When airline pilot Mick Jaffe and his wife, Chris, went shopping in Hong Kong to replace their television set a few weeks ago, they did not do what producers of flat-screen TVs are expecting. After looking at all the models, the Jaffes left the shop with a traditional 29-inch cathode-ray tube set instead of one of the newer models based on plasma or liquid-crystal technology. "The difference in price was just too big," Jaffe says.
In Japan, South Korea, Taiwan, and, increasingly, China, consumer electronics manufacturers are investing billions of dollars to build enormous plants to mass-produce flat-panel displays at the lowest possible cost. They are hoping that, unlike the Jaffes, most consumers will opt for the fancier models when they go shopping for a new set.
It is still not certain that costs can be brought down low enough to bridge the price gap and keep these new plants fully operational. "The central question is, Will consumers buy these flat-panel TVs?" says Corning F. Painter, regional vice president for electronics in Northeast Asia at Air Products & Chemicals, a major supplier of raw materials used in flat-panel displays. "This question matters to our customers, and it matters to us because it ultimately determines how many sheets of glass are processed into televisions sets."
OPTIMISM about growth in the flat-panel industry is warranted. Over the past decade, sales of flat-panel displays have increased 25-30% annually, driven first by sales of flat computer monitors, and now by the growth of the thin-TV market. Sweta Dash, director of LCD and projection research at electronic market research firm iSuppli who has been covering the flat-panel industry for 10 years, expects that, by 2009, global sales will reach 18 million plasma display units and 55 million liquid-crystal display (LCD) units. This year, she expects 4.5 million plasma panels and 16 million LCD panels to be sold.
||BIG ENOUGH? Corning shows off its seventh-generation glass sheet for liquid-crystal displays at the FPD trade show in Taipei. Manufacturers have announced plans to make displays out of larger glass sheets.
||PHOTO BY JEAN-FRANÇOIS TREMBLAY
Both plasma displays and LCDs consist of layers of various materials that are sandwiched between two sheets of glass. Both work through electrical activation of some of the materials. In LCDs, it's liquid crystals, which realign from horizontal to vertical when electro-activated. In a plasma display, a rare gas such as neon or xenon is activated and turned into plasma. An LCD has a low internal voltage, whereas a plasma display uses high voltage.
Notably for chemical makers, an LCD requires a wider range of materials than does a plasma screen. To manufacturers of either type of display, chemical companies supply things such as industrial gases, specialty electronic gases, rare gases, wet and high-purity chemicals, polarizers, methyl methacrylate plastics, color filters, liquid crystals, alignment layers, spacers, barrier ribs, photoresists, chemical mechanical planarization slurries, and an ever-lengthening list of other materials and components.
Display manufacturers' appetite for materials is having a transforming effect on the companies they order from. At Tokyo Ohka Kogyo (TOK), traditionally a supplier of materials to the semiconductor industry, sales to flat-panel display makers now account for 40% of total sales and may exceed 50% shortly, according to Koichi Takahashi, a marketing manager for LCD materials.
TOK is a leading supplier of semiconductor photoresists, and it initially perceived the supply of resists to the LCD industry as a mere side business. "The growth in our sales to display makers has surprised our management," Takahashi says.
It's the same story at Fuji Display Materials, a subsidiary of Japan's Fuji Film, where sales of display materials recently began to exceed those of semiconductor materials. The company has been selling its LCD color resists to filter makers since 1989. At Sumitomo Chemical, one of four manufacturers of polarizers for thin-film transistor-LCDs (TFT-LCDs), sales of electronic materials are exceeding sales of agrochemicals and pharmaceuticals for the first time. Specialty chemical supplier Nitto Denko now derives three-quarters of its operating income from its electronic materials, the majority of which are polarizers.
At JSR Corp., sales of display materials already exceed sales of semiconductor materials by 80%, says Seiichi Hasegawa, the JSR board member responsible for electronic materials. But he stresses that JSR is making a deliberate effort not to allow sales of display materials to to completely dominate the company's business. He adds that innovations achieved in semiconductor R&D can find applications in the flat-panel business.
LCD manufacturers have been building increasingly larger production centers, not only to lower costs but also to produce larger television sets. Plasma TV manufacturers are getting good market response from their 42-inch models, which retail for about $1,500 in the U.S., and it's a size that LCD makers also want to supply. As their scale increases, LCD facilities are labeled as first generation, second generation, et cetera. It takes at least a seventh-generation plant to manufacture 40- and 42-inch LCD screens, iSuppli's Dash says.
The difference between the various LCD plants is the size of the glass sheets they process. A sixth-generation facility can handle glass sheets measuring 1.5 meters by 1.8 meters, whereas a seventh-generation plant can process a sheet measuring 1.87 meters by 2.2 meters, or roughly the size of a king-size bed. The sheets of glass are cut before liquid crystals are inserted but after most of the layering work has been done. Japan's Sharp, South Korea's Samsung, and Taiwan's Chi Mei have all announced plans to build facilities processing still larger glass sheets.
A key benefit of increasing the scale of production is reduced raw material costs, which account for about 60% of total screen production costs. Ralf Fink, Hong Kong-based head of strategy and technology at BASF's electronic materials business, says moving up the generations allows producers to use materials more efficiently. Strengthened by its April acquisition of Merck KGaA's electronic chemicals business, BASF supplies the display industry with wet chemicals including developers and strippers, chemical mechanical planarization slurries, and functional chemicals such as the ones used in making compensation films.
