When China Mobile announced a 100 million target for 4G LTE smartphone devices in 2014, component vendors aggressively dropped prices, even though the 4G smartphone market did not grow rapidly in 1H and the infrastructure and key components are not completely ready. According to our recent research, 5” HD (1280×720) a-Si TFT LCD panel prices declined by more than 15% from January to May. Even LTPS panel makers in Japan and Taiwan have been cutting prices, so that the price gap between a-Si and LTPS TFT HD panels is less than $2. In a vicious cycle, display vendors receive the message that 5” and larger, high resolution demand will grow rapidly, they increase production volume and lower prices. Even though the brands do not need so many components, they do not feel they can cut their orders, lest they lose support if the demand does increase in the second half.
Smartphone application processor shipment number is an important factor to assess whether other components are tight or in oversupply. Typically, smartphone display driver IC shipments exceed those of application processors by 10-15%, sometimes as much as 20%. Because the display supply chain is more complex than for application processors, and since display driver ICs are much cheaper than application processors, makers and brands can build bigger inventories for driver ICs. However, in Q1’14, shipments of WVGA and higher driver ICs to China was more than 30% higher than application processor. Since panel makers are more aggressive than driver IC makers, we can assume that panel shipments are also much higher than application processors, and some inventory still exists from the end of last year.
In our supply chain research, we found that the required volume for display panel and driver IC is not falling, even though some brands and telecom operators are starting to lower their forecasts for this year. We expect that the smartphone display market will fall and then rebound before September. China Mobile cut fees for 4G subscribers, and it will continue to push 2G users to upgrade their mobile phones to 3G or even 4G. Key application processor makers, in addition to Qualcomm, Marvel and Ericsson, such as MediaTek received approval from by China Mobile for their 4G modem chips in May. We assume that their 4G SoCs will be readied in Q3, that Qualcomm will announce new 4G 64 bit SoC models for mid- and entry- level smartphones in China, and that the two leading application processor makers will cut prices to win business in China, which will increase demand.
However, this is the story for application processors, not for displays. Through Q3, display shipments need to be controlled, otherwise panel inventories will be too high and panel prices for all of categories will fall again, as shipments of both display panels and driver IC continue to be higher than application processors.