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AU Optronics deal takes it out of the local arena and into competition with heavyweights like Samsung

Taiwan's competitive liquid-crystal display industry has started the first round of a widely anticipated consolidation process after three years of rumour and speculation.

AU Optronics, the world's third-biggest maker of TFT liquid crystal displays, announced earlier this month that it would buy local rival Quanta Display for about US$2 billion in stock.

The announcement shocked industry watchers and rivals, amid speculation that Quanta Display was in talks with the island's No 3 flat-panel supplier Chunghwa Picture Tubes.

But Lee Kun-yao, chairman of AU Optronics and mobile-phone company BenQ, is a shrewd businessman who recognises the need to grow big quickly to compete with global giants.

And now he has the scale to match the dominant South Koreans such as Samsung, which has gained market share at the expense of the Taiwanese who have been happy to scrap it out among themselves rather than take on the world.

The deal has propelled Mr Lee's outfit into the world's top three and would go some way to help the combined company secure greater efficiency to profit from surging flat-panel television demand around the globe after price falls of between 15 and 20 per cent.

AU Optronics would boast 18 per cent of industry capacity, compared with 19 per cent each for Samsung Electronics and LG Philips LCD, a venture between LG Electronics of South Korea and Royal Philips Electronics of the Netherlands, based on figures from DisplaySearch, a US research company.

After the transaction, Quanta will hold about 6 per cent of AU Optronics, making it the second-biggest shareholder after BenQ, which holds 9 per cent.

'The consolidation of its kind and scale in Taiwan will take better advantage of funds and talents and bring a long-term positive contribution to the whole industry,' Mr Lee said.

Most analysts said the deal was likely to create synergies because AU Optronics and Quanta Display have little overlap among their customers.

Furthermore, through the merger, AU Optronics is also well positioned to become a supplier for the flat-screen TV company Quanta and Sanyo plan to set up.

Last year, Taiwan overtook South Korea as the world's largest manufacturer of LCD panel. However, the island's industry has long been vulnerable to sudden price drops, unlike  its Korean or Japanese rivals,  because the sector is highly fragmented with six players, while the focus on contract manufacturing has resulted in a lack of bargaining power.

The AU Optronics deal will change that. The company will have better control over the supply of crucial components and component pricing, giving it a significant competitive edge over its biggest rival in Taiwan, Chi Mei Optoelectronics, itself under pressure to find a takeover target.

Hannstar Display and Chunghwa Picture Tubes are two possible second-tier players that could be targets.

'[Mr Lee's] plan is to secure a significant component supply chain in preparation for a component shortage in an industry upcycle,' said Daniel Wang of Primasia Securities in Taipei.

'This will give him greater control over costs compared with rivals in Taiwan.'

AU Optronics will also have the world's largest market share on notebook panels,  25.5 per cent; the largest on monitor panels, 18.7 per cent; and the fourth-largest on TV panels, 15.1 per cent.

CLSA analyst Timothy Chen noted that AU Optronics could increase its share of the TV market when its sixth-generation fab, the world's largest, comes online at the end of next year.

The company is also pressing ahead with plans to build a 7.5 generation-fab in the new Taichung Science Park, which will boost capacity next year.

But a key aspect for the company is that as well as strengthening its position in the LCD industry, the merger will allow AU Optronics to dedicate more resources to boosting production technologies and developing next generation display technologies.

Research and development is an important part of the jigsaw. Like most Taiwanese players, AU Optronics relies on advanced technologies from Japan, which has forced the company to collide over patent infringement issues in the past.

And the timing of the merger could be good for AU Optronics. Manufacturers are betting on further gains in demand because of falling prices and the soccer World Cup this summer. Panel makers are poised to raise spending on factories 13 per cent to US$11.6 billion this year, according to DisplaySearch.

'Pricing will drive demand for TFT-LCDs,' Mr Chen said.

Prices have already dropped this month, with 17-inch monitors falling 6 per cent to US$125, 15-inch notebook panel prices declining 8.1 per cent to US$113, and 32-inch TV panel prices sinking 5.8 per cent to an average of US$485.

And there is no sign of a slowdown in the pace of the price decline in PC-related panels.

But AU Optronics, like other panel makers, may find this dents profits if prices continue to fall in the second half of the year.

KGI Securities Andrew Lin said: 'Sharper-than-expected decreases in prices are likely to result in shortfalls relative to targets in panel makers' first-quarter earnings in 2006.'



Taiwanese LCD giant poised to take on the world after buyout