Usually it's semiconductors that cause the most concern when supply is disrupted. These key components have the power to make or break production targets for most OEMs. But now displays seem to be taking the lead as the component most likely to slow production.
Apple Inc., according to Reuters, is poised to invest $1 billion in an LCD panel facility owned by Sharp Corp. This news comes on the heels of a report in Asian trade journal DigiTimes that low yields of high-resolution displays has prompted Apple to cancel production of the Apple iPad 3 scheduled for the second half of the year. If these reports are true (EBN has contacted Apple for comment), the Sharp investment will be the second major move Apple has made this year to secure its supply of LCDs. In February, Apple invested $3.9 billion in three panel makers (believed to be LG, Sharp, and Toshiba) to secure inventory of yet-unbuilt LCDs. (See: Apple Defies Risk-Management Convention.)
What makes this all the more interesting is that DigiTimes reports panel makers are pulling back on their production, and LG Display has delayed breaking ground on a new manufacturing site. Overall, reports IHS iSuppli, inventory for small to midsized displays has been building, and demand has dropped. Panel makers are scaling production back, waiting for inventory to decrease and prices to rise before investing additional capital in production.
This whole dynamic has some interesting implications for the LCD market. For example, maybe LG's money would be better spent investing in a next-generation LCD facility (its groundbreaking was for a large-panel facility). Right now, demand is highest for small to mid-sized panels; in other words, the type that go into tablets. Additionally, the panels Apple uses are particularly high resolution, and so far supply has been limited because of licensing and facility issues. Maybe LCDs should go the way of semiconductors — fabless.
According to IHS iSuppli, LCDs are increasingly headed toward outsourced production anyway. Since LCDs are manufactured like semiconductors, it's a logical step. Investing in next-generation panel production is expensive, so maybe investment should go toward third-party manufacturing facilities rather than to suppliers. Suppliers seem to be moving in the same outsourcing direction: Toshiba recently sold an LCD production facility to Compal, and similar moves have been made by other panel makers. Is it more likely that LCDs will move toward the semiconductor model, or toward EMS? I'm not sure, but I'm leaning toward the fabless LCD.
I've been watching the LCD market more closely since our colleague Tam Harbert suggested that panels are overtaking other components as the most important part of many products. (See: The Big Picture: Is the LCD Becoming the New Motherboard?) I'm convinced Harbert and her sources are right — LCDs are a very strategic component. Although Apple's investments are currently going to LCD panel makers, I don't think it will be long before we see LCDs go fabless and OEMs start relying on third parties.