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Chinese state-supported display makers target Samsung

Technology sector

Chinese state-supported display makers target Samsung

Local government aid fuels land grab in market for next-generation smartphone screens

Billions of dollars of Chinese corporate and local government funds are pouring into the market for next-generation display technology, fuelling a massive increase in capacity but a potential slump in pricing in the coming years. 

The smartphone market is expected to become the biggest adopter of organic light-emitted diode (OLED) displays. But such displays, which offer greater clarity than previous technologies while using energy more efficiently, are also expected to take hold in a range of other segments, from in-car panels to wearable technology to augmented and virtual reality devices. 

The flagship smartphones of Samsung Electronics, Apple and Huawei now all boast flexible OLED screens, a technology that allows displays to be curved or folded. Foldable screens, which the industry hopes will breathe new life into a stagnant market, are on the way — not withstanding the teething troubles surrounding the launches of pioneering models. 

Samsung itself dominates smartphone display production through its subsidiary Samsung Display (SDI), which commands 95 per cent of the flexible OLED market, according to IHS Markit. 

Chinese companies, which are already major manufacturers of older display technologies such as LCD and rigid OLED displays, are now setting their sights on flexible OLED screens. Between 2018 and 2023, Chinese display makers will spend $29.7bn adding capacity for mobile OLED display manufacturing, 88 per cent of the total for all manufacturers, according to Display Supply Chain Consultants (DSCC), an industry consultancy and data provider. 

This increase in capacity is expected to hit industry prices. DSCC expects the volume of OLED shipments to nearly double from 2018 to 2022 to 818m panels, while their value is expected to grow just 34 per cent in that time. 

Beijing-based BOE Technology is now the biggest Chinese manufacturer of mobile OLED displays. The company says it shipped 2.7m panels to its “top brand” customers in 2018 and, as more production lines go into operation, it estimates shipments will hit 30m in 2019. While DSCC estimates that BOE’s 2019 shipments will reach just 18.6m, it also expects them to jump to 161m in 2023. Smaller Chinese rivals such as Visionox and Tianma Microelectronics are also ploughing billions of dollars into building new capacity for mostly flexible OLED displays. 

DSCC expects Chinese producers to eat into Samsung’s dominance over the next five years, with SDI’s share of global capacity for mobile OLED displays dropping to 48 per cent in 2023 from 91 per cent this year, while BOE’s share jumps to 18 per cent from 1.3 per cent, and Visionox’s to 9.1 per cent from less than 2 per cent now. For flexible displays, BOE will be even further ahead, with an estimated capacity share of 27 per cent compared with SDI’s 32 per cent. 

Investment is being propelled not just by the prospect of growing market demand, but also by China’s industrial policy. 

The government aims to transform the country into a high-tech powerhouse and achieve Chinese dominance of the technologies of the future, cutting its reliance on foreign technology. Support for flexible OLED display manufacturing was reiterated by the powerful National Development and Reform Commission on June 6, sending a clear signal to companies, banks and local authorities that it continues to back the industry, despite the risks of such a state-supported industrial push. 

“China has high goals and aspirations,” said Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies in Washington DC. “But the results so far have been mixed. Industries are doing OK but there are big problems, such as massive overcapacity and poor quality. Other industries have seen no success at all, such as commercial aircraft and semiconductors.” 

Subsidies for all

As in other high-tech and emerging industries earmarked for state support, companies are benefiting from favourable treatment in a range of areas including land use, energy prices and low-cost loans from banks. Local governments are also using money from government-guided industrial funds to invest directly in projects. 

In October 2018, Visionox and the government of Hefei, a city in the eastern province of Anhui, announced plans to set up a joint venture involving Rmb22bn in equity investment, of which Rmb18bn will come from the government and a further Rmb22bn in debt financing. The facility will have capacity to produce 30,000 OLED sheets a month (one sheet can make over 200 panels) and is due to start mass production in 2021. 

In 2018, BOE reported receiving government subsidies of Rmb2.1bn, while Tianma, China’s second largest display manufacturer, said it received government subsidies of Rmb958m last year. 

“Display manufacturing is very capital-intensive so, without government support, there would be no way to compete with foreign companies — it is very important for China to develop its own display manufacturing industry as it is closely related to the semiconductor, TV and smartphone industries,” said Gao Yang, an analyst with BOCOM Schroder Asset Management. 

Within Asia, the Chinese government is not alone in providing support for its technology industries. Japan and Taiwan have spent decades supporting their industries, while Korean OLED manufacturers have benefited from government subsidies and state protection. 

“But none of them has the scale of policy support and capital investment we have seen in China,” said David Hsieh, senior director for display technology research and analysis at IHS Markit. “In China, local governments usually set up joint ventures with display manufacturers or help the company obtain lending for the initial stage of the investment, which is critical for expansion in capital-intensive sectors.” 

Drive for self-sufficiency

Chinese display manufacturers are being supported by the emergence of domestic mobile phonemakers, who are gaining market share and looking to reduce their dependence on foreign technology and component suppliers. Three of the world’s top five smartphone vendors are now Chinese. 

Chinese OLED screen manufacturers are winning business from domestic smartphone makers. BOE Technology provides flexible OLEDs for Huawei’s Mate 20 Pro and P30 Pro models while Xiaomi works closely with Visionox. BOE is also supplying screens for Huawei’s first foldable mobile phone, the Mate X, expected to be released after the northern hemisphere summer. 

There has long been speculation that Apple will appoint BOE as a screen supplier as it seeks to diversify its supplier base, although neither side will comment. Joining the Apple fold would be a coup for Chinese display manufacturers, provided the OLED industry does not get caught up in the US-China trade war. 

The growing strength of Chinese smartphone companies will help domestic OLED display makers gain market share as vendors work more closely with their suppliers to innovate and improve the customer experience. 

“China’s mobile manufacturers are no longer chasing the iPhone but are starting to lead market trends, especially with the advent of 5G. To innovate, they have to work with suppliers, just as Apple did with [consumer electronics group] HTC, and that’s how suppliers can improve their technology and yield,” said BOCOM’s Mr Gao, referring to the percentage of non-defective panels in total output. 

But China faces considerable challenges in taking on this industry. Samsung is likely to continue to dominate for the next few years, partly because of its close relationship with Canon-Tokki. The Japanese company has a near-monopoly on the manufacture of the vacuum evaporation equipment that is crucial in the manufacture of OLED displays and sells most of its output to the South Korean electronics group. 

Yield is another problem for domestic manufacturers. Ross Young, chief executive of DSCC, said as few as one in 10 of the panels produced by SDI are defective, compared with as many as nine in 10 of those produced by lower quality suppliers. BOE Technology told investors last year that yield at its Chengdu OLED production line rose to 70 per cent at the end of 2018, although some industry analysts believe this is exaggerated. 

OLED could also be challenged as technology develops. Micro-LED screens are superior to OLED displays and, while they are currently too difficult and expensive to manufacture on a large scale, both Apple and Samsung are investing heavily in the technology. The risk is that, just as Chinese companies start to dominate OLED, it becomes yet another low-margin, high-volume business supplanted by a newer technology.

— Wang Suya, Head of China Research, FT Confidential Research

scoutAsia is a corporate data and news service from Nikkei and the FT, providing in-depth information about more than 660,000 companies across more than 20 countries in east Asia, south Asia and Asean. This exclusive scoutAsia Research content has been produced by FT Confidential Research.

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors

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