Last week, we reported on the warning that Apple issued regarding the temporary impact to the iPhone 14 Pro and iPhone Pro Max as a result of the COVID-19 outbreak at the Foxconn facility in located in Zhengzhou, China.
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Apple issued a notice last week on their website noting that COVID-19 restrictions have temporarily impacted the primary iPhone 14 Pro and iPhone 14 Pro Max assembly facility located in Zhengzhou, China. The facility is operating at significantly reduced capacity. The Foxconn facility in Zhengzhou China has been dealing with a COVID-19 outbreak since mid-October that has caused panic among many of its workers.
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In October 2022, headline inflation numbers in the US continued their slow but steady decrease from their highest point in more than 40 years. Meanwhile, the steep declines in LCD TV panel prices that started in the second half of 2021 are continuing to flow through to retail and resumed their downward trend after a one-month pause in September.
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After fifteen months of decreases, LCD TV panel prices finally hit bottom in September 2022 and prices for several sizes increased in October. We now expect to see a modest increase in prices through the end of the year with prices plateauing in the first quarter above their all-time lows. The last phase of the downward spiral in panel prices was characterized by a massive inventory drawdown in the display supply chain and a corresponding massive reduction in fab utilization by panel makers. With some panel makers delaying to resume production until prices increase, the industry has seen prices edge up toward cash cost levels.
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Falling prices and weak demand hit hard on panel maker profitability in the third quarter, as reported by LG Display, AUO and Innolux in their earnings releases last week. All three companies reported larger net losses for the quarter, the worst quarter in years.
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Although the pandemic boom in semiconductors is over, and consumer electronics demand has weakened, Samsung Electronics continued to generate strong revenues and profits from multiple businesses, and its display business set a new profit record in the first quarter after ending LCD production. While competing display makers reliant on LCD suffered severe losses in the quarter (see separate story), Samsung generated profits selling OLED panels.
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The slowdown in display fab utilization that we predicted earlier this year reached new depths in the third quarter and was even more severe than we expected, according to the latest release of DSCC’s Quarterly All Display Fab Utilization Report issued this week. After more than a full year of panel prices falling to reach all-time lows, and after the entire display supply chain built excessive inventory, panel makers started to reduce utilization in Q2 and the slowdown accelerated in Q3. After a 6% sequential decline in Q2’22, total TFT input for all display makers in the third quarter was down 20% Q/Q and 24% Y/Y at 66.1M square meters, and in the current Q4’22 we expect total TFT input to be flat Q/Q and down 23% Y/Y at 66.1M square meters.
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We had expected Q4’22 foldable panel shipments of 5.4M based on supplier surveys, but we are now seeing 2.9M, a 46% reduction as shown in the chart below. Q4’22 foldable panel shipments are expected to be down 54% Q/Q and 26% Y/Y. Sell through of the Z Flip 4 and Z Fold 4 have been below expectations. The iPhone 14 Series has sucked up most of the attention and sell-through and the Z Fold 4 price of $1799 remains too high in this environment. As a result, both the Z Fold 4 and Z Flip 4 are expected to be down Y/Y vs. the Z Fold 3 and Z Flip 3 in Q4, in fact, they are expected to be down big as you can see in the chart below. However, they were up in Q2 and Q3 and should be up for 2022, but only in the mid-single digits. Also weighing on Q4’22 foldable panel shipments are a number of Chinese models ramping slower and/or later than expected.
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In the next few weeks, we will see the Q3 earnings announcements for flat panel display makers, starting with LG Display and AUO on Wednesday, October 26th. The heady profits of 2021 seem like a distant memory, and the industry looks poised for its worst quarter since the start of the pandemic. Panel prices started to decline a year ago and have not stopped their decline, and even with lower prices the demand for panels has decreased. After panel makers along with their downstream partners in the display supply chain built a tremendous amount of excess inventory, they slowed their utilization in the third quarter in a bid to reverse the industry oversupply. We expect that panel makers will report another quarter of declining margins for Q3’22 and expect several panel makers to report operating losses.
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For the first time in seven months, total revenues for the three Taiwan-based panel makers increased on a M/M basis, as reported by the companies last week, giving a hopeful sign that LCD panel makers may have reached the bottom. Combined revenues increased by 5% M/M and the Y/Y comparison while still severe is slightly improved from August, the first such improvement in the Y/Y trend for nearly two years. September revenues for the three companies of TWD 34.3B (US$1.09B) were down by 47% compared to September 2021.
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