Apple’s Newest OLED Supplier
Author’s note: If you want to watch the video first, you can below.
As I had hinted, Apple ended up tapping BOE Technology for their iPhone 13 OLED screens.
BOE will initially split orders for the 6.1-inch iPhone 13 displays with Samsung Display, with the Chinese company's share accounting for up to 20% of the total, sources said. Under the most optimistic scenario, BOE aims to grab 40% of orders for this model from the South Korean display giant, the people added.
Taiwanese and Japanese display makers have lost market share to the Chinese. Right now, the OLED space is between the South Korean players - LG and Samsung - and BOE.
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Beijing Orient Electronics or BOE Technology Group as it is now called is a publicly traded display technologies company based out of Beijing.
With $19 billion in revenue, they are the world’s second largest OLED vendor and the biggest seller of flat panel displays. They are China's most advanced display technologies company - the only one equipped to produce LCDs in the 6th generation category or above.
They are a serious challenger to Samsung and LG Display and might supply the next iPhone. In this video I want to take a look at BOE’s development and how they are challenging the current display incumbents.
Like HikVision, another Chinese company I have profiled, BOE was born out of the remnants of the Chinese socialist era. As a result, various local government entities such as the city-province of Beijing own shares in the company. Nine of the top ten shareholders are state-owned entities. More on that, later.
The private corporate entity now known as BOE Technology was founded in 1993 by Wang Dongshen. Wang raised 6.5 million RMB to acquire the privatized assets of the Beijing Electron Tube Factory. The state-owned factory, which employed over 2,500 people, was established in the 50s.
BOE started off far behind in the display industry, and sought foreign technology transfers to catch up. They reached out to various companies in the display industry, offering their cheap labor in a joint venture.
They had some initial success manufacturing components for Japan's Asahi Glass and Nippon Terminal but the first big break came in 1997 with a joint venture with Taiwanese-American company Admiral Overseas Corporation.
AOC is a venerable brand that used to be the leading manufacturer of color television sets. The company is now owned by Chinese monitor manufacturer TPV Technology.
BOE got a good foothold in the market from this joint venture. But the display field is a competitive one, and BOE feared someone else coming in with a better thing. They sought to differentiate their offerings from the rest of the industry by breaking into and commercializing the latest in display technology.
At that time, that would be thin film transistor liquid crystal displays or TFT-LCD technology.
An Analysis of TFT-LCDs and Display Industry
Compared to their predecessors, TFT-LCDs are capable of delivering better contrast ratios and refresh rates. Today, they are widely used in televisions, laptops displays, monitors, and mobile phones.
The Americans pioneered the technology at RCA and Westinghouse, but the Japanese and South Koreans were the first to commercialize it. Thus they held first-mover advantage and their firms dominated the industry. Critically, patents for innovative, superior features cemented their manufacturing and product edges and kept out potential insurgents.
The TFT-LCD product is at its heart a semiconductor like those made by TSMC and Intel. Which means being subjected to the same brutal up and down business cycles every 1.5 to 2 years that frequently overwhelm other semiconductor sectors. Building up supply capacity is extremely capital-intensive and takes years of lead time. And margins are tight - BOE makes less than 15% gross margin.
Vendors can easily swap out one display for another and thus constantly pit suppliers against each other on the basis of price and features. There always is another competitor willing to cut into your share, so accumulating scale, IP walls, and feature differentiation is crucial.
Today, the industry is extremely mature with multiple vendors all competing against each other. Many of these vendors - AUO, LG Display, Samsung Display, Innolux, and Sharp - have "big brothers" backing their P&L, making the industry kind of like a tech proxy war.
BOE's entry and rise would add another pair of sharp elbows into the market. But before that, they needed someone to open the door and let them in first. In 2001, a lucky break came along.
The Fall of Hyundai Semiconductor
Hyundai Semiconductor had been the electronics arm of the once-mighty Hyundai Group. After the Asian Financial Crisis, banks and creditors forced the Hyundai Group to break itself up and sell off chunks of its empire. I did a profile of Hyundai in a previous video which mentions this.
The Korean government mounted a weak attempt to prevent Hyundai Semiconductor - or Hynix as it was then called after a 2001 name change - from being thrown out into the cold. The electronics business was seen as strategically important for Korea's economic position. Though Hynix only had 4.5% share of the market (leader Samsung had 19.5%), its technologies and patents still held substantial strategic value.
But to bail out Hynix right then after all that Hyundai did flew in the face of everything the administration preached about chaebol excess and reform. Reluctantly, the government bowed to political pressure and the banks and creditors took possession of Hynix in March 2001. The Thanksgiving turkey carving began immediately thereafter.
