Taiwan Finally Lets Its LCD Makers Set Up Fabs in China

This article was updated on 22 March 2010.

17 March—AU Optronics Corp. (AUO), Taiwan’s largest manufacturer of thin-film transistor liquid crystal display panels (TFT-LCD), submitted an application on 15 March to the government confirming its plan to build a 7.5-generation plant in eastern China. It thus became the first Taiwanese LCD maker to take advantage of its own country’s lifting of the ban on building TFT-LCD fabs in China.

The company plans to spend US $1.2 billion initially; the total investment will be about $3 billion. It will begin by processing 60 000 glass substrates a month, with capacity eventually topping out above 90 000 subtrates per month.

A 7.5-gen fab turns out a glass substrate 1950 x 2250 millimeters—big enough for manufacturers to cut it up into eight 42-inch panels, six 46-inch panels, or three 55-inch panels. These specifications fit the Chinese market, which consistently favors screens measuring 42 inches and up.

In terms of revenue, AUO is the world’s third-largest flat-panel maker after Samsung Electronics Co. and LG Display Co., both of Korea. Taiwan’s decision to ease restrictions on its own companies’ investments in China was a defensive response to the aggressiveness of competitors in China in 2009.

The Chinese government in late 2008 expanded its practice of offering subsidies to rural households that purchase electrical appliances, not only to stimulate rural consumption but also to narrow the digital divide between urban and rural regions. To exploit demand for flat-screen televisions above 40 inches in size, Samsung announced in October 2009 that it will establish a joint venture to build a 7.5-gen LCD panel plant in Jiangsu province, in eastern China—an investment of about $2.25 billion. The decision actually preceded the Korean government’s decision in December 2009 that allowed Samsung and LG Display to establish TFT-LCD fabs in China.

In August 2009, Japan’s Sharp Corp., which has been doing business in China for years, agreed with both Nanjing Municipal Government of Jiangsu province and Nanjing China Electronics Panda Group Corp. to sell used 6th-generation equipment and also to help establish an 8th-generation LCD panel production line.

The original ban is a leftover from the days of political hostility between China and Taiwan following the Chinese Civil War. The freeze began to thaw in 1987. Still, Taiwan’s restrictions on China-bound investments continued in various forms under the ”No haste, be patient” policy, to prevent overdependence on China. Even in 2002, when Taiwan’s entry into the World Trade Organization triggered calls for a wider opening of bilateral investment, the country prohibited certain industries from making investments in China in order to prevent China from getting its hands on Taiwan’s intellectual property.

Then, on 20 February of this year, Taiwan lifted the ban on building TFT-LCD and semiconductor fabs in China, enabling Taiwanese panel makers to invest in gen-6 and higher fabs in China—as long as no more than three fabs are involved. Most important, the technology to be adopted in China must be at least one generation behind the most up-to-date one in Taiwan. In addition, any Taiwanese firm filing to invest in China must also produce a plan for new investment in Taiwan. Furthermore, to maintain corporate independence, Taiwanese firms are not allowed to merge with or buy shares in Chinese companies. However, entering into joint ventures with Chinese companies or venture capital firms is acceptable.

”Related regulations ensure that Taiwan still keeps the newest core technologies and, at the same time, more investments will be made locally,” Jing-Yang Jou, deputy minister of the National Science Council, said at a news conference on 23 February.

According to Freda Lee, a spokeswoman for AUO, the company will soon submit its application to the Ministry of Economic Affairs for evaluation in March. Lee says that a gen-7.5 fab can cut some larger-size TV panels from glass substrates in a cost-efficient manner.

LCD industry observers noted that AUO may team up with China’s Infovision Optoelectronics (IVO), in eastern Jiangsu province, a company that has received approval from the Chinese government to establish a 7.5-generation LCD fab. AUO declines to confirm the speculation. ”The location of our new 7.5-generation plant will be not too far from our module plant in Suzhou of Jiangsu province in order to keep transportation cost affordable,” Lee tells IEEE Spectrum.

Lee says that AUO’s business in Taiwan continues to grow as planned, adding that in the second half of 2010 it will begin to install equipment for its second 8.5-generation plant, which is based at the Central Taiwan Science Park. ”We do plan to build a 10th-generation plant in Taiwan, but when to begin the construction remains uncertain,” Lee says.

Nancy Liu, an analyst with Taiwan’s quasi-official Industrial Technology Research Institute, says that Japanese and Korean panel makers have tempered the enthusiasm they had for investment in China in 2009. ”Since early this year, Sharp has experienced difficulties regarding the transportation cost of old 6th-generation equipment, further pending the deal,” Liu notes.

She says China no longer needs all that many foreign-built LCD fabs now that several local makers, such as BOE Technology Group, have received approval to build 7.5-generation and 8.5-generation fabs, together with government financial assistance. ”China aims to form a cluster of LCD [manufacturers] rather than just obtaining some new fabs independently run by foreign investors,” Liu says, adding that Samsung’s insistence on maintaining full independence has caused China’s government to back off a bit.

Samsung will have to form a joint venture in order to set up its factory, but it’s still unclear how it and its Chinese partner would run the venture. Analysts argue that Samsung insists on being the dominant shareholder, further disturbing China.

Meanwhile, though, relations between Taiwan and China continue to get warmer. Since incumbent Taiwanese President Ma Ying-jeou took office on 20 May 2008, Taiwan and China have signed 12 agreements covering tourism, fishery labor cooperation, agricultural quarantine inspection, industrial product standards certification, Chinese tourism in Taiwan, charter flights, direct shipping, direct air links, postal services, food safety, financial services, and cooperation in fighting crime. More such agreements are clearly in the cards.

Therefore, it’s hardly surprising that China has expressed its willingness to assist Taiwanese companies that make LCD panels. Signs of cooperation are apparent. For instance Chi Mei Optoelectronics, Taiwan’s No. 2 LCD maker, and Innolux Display Corp. are now officially merging into a new company, named Chimei Innolux Corp. Liu says the new company might also file an application to set up LCD plants in China.

As Taiwanese panel fabs are built in China, suppliers of related components will certainly follow. These components include glass substrates, backlight modules, polarizers, and integrated circuits. According to Liu, the Taiwanese government’s announcement has worried some glass substrate makers currently operating in Taiwan. When Taiwanese LCD makers launch mass production in China, they will continue to buy components from their own suppliers currently operating in Taiwan, such as Japan-based Asahi Glass Co. and US-based Corning Incorporated.  According to Liu, these suppliers might also have to set up braches in China to lower the transportation cost.

As the market for LCD panels takes off, Taiwanese panel makers fabricating in China might do well. But once Chinese competitors obtain key technologies and form a cluster of LCD industrial outfits, China will certainly promote its own firms at the expense of foreign firms, Liu says.

Some analysts, however, note that allowing the establishment of 8.5-generation fabs in China can make Taiwanese firms more competitive. According to Taipei-based Topology Research Institute (TRI), Taiwan’s 7.5-generation fabs might encounter severe challenges when China’s 8.5-generation fabs go into mass production in late 2011. Running 8.5-generation fabs enables Taiwanese makers to effectively occupy the growing market in China, demanding megasize 47-inch and 55-inch television panels, TRI said in a statement dated 2 March.