Painter says Air Products can deliver gases more cheaply at bigger facilities. In South Korea, Air Products supplies Samsung's seventh-generation LCD complex from a dedicated air separation plant. At the same site, the U.S. company also delivers silane, ammonia, and nitrogen trifluoride gases by pipeline to points of use inside the LCD plant. At smaller LCD plants, Air Products uses gas cylinders instead. Similarly, TOK's Takahashi says usage requirements are so large in the LCD industry that he can sell photoresists in 200-L drums instead of the 20-L bottles that are more common in the semiconductor industry.
But to keep their customers' business, suppliers of materials to the flat-panel industry need to be more creative than just building bigger plants or delivering in larger containers. The relatively young flat-panel industry is subject to boom-bust cycles of various durations. And owing to oversupply or slack consumer demand, the whole industry can operate at a loss for as long as six months.
Dean O'Connor, business development manager in BOC Edwards' flat-panel sector, acknowledges that prices agreed upon in supply contracts don't mean much in the flat-panel industry. "It's a very competitive industry, and we have to be responsive to our customers' concerns," he says. If a customer asks for a price reduction, O'Connor says he needs either to respond sympathetically or accept being shut out of the next round of contracts when the customer builds a bigger plant.
Like BOC, JSR takes it as a given that customers will relentlessly demand lower prices. According to Hasegawa, nearly all the company's display R&D is geared toward helping customers lower their production costs. It's a substantial effort. JSR spends nearly as much on display research as it does in developing new semiconductor materials, even though the cost of instrumentation in semiconductor research is higher, he says.
AT BASF, Fink says his team responds to requests for lower prices by focusing on the concept of total cost of ownership. Instead of lowering its prices, BASF invites its customers either to adopt different product grades or to modify their manufacturing processes by using higher value chemicals, with the goal of overall lower manufacturing cost.
TOK's Takahashi contends that customers respond poorly to such suggestions and instead focus on buying their materials at lower cost. "The performance of the material is less important than its price," he says. Moreover, he adds, the equipment used to make flat-screen displays has more impact on manufacturing efficiency than the type of material being used.
Some suppliers to the flat-panel industry enjoy pricing power. Hisato Ichimiya, a sales manager at Teijin DuPont Films, says his company is one of only two suppliers of reflective films. Looking much like a regular sheet of white plastic, the reflective film, made from polyethylene terephthalate, is critical to the performance of an LCD. Toray Industries used to own the critical patents on the reflective film, Ichimiya says, but licensed production rights to Teijin DuPont last year. Both companies are producing flat out, he says, and Teijin DuPont already enjoys a 40% market share.
While Teijin DuPont offers several materials to the flat-panel industry, the reflective film is a new product that demonstrates it is still possible for newcomers to muscle into the display materials market.
There are other ways as well. At electronic materials supplier Nikko Materials, salesman Rex Chen notes that his company and its competitors are facing a shortage of the rare metal indium, a coproduct of zinc mining. Strong demand from the LCD industry has caused indium prices to surge in the past two years, but it remains uneconomical to mine zinc just to obtain indium. Indium is used to make indium tin oxide ingots. ITO is one of the first layers of materials deposited onto the glass sheet in constructing an LCD screen. Chen says anyone who discovers a material to replace indium will find a welcome place in the flat-panel industry.
Materials suppliers based in Taiwan, South Korea, or China have an easier time in establishing themselves because new display plants are mostly built there now. Sharp is the only display maker still expanding capacity in Japan, and JSR's Hasegawa expects competition from outside of Japan to increase.
"This is one of the reasons why we have started local production of LCD materials in Korea and broke ground in Taiwan for the same purpose on June 1," he says. Similarly, Japan's Sumitomo Chemical has invested more than $1 billion in electronic materials facilities in South Korea over the past five years, and LG Chem launched production of LCD polarizers in South Korea two years ago.
In Taiwan, Frank Wang, a sales manager at local color resist producer Eternal Chemical, says his firm has an advantage in marketing to Taiwanese display manufacturers. "We can offer better service, we have a common language, and we're more familiar with the local market," he says. But he admits that Eternal has a hard time parlaying this advantage into new sales. Customers find it risky to switch to a new supplier whose material might later prove unsuitable. Moreover, display manufacturing equipment made in Japan is often guaranteed to work only with certain Japanese materials.
ANOTHER WAY of becoming a substantial materials supplier is to focus on newer display technologies that stand a chance of becoming the next plasma or liquid-crystal display.
Teijin DuPont is doing this with its heat-resistant polyethylene naphthalate film designed for use as a substrate for flexible displays. The technologies required for flexible displays are still emerging, but Ichimiya says Teijin DuPont's film is endorsed by the U.S. Display Consortium, a nonprofit group that focuses on display industry technology trends. Flexible displays may one day be used in the manufacture of lightweight laptop computers.
The technology behind TFT-LCD and plasma displays is only a few years more mature than that of flexible displays. "The industry is still in its infancy and the devices are still subject to substantial changes," says Patrick X. Murphy, director of electronic specialty materials for Asia at Air Products.
He expects LCD and plasma displays to increase in design complexity in coming years, providing opportunities to supply more materials. Paradoxically, display manufacturers need costs to continue to decline while the complexity increases.
For the near future, until the price gap between traditional and flat-panel TVs narrows substantially, the display industry's basic trend will remain unchanged. Scales of production will increase, and cost pressure will remain intense. At times, for materials suppliers, it may feel much like the warning to new entrepreneurs that they can't sell at a loss and make it up on volume.