Hon Hai plans on becoming LCD powerhouse

Merger helps world's largest EMS company become a major builder of LCD TVs.

By Tam Harbert, Contributing editor -- EDN, July 6, 2010

The soaring shipments of flat-panel TVs have LCD panel suppliers, EMS (electronics manufacturing services) companies, and OEMs moving to tighten electronics supply chains in order to increase efficiency and lower costs. And the world's largest EMS company, Hon Hai Precision Industry Co Ltd, is leading the way.

Q1 shipments of LCD panels, 10-inch and above	LCD supplier market share
LG Display	25.5%
Samsung	22.1%
ChiMei Innolux	17.8%
AU Optoelectronics	17.3%
Chunghwa Picture Tubes	4%
Hannstar	2.8%
Others	2.2%
Source: iSuppli Corp

With global shipments reaching 180 million this year and on track to hit 228 million by 2013, the LCD TV has become a commodity, noted David Hsieh, vice president of the Greater China market for DisplaySearch. "And when it comes to commodities, the most important things are supply chain efficiency and low costs."

The Taiwan-based Hon Hai, with its Innolux Display Corp, is the poster boy for this trend. In a $5 billion-plus, three-in-one merger of Innolux, Chi Mei Optoelectronics, and TPO Displays Corp that was completed in March, Hon Hai is creating a vertically integrated supply chain that could make it a big player in the LCD TV market.

Innolux was founded in 2003 by Terry Gou, the secretive founder and chairman of Hon Hai, the world's largest contract manufacturer. Although the exact details of the corporate relationship between Hon Hai and Innolux are murky - which is typical of Gou and Hon Hai - "Gou is the largest single shareholder in Innolux and he, Hon Hai and other related interests together own about 24% of the display maker," according to Dow Jones. Hsieh said Innolux is a subsidiary of Hon Hai, which also operates under the trade name of Foxconn Technology Group.

Whatever the official relationship, it's clear that Innolux is Hon Hai's baby. Innolux was able to establish market share in LCDs right out of the gate because it had a ready-made customer in Hon Hai, said Sweta Dash, senior director of LCD research at iSuppli.

Innolux had Gen 4, 5, and 6 fabs, which enabled it to supply Hon Hai with LCD panels for small devices like mobile phones and netbooks, as well as LCDs for notebooks and desktop PCs. But it did not have the fab capacity to make the larger LCD panels required for TVs, said Dash. "You can't really make 14-inch and above in Gen 6 - it's just not efficient," he said. "To do 14-inch and above you have to go to Gen 7.5 or Gen 8.5."

Chi Mei had that capacity. Specifically, it had Gen 7.5 and 8.5 fabs in addition to six fabs ranging from Gen 3.5 to Gen 6, said Dash.

Chi Mei had excellent LCD technology, according to Ken Werner, a senior analyst at Insight Media, but the company was under financial stress, which made the merger with Innolux especially attractive.

The new company, called ChiMei Innolux (CMI), is the third largest LCD maker in the world, after LG Display and Samsung. "Innolux just ate up CMO and TPO," said Hsieh. "In the long run, [Hon Hai] will become a very highly integrated monster."

Unit shipments of LCD TVs worldwide	Forecast in millions
2008	106
2009	146
2010	181
2011	200
2012	214
2013	228
Source: DisplaySearch

Meanwhile, Sony has been offloading its TV assembly plants to Hon Hai, notes Hsieh. Last fall, Sony sold Hon Hai its Mexico factory and in March it sold a 90-percent stake of its Slovakia LCD TV subsidiary to Hon Hai, which included assembly operations. The deals hold benefits for both companies. They assure Sony of an LCD panel supply and relieve it of the expense of manufacturing. And they give Hon Hai a large chunk of the LCD TV market. "Sony is not only selling their factories to [Hon Hai]," said Hsieh. "They are also selling their orders."

The most important part of Hon Hai's move, however, is that it becomes a one-stop shop for TV manufacturers. Rather than sourcing LCD panels separately and then having an EMS build the set, TV manufacturers can hire one company to do it all. And CMI can offer an assured supply of good quality LCDs, probably at a lower cost than competitors. According to Hsieh, the LCD panel accounts for 70% of an LCD TV's cost and 90% of the TV's display performance. "If you have a good panel, then you have a good TV," he said.

"What we see is that [Hon Hai] and CMI are trying to build a new business model that combines the ODMs and the panels," noted Hsieh, one that allows it to go after the entire LCD TV market. "[Hon Hai] is going to be the ODM for Sony and CMI will be the ODM for everybody else," he said. "They are both making LCD TV finished goods, and they both share the capacity of CMI."

And it's important to note that CMI got more capacity for smaller screens from the acquisition. In addition to CMO's fabs, TPO had a Gen 3 fab for low temperature polysilicon used for mobile phone displays. That's a difficult technology, and capacity for it is hard to procure, said Dash. So the merger not only opens up the TV market to Hon Hai, but also tightens and strengthens its supply chain in other products.

"From mobile displays to notebooks to monitors to TVs, now Hon Hai can produce everything from the display panel to the module to the finished system," said Dash.

This puts other LCD panel makers as well as EMS companies at a disadvantage, but they aren't standing still. TPV Technology Ltd, an EMS company that specializes in building monitors, is forming strategic alliances with LCD panel makers to beef up its capacities, said Hsieh. AU Optoelectronics, CMI's chief rival in displays, has established an ODM division and is telling customers it can also do finished goods, said Hsieh. It has also purchased the polysilicon fab capacity of Toshiba Matsushita Display, according to Dash. The company is also aggressively expanding it portfolio of display technologies, according to Werner, including OLED, electroferretic, and field emission.