Now cut off from its profit-making siblings Hyundai Motors and Hyundai Heavy Industry, Hynix needed to lose weight and pay back its debt while preserving its core semiconductor businesses. Thus Hynix progressively sold its display technologies subsidiaries to BOE to get that money.
First, the STN-LCD and OLED businesses in 2001. These were not that strategically important. STN-LCD was an older technology even then. More power-efficient and cheaper to manufacture than TFT-LCD, but with the drawback of lower image quality and slower response times. OLED screens for their part were still at the prototype stage at the time.
A year later, Hynix sold its valuable TFT-LCD display arm to BOE for $350 million. Crucially, the sale included Hynix's comprehensive intellectual property and patents for its 4th and 5th-generation TFT-LCD technologies. Hynix had been doing TFT-LCD research in the US for years by then so this was excellent stuff.
These acquisitions, criticized at the time, would turn out to be a seminal moment in Chinese display technology history. A classic story of excellent timing. They immediately vaulted BOE into being the 13th largest company in China - up from 41st a few years earlier.
As founder and CEO Wang Dongshen said in 2003:
“This core ... was in the hands of South Korean and Japanese companies ... an acquisition was the only way we could get hold of it.”
As expected, BOE absorbed Hynix's display technologies and capacity to rapidly catch up to the market incumbents. Backed by the Beijing city government's financial firepower, the company invested over a billion dollars to build its first cutting edge LCD factory.
But BOE still needed to build distribution networks and competence in the international market. To do so, they again opened up the checkbook and purchased a 26% stake in TPV Technology, a large Hong Kong-based monitor maker for a billion dollars.
TPV's upstream and downstream experience helped BOE turn a rare profit in 2003. By 2006, it was China's leading TFT-LCD maker and ninth largest in the world. As the stars of Chinese tech companies like Xiaomi and Huawei have risen, BOE as a core displays supplier has also risen alongside them.
Products and Losses
BOE's core business lines are in display technology. They run factories in nine cities, including their leading edge 10.5 generation TFT-LCD production lines in the cities of Beijing and Hefei, Anhui.
They also have a 6th generation flexible AMOLED display factory in Mianyang, Sichuan.
Like HikVision, the company invests large amounts of R&D to continually improve its products. They are a patent filing machine. In 2019 they applied for 9,655 new patents and so far own over 70,000 in total.
To push this along, Wang declared his own version of Moore's Law: Panel-performance metrics must at least double every 36 months for a given price point.
They are especially prolific in the OLED space, with the third most patents in OLED technologies behind Samsung Display and LG Display. The whole ranking is dominated by East Asian companies, with Kodak the only American on the list.
Their flexible AMOLED displays are second only to Samsung Display and recently appeared in Huawei's folding Mate X phone.
The company is also making moves into the IoT and health spaces. IoT items like intelligent windows and smart TVs, kind of makes sense. But medical? I know, it seems a little weird that a display company should expand into hospitals and medical research.
Considering all of this spending and the low gross margins, you might not be surprised to learn that BOE also produces a whole lot of losses. Remember when I said that nine of the top ten shareholders are state owned entities? There is a reason for that and that is 15 years of operating losses. From 2008 to 2012, BOE turned 5 consecutive years of annual losses.
In 2019, the whole company turned a negative net loss of $181 million USD before "exceptional gains and losses". The company's core displays division - called Interface Devices on its annual report - lost $237 million USD. Its gross margin was just 13%, hardly better than your average fast food restaurant.
Even after becoming the world's largest panel maker, the company continues to lean heavily on government subsidies. In 2019, BOE received $400 million in subsidies from various Chinese local and provincial governments. Per Chinese sources, from 2010 to 2019, they took in over $1.7 billion of subsidies - constituting over 50% of their net profit during this time.
In 2019, Wang Dongshen, BOE's founder, stepped down from his chairmanship. He founded BOE with the assets of a hopelessly backwards vacuum-tube factory. He ended his tenure at BOE with over 60,000 employees and a company worth over 220 billion RMB or $33 billion USD.
BOE is certainly a semiconductor national champion to be proud of, but it achieved this status only through a great deal of struggle. And it seems to me that the company is trying a whole lot of things in order to grow beyond its core TFT-LCD business. They have bet a whole lot on OLED being that thing.
While BOE has provided OLED panels for some of Huawei's flagship Mate phones, its market share still lags behind Samsung and LG Display. The same dynamics that kept BOE out of the TFT-LCD market also apply to OLEDs. This is critical as it seems inevitable that OLED will be the dominant display technology going forward.
Perhaps that will change with the rumors that BOE's OLED screens have finally passed Apple's quality control checks. Joining the ranks of Apple's iPhone suppliers can help send the company forward towards getting the same type dominance in OLED panels that it now has in other display markets.