalent, LG Show’s fortunes may flip, analysts say.

LG Show’s OLED panels have helped its sibling, LG Electronics, take the lead in high-end televisions. Some analysts consider LG Show has been pressured to produce these panels cheaply, hurting its profitability, although the corporate denies that’s the case.

However the OLED market guarantees to be powerful. Samsung boasts that it has been investing in OLED since 2005. BOE is entering into OLED too. There are additionally nonetheless technical challenges in making large-panel OLED TV screens that don’t put on out too rapidly, famous Ross Younger, CEO of analysis supplier Show Provide Chain Consultants.

Son Younger-jun, LG Show’s vice chairman of public relations, stated in a press release that the corporate is the one producer of large-size OLED shows and had “unmatched technological experience” in OLED. “The potential and outlook forward is promising,” he stated.  

LG Show says its OLED division will flip a revenue within the third quarter. It additionally expects LCD costs to stabilize, enabling it to squeeze income from the older know-how till the newer one matures.

“Given OLED is our reply and answer to the disaster, there’s nothing else we are able to do apart from tightening our belts and pushing for OLED,” an organization official stated.