Is there oversupply in chips, flat screens?

By Kim Yoo-chul

Staff Reporter

Concerns have grown that the global market for memory chips and flat-screens, mostly used in digital products, might be saddled with another oversupply sometime in the latter half of this year as manufacturers are aggressively ramping up their output.

In general, analysts have no big questions over the continued "bullish moods" in those two sectors, citing steady spending by general consumers on gadgets amid the gradual economic recovery worldwide.

But some have claimed that details of inventory data released by various semiconductor and flat-screen supply chain companies were piling up "evidence" over the weakening cycles.

"There are some signals to possibly justify the sectors' oversupply in future months. You see large OEMs, end producers, contract manufacturers and distributors stock piling inventory," a high-ranking industry executive said, Monday.

Big spending plans by top-tier players are cited as another reason why. In chips, the world's top maker of memory chips Samsung Electronics said it will "substantially increase" capital spending in 2010.

In flat-screens, LG Display has also increased this year’s investment budget by 28 percent to 5.5 trillion won ($4.8 billion) from an earlier projection of 4 trillion, followed by Samsung.

"The key question is how many such manufacturers will rapidly join the ranks of top-tier manufacturers linked to aggressive investments," the well-known executive said, asking not to be identified.

Memory chips are widely used in gadgets from PCs and smartphones. Liquid crystal displays or LCDs are components used in everything from flat-screen TVs to mobile phones.

Korea's Samsung Electronics is the leader in the global memory chip market both for DRAMs and NAND flashes, while Hynix is the runner-up of Samsung in DRAMs and the world’s third-biggest maker of NAND flash memories. Samsung is also the leader in the global market for LCDs, closely followed by LG Display.

Memory chips and LCDs are well regarded as commodities. The businesses are highly susceptible to market situations. If prices go down and inventories go up influenced by economic reasons such as recession, then the profitability of such companies falls.

Major manufacturers of chips and LCDs have begun taking a profit since last year after a long term downturn.

Chips: Samsung triggering oversupply?

Glut fear in the global semiconductor industry came after Samsung had just confirmed the long-awaited capital increase plan, last week, though the company was mum to unveil specific numbers.

"It is expected that the global memory market will see an oversupply in the second half of 2010 as the growths for memory capacities will be limited," Cho Nam-seong, a senior executive of Samsung Electronics’ memory business, said in a conference call to analysts.

Referring to closer phases by rivals for the implementation of efficient, thinner technologies into manufacturing and stronger market, Cho expects the sector to maintain the oversupply until the first half of next year.

Samsung is predicted to invest as much as $17.3 billion to increase semiconductor capacity in the period leading up to 2011. Japan's Toshiba is reviewing a possibility to increase capital by a "few billion dollars" to strengthen its semiconductor business, while Hynix Semiconductor is gauging what the company says is the "right timing" for further investment.

Samsung said it will disclose "the number" before July, while a spokesman of Hynix declined to comment. A representative of Toshiba’s Korean branch wasn’t immediately available.

Currently, Samsung has fixed 5.5 trillion won of its investment plan for chips, while that of Hynix was 2.3 trillion won, according to the companies.

Cho's remarks came after the chief of Samsung’s semiconductor business told The Korea Times that it was concerned about a possible bubble in the memory sector.

In an exclusive interview last February, the top decision maker Kwon Oh-hyun said Samsung is being watchful and hesitant about increasing investment until demand uncertainties were resolved.

"It makes sense that Samsung was restraining investment. We maintain a 'neutral' position to chip stocks due to a possible oversupply in the remaining part of the year ― partly a result of the investment rally by leading chipmakers," Lee Jin-ho, an analyst at Samsung Securities, said.

"Rising inventories will burden them."

Another indication to confirm the uneasiness. WPG Holdings ― a chip and electronics distributor based in Asia ― said inventory for its first quarter had grown by 31 percent from the previous quarter, proliferating fears that inventories may be building up rapidly in the supply chain.

Despite the fears, analysts say Samsung and Hynix could be the "winners" under the current "market boom."

The Korean chip duo have posted record quarterly profits in the first quarter and are expected to report another "historical performance" in the current quarter as solid demand is driving up earnings.

Figures from DRAMeXchange, Asia’s biggest spot market for memory chips, show that the average spot price of the benchmark DRAM chip as of the end of March was up 14 percent since the beginning of this year.

LCDs: LG Display weighing?

The situation is not much different in the LCD sector.

The overall outlook for the flat-panel industry throughout this year seems stable from brisk flat-screen TV sales in China and due to major sports events scheduled, worldwide.

But skeptical views about the cycle have been emerging. But this time, the main player is not Samsung. LG Display, which has beaten Samsung for the first quarter in terms of profit, is significantly revising its investment budgets.

The company raised its 2010 capital expenditure target to above 5.5 trillion won. In 2009, the company spent 3.5 trillion won.

Along with LG, Samsung plans to inject more on LCDs after it just fixed its 500 billion won investment plan. Citing a weakening yen and rushes by leading Japanese and Taiwanese LCD makers for additional capacities, analysts are opening up such possibilities.

DisplaySearch, a market research firm, expects the industry might suffer from oversupply sometime in the third quarter and panel prices may fall, putting a toll on sector leaders.

Daiwa Securities of Japan has also been in line with the house by saying that increased spending by the leaders will raise worries over an oversupply in the long-term.

As manufacturers rush to add capacity, DisplaySearch expects LCD manufacturing equipment investments to nearly double this year from the recession-struck low of $7 billion last year.

"The critical question is how many panel manufacturers will get confirmation of their construction plans by Beijing," another high-ranking industry executive said.

The executive said the Chinese government has an edge to decide on the industry's oversupply.

It has been known that two overseas panel makers will get a green-light from Beijing to build their respective new lines. Among the candidates are Samsung and LG.

Despite such variables, the industry fundamentals are expected to remain healthy thanks to the rising popularity of LCD panels with light-emitting diode (LED) backlight and stable demand for monitor panels embedded with LED chips, buffering panel prices from any big drops.

Also, Apple's iPad and upcoming 4G iPhones will help sales. LG Display supplies its IPS tech-made LCD panels to Apple, while Samsung has recently struck a $240 million deal with the U.S. company to provide the IPS displays as the newspaper earlier reported.

"The Chinese TV market appears to be growing more firmly than we had expected. Plus, LG's major customers in other markets such as emerging markets and the U.S. are also doing very well," LG Display CEO Kwon Young-soo said.

"Overall demand looks stronger than we had thought. We expect the global LCD market to remain tight throughout this year," he said, referring to higher appetites by consumers for 3D TVs amid the approaching World Cup.