Chinese panel makers’ Gen 8.5 and Gen 10.5 fabs have almost finished depreciating

Senior Principal Analyst Robin Wu shares a timeline of the recent depreciation of Gen.8.5 and Gen 10.8 fabs and what this could mean for panel makers in his latest blog.

The first Gen 8.5 TFT LCD fab in China, BOE’s Beijing B4 Gen 8.5 fab, started production in 2011. Since then, Chinese panel makers have invested in a total of eight Gen 8.5 fabs (including one fab bought from Samsung Display in 2020). Chinese panel makers also invested in eight Gen 8.6 and four Gen 10.5 fabs.

Normally, Chinese panel makers follow a depreciation schedule of seven years. TFT LCD fabs require a huge amount of capital investment, so depreciation costs make up an important part of panel costs in the early stages of mass production. Taking a 32-inch HD TV panel for example, depreciation costs could constitute around 20–25% of the total manufacturing cost.

Depreciation costs are closely related to fab utilization ratio. When the fab utilization ratio is high, the depreciation cost for each piece of panel produced is low. On the other hand, when the fab utilization ratio is low, the depreciation cost for each piece of panel produced is relatively high. This relationship between depreciation cost and fab utilization ratio is the important reason why Chinese panel makers always maintained higher utilization ratios at newly built fabs in the early years of their depreciation.

However, the situation recently changed. Based on Omdia’s latest observations, among the eight Gen 8.5 fabs in China owned by Chinese panel makers, five have finished or are almost finished depreciating, while one will finish depreciating within a year.

Omdia’s observations note that the four Gen 10.5 fabs are also in the latter part of their depreciation schedules. For example, BOE’s Hefei B9 Gen 10.5 fab started mass production in March 2018 and will finish depreciating in two years (2025).

When panel makers no longer need to consider depreciation costs, their operation strategies could change significantly. As seen in past quarters, panel makers can make massive cuts to their fab utilization for a stronger position in price negotiations. Thus, after the fabs finish depreciating, panel makers can adjust their fab utilization to a comfortable level that fits the market demand without losing too much money.

However, another possible scenario could occur. The end of depreciation costs means a lack of production control could lead to panel prices falling even lower compared with past levels. Considering the recent situation, if TFT LCD capacity is huge while end-market demand is weak, a lack of supply restrictions could lead to more severe price drops. Therefore, production control will remain critically important for panel makers to run their businesses successfully in the coming years.

1. Figure 1: Depreciation status of Chinese panel makers’ high-generation fabs

To read more insights and analysis covering market trends and industry forecasts prepared by Omdia’s Display practice, click here.