At the beginning of this year, terminal demand began to weaken, and the inventory pressure of driver ICs increased accordingly. In order to effectively control inventory, manufacturers' stocking trend has become conservative. Peripheral ICs such as driver ICs, Tcons, and PMICs for panels, which are in short supply in 2021, have also begun to reverse their supply and demand this year.
In the case of supply and demand imbalance, sufficient inventory or even excess, the price of driver ICs is expected to drop by 8-10% in the third quarter, and the price may slowly decline.
The Driver IC Market Ushered In A Period Of Adjustment
Under the pressure of rising upstream prices, some companies were forced to adjust their wafer investment plans. Long-term agreements with foundries may also need to be renegotiated. Under the circumstance that the input of panel driver IC wafers has been greatly reduced and other product structure adjustments cannot make up for the capacity gap, the overall utilization rate of the 2H22 fab is likely to be interrupted.
Although the profit of panel driver IC is not as good as that of other products, if fabs want to improve their production capacity, the most effective way is to rely on such products.
Looking ahead, after the price of driver ICs suffered a sharp drop in the third quarter and the wafer production plan was reduced, it is still necessary to observe whether the foundry prices remain the same as in the second quarter, or moderately reduce prices to maintain high utilization.
The Price Cut Signal Is Very Obvious
Foundry prices have continued to rise for several quarters and remain high amid a shortage of chips for the past two years. Now, however, the situation is quite the opposite, as driver IC manufacturers face lower prices from downstream customers.
In order to consolidate the power of the supply side, Chinese panel driver IC manufacturers are more inclined to meet the requirements of panel manufacturers, and offer a price discount of 10-15%. However, considering that demand is difficult to rebound in the short term, the possibility of continued decline in panel driver IC prices cannot be ruled out, and prices are likely to return to the initial value in 2019 faster than expected.
Although the demand in the end market is sluggish and the inventory of panel manufacturers and panel driver ICs has increased, for foundries with diversified product portfolios, even if the demand for panel driver ICs has been reduced in the short term, the foundries will still adjust their product structure and various aspects. Utilize idle capacity to efficiently allocate and maintain capacity utilization.
Inventory Prices Bring Double Pressure
Under a series of chain reactions, panel manufacturers' demand for panel driver ICs may decline more significantly in the third quarter of this year. This year, terminal brands have continued to adjust their inventories. Not only has panel demand weakened, but panel quotations have also continued to decline.
According to relevant reports, the utilization rate (calculated in terms of raw material input) in the third quarter of 2022 is expected to drop to 70%, a sharp drop of nearly 7.3 percentage points from the second quarter. The report shows that border controls and blockades have disrupted logistics and labor in the past two years due to the outbreak. In order to avoid the deadlock of production and shipment, brand manufacturers have a backlog of distribution channels and inventories.
However, with the improvement of logistics and transportation conditions, the materials prepared in the early stage have been delivered to relevant warehouses or ports one after another. Still, as pandemic-induced demand fades, terminal sales have been hampered by rising global inflation and the Russia-Ukraine conflict. Therefore, the panel inventory problem continued to deteriorate, and all aspects of the overall supply chain entered a state of alert.
The General Trend Of Production Capacity Adjustment
Since this is not the case for a single application, whether it is Gen5 (fifth generation), which is mainly used to produce laptops, or large LCD monitors and TVs, the utilization rate will be reduced. Large-scale fabs across all production lines have been spared.
The utilization rate of Gen5 to Gen7.5 is expected to decrease by 7.7 percentage points to 63.7% in 3Q22, and the utilization rate of Gen8 to Gen10.5 will decrease by 7 percentage points to 75%. The Gen10.5 utilization rate of over 90% used to produce TVs is expected to decline by 17.8 pps QoQ, which also highlights the continued pessimistic demand for TV panels in 3Q22.
Observer media pointed out that if panel makers do not want to face high inventory risks at the beginning of 2023, they should continue to take production reduction measures in the fourth quarter of 2022 to eliminate existing panel inventories. Therefore, it cannot be ruled out that the operating rate of the fifth-generation LCD (inclusive) and above large foundries will remain the same as in the third quarter.
In the past, when the market was oversupplied, production cuts were the main response for manufacturers. However, with future capacity still growing, the speed at which brands consume inventory, as well as global political and economic trends will be key factors affecting the future display market. If market conditions continue to deteriorate, it cannot be ruled out that the industry will face another reshuffle.
