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

AUO

13/09/2018 01:10

(Repeats story from Sept. 12)
    By Ju-min Park and Heekyong Yang
    SEOUL, Sept 12 (Reuters) - The chief executive of South
Korea's LG Display  034220.KS , Han Sang-beom, was determined to
deliver a strong message when he appeared before 1,000 employees
at the firm's main manufacturing plant last spring.
    So he donned a pair of goggles, picked up a hammer, and
smashed a liquid-crystal display screen to bits.
    The symbolism was impossible to miss: LCD panels, the
company's mainstay for years, were being relegated to the
industrial dustbin. The company's future would depend on a newer
technology, organic light-emitting diode, or OLED.
    "I've never seen him do such a thing," said one company
official who was present. "His performance showed a grim
determination to weather this crisis."
    Yet LG Display's predicament was in many ways one of its own
making. Less than a year earlier, the company had showered
employees with perks and bonuses as profits rolled in, driven 
by the company's leadership in LCD screens for TVs, computer
monitors and smartphones.
    But LG Display had misread the market: Chinese competitors
were coming on strong, and by early this year prices for LCD
screens were plummeting. The fat profits of 2017 turned into big
losses in 2018 - and the company abruptly announced in July that
it would slash $2.7 billion in capital spending it had planned
through 2020.  ID:nL4N1UG06G 
    It did not reveal its total or previous targets but made
about $6 billion in capital expenditures in 2017, according to
Eikon data. 
    The company's troubles stand as a stark example of the risks
inherent in hotly competitive technology businesses that require
massive capital investment.
    "It seems that LG Display made a major miscalculation on its
LCD business, not accurately judging the timing to pull away
when they could see China's rapid catch-up," said Lee Won-sik,
an analyst at Shinyoung Securities.
    "We knew from last year LCD prices would go down but we did
not expect this big and fast fall," acknowledged one LG Display
official, who, like others in this article, declined to be
identified because he was not authorised to speak to the media.
"Customers had been asking for price cuts, but we didn't act
until it got too late."
        
    PRICES IN FREE-FALL
    LG Display posted five straight years of strong profits
after Han took the helm in 2012, riding a tide of LCD screen
orders from Apple Inc  AAPL.O  and strong demand for both phone
and TV screens from LG Electronics  066570.KS , which owns more
than a third of the display-maker.
    LG Display also began to invest in OLED displays, which
unlike LCD screens don't require backlighting and can deliver
more natural-looking colours. OLED screens also consume less
energy and can be bent and folded.
    But the technology is expensive, and LG Display was earning
the vast majority of its revenue from LCDs. Until its recent
cutbacks, it was running eight LCD production lines in South
Korea and another in China.
    While LG Display hummed along, Chinese companies, led by BOE
Technology Group Co Ltd  000725.SZ , were pouring huge sums into
LCD production. 
    By January 2017, BOE had become the No. 1 supplier of LCDs
larger than 9 inches, according to market tracker IHS Markit,
taking 22.3 percent of unit shipments versus 21.6 percent for LG
Display. It was the first time a Chinese display maker had taken
the top spot.
    By early 2018, prices for many types of LCDs were in
free-fall. Prices for 50-inch LCD television panels, for
example, slid 32 percent in August versus the same month last
year, according to IHS Markit.  
    LG Display's big South Korean rival, the display unit of
Samsung Electronics  005930.KS , had begun pulling back from LCD
years earlier, shutting down older LCD production lines in South
Korea beginning in 2010, according to a Samsung Display
official. The company now has just two LCD factories in South
Korea and one in China.
    But LG Display was caught flat-footed and is now furiously
slashing LCD capacity. It has closed three LCD production lines
since last year and abandoned plans for a new one.  
    The company in April also rolled out an "emergency
management system," with employees being told to use cheaper
flights and cut back on group meals, company sources told
Reuters. Cash flow has become a concern: it was negative 838.2
billion won ($743.93 million) in the second quarter, according
to Eikon data, and has been negative for three straight
quarters.
    Three company sources say the company is not planning
layoffs for fear of losing talent to China, but some employees
are frustrated with cuts in benefits.
    "Executives are trying to keep the morale up, telling us
media reports about a voluntary redundancy program are false," a
company source with knowledge of the matter said.

    OLED A GAME CHANGER?
    LG Display is now betting the house on OLED, and says it can
fund $17.6 billion in OLED investments over the next three
years. It expects the newer technology to account for 40 percent
of revenue by 2020, up from just 10 percent today.
    As OLED becomes more prevalent, LG Display's fortunes could
turn, analysts say.
    LG Display's OLED panels have helped its sibling, LG
Electronics, take the lead in high-end televisions. Some
analysts believe LG Display has been pressured to supply those
panels cheaply, hurting its profitability, though the company
denies that is the case.
    But the OLED market promises to be tough. Samsung boasts
that it has been investing in OLED since 2005. BOE is getting
into OLED too. There are also still technical challenges in
making large-panel OLED TV screens that don't wear out too
quickly, noted Ross Young, CEO of research provider Display
Supply Chain Consultants.
    Son Young-jun, LG Display's vice president of public
relations, said in a statement that the company is the only
producer of large-size OLED displays and had "unmatched
technological expertise" in OLED. "The potential and outlook
ahead is promising," he said.  
    LG Display says its OLED division will turn a profit in the
third quarter. It also expects LCD prices to stabilise, enabling
it to squeeze profits from the older technology until the newer
one matures.
    "Given OLED is our answer and solution to the crisis,
there's nothing else we can do other than tightening our belts
and pushing for OLED," a company official said.
($1 = 1,126.7200 won)

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
LG Display's troubles: falling panel prices, heavy investment   
https://tmsnrt.rs/2PyEKQc
LG Display's crisis png    https://tmsnrt.rs/2NMVWRC
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 (Reporting by Ju-min Park and Heekyong Yang; Editing by
Jonathan Weber and Gerry Doyle)
 ((ju-min.park@thomsonreuters.com; +82 2 3704 5650; Reuters
Messaging: ju-min.park.thomsonreuters.com@reuters.net))