Technology Gap with Rivals Narrowing Rapidly
Samsung Display's position is weakening due to Chinese companies' LCD price war and increased investment in small and medium-sized OLEDs. Although Samsung Display announced that it will invest 13.1 trillion won to develop quantum dot (QD) displays by 2025 and widen its gap with followers, it is facing a tough situation.
Samsung Display invested 1.62 trillion won in production facilities in the first half of 2020, double the 802.9 billion won it invested in the same period of 2019. Yet the amount fell short of expectations.
The company’s facility investment has been on a sharp decline over the past three years. It invested 13,545.6 billion won in 2017, but the figure dropped significantly to 2,936.1 billion won in 2018 and 2,187.0 billion won in 2019. Samsung Display significantly increased its investments for three years from 2015 to expand its presence in the small and medium-sized OLED market. It invested 4,729.4 billion won in 2015, 9,831.3 billion won in 2016 and 13,545.6 billion won in 2017. Assuming that the investment trend in the first half of 2020 will continue in the second half, the company’s full-year facility investment is expected to stay around three trillion won, similar to the investment level in 2018.
The decline in facility investment is attributable to China's LCD price war and slower-than-expected growth in the small and medium-sized OLED market. After posting 1,673.1 billion won in net profit in 2015, Samsung Display also recorded a good performance in 2016 and 2017 by earning 1,498.6 billion won and 3,352.8 billion won in net profit, respectively. However, the company's performance worsened in 2018 (1,263.0 billion won in net profit) and 2019 (407.7 billion won in net profit). The company was expected to recoup its facility investment in 2018 and 2019. But its performance in these two years fell far short of expectations, significantly reducing its capacity to invest. Chinese companies backed by the central government's strong support played a chicken game on LCD, driving Samsung Display’s LCD business into negative territory. Ultimately, Samsung Display has decided to stop producing LCD panels beginning in 2021.
In the case of small and medium OLED panels, the low adoption of OLED panels in the smartphone sector is also fueling concerns. Apple paid US$950 million in compensation to Samsung in the second quarter of 2020 due to sluggish sales of OLED display products such as the iPhone 11 Pro and the iPhone 11 Pro Max in 2019. Apple makes exclusive contracts with its partner companies to secure stable parts supply, and pays compensation money if the amount of its orders does not meet a certain level.
Apple also paid about 900 billion won to Samsung in 2019 in the name of compensation due to sluggish sales of the iPhone X loaded with OLED panels. On the surface, Samsung seems to have earned profits for nothing, but its loss is much greater considering huge fixed costs such as the amount of facility investment. As a result, Samsung Display posted only 57.7 billion won in net profit in the first half of 2020. Although Apple is planning to launch the iPhone 12 series with OLED panels in 2020, it has postponed the launch of the new model to October from September due to the COVID-19 spread.
Samsung Display is said to be ahead of its rivals in technology terms because it has Y-Octa technology, a touch-integrated OLED technology that allows it to produce thinner displays that companies that use touch screen panels (TSPs). However, the technology gap is narrowing rapidly. LG Display said in a second-quarter earnings call that it has developed touch on encapsulation (TOE) technology and is already supplying TOE products to some customers. LG Display says that there is no wide gap between TSP and TOE technology. LG Display applies TOE technology to OLED panels for smartphones. Above all, China's BOE and Visionox are also developing their own touch-integrated OLED technologies, threatening Samsung Display’s technological leadership in this sector.
The biggest problem facing Samsung Display is that it is not easy to make profits due to Chinese companies’ catch-up in the small and medium OLED market. According to market research firm Omdia, Samsung Display's share of the OLED market for smartphones stood at 85.3 percent in the fourth quarter of 2019. It still maintains an overwhelming position. The point is Samsung Display does no enjoy such a lead in other important small and medium OLED markets such as the automotive OLED market. Market research firm DSCC predicted that the share of Chinese companies in the overall mobile OLED market will rise from 31 percent in 2020 to 53 percent in 2025, while that of Korean companies will decline from 67 percent to 46 percent during the same period. DSCC forecast that BOE will have a similar share to that of Samsung Display in 2025 in the flexible OLED market, where Samsung Display had a 87 percent share in 2016. In fact, BOE is focusing on overtaking Korean companies by investing 46.5 billion yuan in Chongqing, China to build a sixth-generation OLED plant among others.
Some experts forecast that Samsung Electronics will not adopt QD displays. This deepens Samsung Display’s woes. A QD display is an OLED-based product that uses blue light source and color filter based on quantum dot to increase color reproduction. As LG Display is currently the only company in the world that mass-produces OLED panels for TVs, Samsung Display will be able to divide the OLED panel market with LG Display when it mass-produces QD display panels.
Samsung Electronics, on the other hand, has yet to give a definite answer on whether it will adopt a QD display or not. Although Samsung Electronics released OLED TVs that were produced through the red, green, and blue (RGB) method in 2013, it withdrew from the market within a year of its release due to failure to mass-produce them and their low price competitiveness. Since then, top executives of Samsung Electronics, including Kim Hyun-suk, head of the CE Division, and Han Jong-hee, head of the VD Division, have denied the possibility of launching OLED TVs. This explains why Samsung Display named OLED panels with QD light layers as somewhat ambiguous QD Display.
Samsung Electronics is discussing parts supply with foreign companies such as Sana, Epistar, and Lextar to produce micro LED TVs. Even if Samsung Display mass-produces QD displays in 2021 as planned, it may not be able to supply its products to Samsung Electronics, the world's No. 1 TV maker and its parent company.