Consolidation in transparent conductive film industry taking its toll

Last year IDTechEx Research asserted that the transparent conductive film industry had entered a period of intense consolidation (e.g., ITO alternative leaders will emerge despite the pending consolidation). We have been proved right as the consolidation period is beginning to take its first round of high profile victims.

The TCF industry generated well more than $400m in 2015. The market remained dominated by ITO films even though metal mesh and silver nanowire films found their way onto numerous commercial products. The industry was however plunged into a period of consolidation in 2014/2015.

 

This was triggered because ITO film makers adopted the policy of protecting their market share at the expense of profit margin to stave off the threat of substitutes. This meant that they slashed their prices piecemeal every time they sensed they were to lose business. The net effect was that selling prices were reduced from around $30/sqm to less than $20/sqm in less than 1.5 years.

 

This effectively created a price war. It downgraded the value proposition of ITO alternatives from more-for-less to at best more-for-same. It also forced them to slash their own prices and generally made life difficult particularly for companies who had adopted a price pegging strategy to undercut the incumbent. This was bound to strain already strained cash flows.

Most ITO alternatives were sustaining (as opposed to disruptive) technologies. They promised to improve the performance and lower the cost of TCFs along well-established performance figures-of-merits (e.g., optical transmission and sheet resistance). They therefore had to wait for the next-generation of applications to emerge since ITO was good enough for most existing applications.

 

 

In particular, ITO alternative companies pinned their hopes on medium-to-large sized displays needing a low sheet resistance (tablet or large), flexible devices and nascent lighting or photovoltaic applications. All were slow to appear. In fact, the sales of All-In-One PCs (AIOs) and similar devices generally undershot market expectation, resulting in sluggish potential demand at best.

In the absence of rapid demand creation, the bargaining power shifted to the hands of buyers who were increasingly becoming cost sensitive to survive in the commoditized consumer electronics market. The industry had too much supply capacity, too many players and too many alternative technologies. This enabled the buyers to aptly play the suppliers against each other, further fanning the price wars and further supporting the downward price spiral. This ultimately put the material suppliers and the film makers (to a lesser extent) at a weak and precarious position. This highly asymmetrical distribution of buying power will remain until the industry consolidates and demand creation accelerates. It is hard to devise a strategy out of this for material and some film suppliers.

Many ITO alternative companies had received heady valuations. ITO films had reached the limits of their performance and were thought not to be able to service the emerging demand. At the same time, the price of indium was rapidly fluctuating and there was supply side risk since China controlled more than 25% of supply of primary indium. All this combined to create strong interest in alternative technologies and ultimately led to high valuations industry wide.

 

 

This was plain and obvious for material suppliers even then as these companies all faced a difficult business math. This is because even assuming an optimistic market share projection in the touch screen market, the revenue streams would still remain constrained given the small amount of material consumed per device.

 

The valuations will inevitably go through a correction phase. We believe that this will happen as part of the ongoing consolidation period. This means companies, IP and technologies will change hands and in the process the valuations will be corrected to reflect the new market reality.

 

The cycle of over-valuation followed by a correction induced via a consolidation period is common in many emerging industries and is a natural part of the commercialization process, an aspect that IDTechEx Research has seen elsewhere when studying emerging technologies. Such times are prime opportunity for large cash-rich companies to pick leading technologies at discount prices. IDTechEx Research expects that this will be witnessed in the next 1 to 2 years in the TCF industry.

 

 

Despite this, IDTechEx Research think that ITO has largely reached the limits of its price erosion. The margins are already small and there is little room for further price manoeuvring. There may be price reductions in the future but will not be on the same scale. This means that the price war strategy has largely reached the limits of its effectiveness.

 

 

We also think that demand will eventually pick up, creating opportunities for technologies that ultimately better the performance of TCFs such as silver nanowires and metal mesh. These technologies will not forever overshoot the market's performance requirements. Whilst this is a testing time for all suppliers and some specific companies may not survive, we believe that the high-performance TCF technologies will in one form or another. In fact, we believe that silver nanowire and metal mesh alternatives will continue to lead the way amongst all the alternatives and grow to become $126m and $191m markets, respectively. Other alternative such as CNTs will ramp up their efforts to find new markets that capitalize on their non-traditional figures-of-merit such as stretchability. This will open new and promising frontiers for these technologies.

 

For more information about this market please contact the IDTechEx Research lead expert on the topic at khasha@IDTechEx.com or refer to the market research report Transparent Conductive Films (TCF) 2015: 2025: Forecasts, Markets, Technologies.