During his four decades at the helm of one of Taiwan's biggest industrial conglomerates, tycoon Shi Wen-long shunned the equity markets. While others took their companies public to fuel expansion, Shi stubbornly kept his Chi Mei Group private. Then, in 1999, his electronics subsidiary started making thin panels--the devices that power those crisply lit, ultraslim display screens used on everything from cell phones to personal-computer monitors to TVs. Problem is, the hypercomplex components cost a fortune to build. So this year, Shi jumped into the equity game to raise the needed capital. On Aug. 24, Chi Mei Optoelectronics premiered on the Taiwan bourse.
Shi may be wishing he had stayed on the sidelines. Worried about sluggish economic growth in key markets and increased competition among panel makers, investors shunned Chi Mei like a three-year-old cathode-ray tube. Within days of the issue, its stock fell by nearly 40%.
Ouch. Other Taiwanese producers of display panels, called thin-film-transistor liquid-crystal displays (TFT-LCDs) have been feeling the pain, too. On Aug. 27, Quanta Display Inc., an LCD joint venture between Taiwanese notebook-maker Quanta Computer and Japan's Sharp Corp., started trading in Taipei, only to see its shares fall by 24% in their first week. The stock of rival Chunghwa Picture Tubes Ltd. is off 68% since March, and shares of local market leader AU Optronics Co. are down by half over the same period.
Talk about bad timing. With share prices dropping, Taiwan's panel makers may have a tough time raising more capital just as the industry starts a crucial shift to new manufacturing technology. The world's two largest panel makers, Samsung Electronics and LG Philips, are starting production at so-called fifth-generation plants. These new factories, costing $1 billion-plus, can make glass sheets that panels are cut from nearly 80% larger than those the Taiwanese producers manufacture in their older factories.
The Taiwanese don't want to be left behind. So all of the island's five major producers are planning to build fifth-generation factories. "Everybody in the industry has to jump into [fifth generation]," says C.Y. Lin, president of Chunghwa Picture Tubes. "If you don't, you can't compete."
Paying for those plants could now be a problem. Local listings were supposed to provide a first dollop of cash, with the bulk of the financing coming from later offerings in New York or London. "The capital market in Taiwan is rather shallow," says Eddy Chen, finance manager at Chi Mei Optoelectronics. To fund its fifth-generation plant, AU Optronics listed on the New York Stock Exchange in May, raising almost $600 million. Other Taiwanese players, including Chi Mei and Quanta, want to do the same. But their dismal performance in the local market doesn't bode well for their prospects overseas.
That plays well to Samsung's and LG's hand. Indeed, Eric Oh, a researcher at International Data Corp. in Seoul, says the two companies have deliberately driven down prices to sour the market and make it tougher for their Taiwanese rivals to raise cash for new factories. "Samsung and LG don't want Taiwanese vendors to penetrate the market," he says. Prices are indeed falling: The industry benchmark, 15-inch LCD panels, peaked at $260 in June and could hit $200 by yearend. Samsung and LG deny the price drop is their doing. They blame excess Taiwanese inventories, sluggish growth in the U.S., and a global slowdown in PC demand for the slide. And LG Philips is playing tough: On Sept. 3, it said it filed a lawsuit against Chunghwa, claiming patent infringement. Chunghwa couldn't be reached for comment.
The fight should mean bargains for consumers. Prices for flat-screen monitors are expected to fall by more than 10% by yearend. And within two years, fifth-generation plants will be making enough panels to drive prices for 20-inch flat-panel TV sets below $1,000, predicts AU Optronics Chairman K.Y. Lee. "The TV market will be booming," he says. Eventually, that will translate into good times for LCD producers--but only for those that can raise enough cash to stay in the game.
By Bruce Einhorn in Taipei, with Moon Ihlwan in Seoul