'Based on July and August shipment results, [the third quarter] was much stronger than anticipated for the entire TFT LCD supply chain,' market analyst Display Search wrote in a report earlier this month.

It estimated that LCD TV shipments would exceed 20 million units this year.

The news has alleviated concerns that the first half of 2006 would be disastrous because an expected increase in supply of large-sized panels by manufacturers would flood the market.

'Concerns about the first half of 2006 are logical but overdone,' said Frank Su, an equities analyst at BNP Paribas Securities in Taipei. Prices of 32-inch LCD TVs have fallen as low as US$1,500, making them cheaper than plasma displays, while the US$2,000 price tag of 42-inch screens is also expected to spark interest.

But the Taiwan TFT-LCD industry, which closely trails South Korea, risks failing to realise some of the potential because of a shortage of components such as cold cathode fluorescent tubes (CCFLs), polarising filters and cellulose triacetate (TAC) film.

'Historically, Korean companies have had an advantage over Taiwan, and it's an ongoing event,' said Frank Lee, an electronics analyst for Deutsche Bank in Taipei.

The world's two largest TFT-LCD manufacturers, Samsung and LG Phillips, have more secure supply chains than Taiwan's AU Optronics and Chi Mei Optoelectronics.

Japanese firms in particular dominate the materials or components industry but have not increased production to match the growing demand.

One reason is concern that current technologies will be superseded in the near future, rendering their products obsolete.

Until the supply capacity is increased, however, output will continue to suffer.

'The Taiwanese are becoming interested in the materials industry, which is dominated by demand, but the problem is that, historically, Taiwan and Korea haven't known how to do material-related work. The catalyst is ensuring the control and supply of materials and components,' Mr Lee said.

The situation has prompted the Taiwan government to call on the industry to integrate its supply chain to reduce its reliance on overseas suppliers.

'We are still facing several problems, including an inability to control key technologies and materials,' Taiwanese vice-minister of economics Shih Yen-shiang told an industry conference in Taipei last month.

The Taiwan government is promoting its tax and loan incentives to encourage local and foreign companies to set up production in Taiwan.

'The challenge is to build a complete sector,' said Chen Chao-yih, director general of the Taiwan economic ministry's Industrial Development Bureau.

Chi Mei Optoelectronics, the world's fourth-largest TFT-LCD maker, has already attracted a cluster of component suppliers to set up factories near its home base in the Tainan Science Park in southern Taiwan.

The suppliers will deliver essential components for flat-screen television sets.

Among the goals for the government is to build an equipment industry to supply LCD manufacturers.

But even with a more complete supply chain, the future remains bleak for second-tier manufacturers such as Hannstar and Chunghwa Picture Tube, which are too small to compete in the market and face increasing competition from Chinese firms that are supported by the mainland government.

The Chinese government owns about one quarter of both Beijing Orient Electronics and SVA-NEC and these companies are likely to pose a significant challenge to Taiwan's smaller players.

'Once Chinese TFT-LCD makers' production efficiency, cost structure and scale catch up in 2006, the outlook for tier-two Taiwan panel makers' will be gloomy,' Mr Su said.