Earlier this week, Korean media sources raised eyebrows by reporting that LG Display Co. Ltd. (NYSE:LPL) is set to announce new alliances with several Chinese TV vendors by the end of this month.
Specifically, according to Korean news site DigiTimes, LG Display is preparing to sign memorandums of understanding with Skyworth, Konka, Changhong, Hisense, and TCL. What's more, LG Display is set to supply several of these China-based companies with OLED panels from its own manufacturing plants. And LGD is reportedly willing to offer the panels at reduced prices, despite the potential for incurring losses from its OLED division in the process.
Needless to say, that would be great news for OLED specialist Universal Display (NASDAQ:OLED), which currently counts LG Display as its second-largest customer behind only Samsung (NASDAQOTH:SSNLF). To be sure, Universal Display shares skyrocketed earlier this year after the company signed its own long-term patent license and material supply agreement with LG Display. Under that deal, which runs through the end of 2022, Universal Display not only provides OLED emitter materials to LG Display for use in its products, but also receives license fees and running royalties on sales of those products.
The (money losing) question
But that also raises the question: Why is LG Display willing to strike such a seemingly sour deal with its Chinese counterparts? It's all about jump-starting demand for the OLED TV market, which LG Display views as the future of display technology and wants to ensure it continues to lead.
To be sure, in his keynote speech at IFA 2015 last week, LG Display CEO Dr. Sang-Beom Han insisted, "We want OLED to be the revolution of light that opens up the future we all want to live in." Sang further elaborated that OLED "is the only technology that overcomes the limitations of conventional displays because it offers enhanced reality combined with dynamic form."
For anyone familiar with the benefits OLED, that assertion isn't terribly surprising. Because OLED materials are a self-emitting light source, OLED TVs, in particular, can be made incredibly thin, flexible, and even semi-transparent, all while offering unrivaled picture quality and virtually infinite contrast.
In addition, these imminent agreements with Chinese display manufacturers were a long time in coming. As The Wall Street Journal suggested in February, affiliate LG Electronics was still "virtually alone in the global market for TVs using OLED technology," so had been planning for some time to forge agreements with "select Japanese and Chinese companies."
To be fair, however, just last week Panasonic unveiled its own curved 65" OLED television, and recent reports suggest Samsung -- which effectively shelved its large OLED panel development following manufacturing challenges last year -- remains committed and will reenter the OLED TV market by 2017.
But for now, the primary problem is one of manufacturing capacity and, therefore, prohibitively high prices for OLED TVs. LG's latest 55" curved OLED television (pictured above), for example, currently sports a suggested retail price of $5,000. Though older models sell for considerably less, that's hardly competitive in many consumers' eyes.
Speaking in a WSJ interview in April, Dr. Sang-Beom Han offered another pre-emptive look with a compelling explanation that so happens to speak to the most recent reports:
Because of the small capacity, there are limitations in the number of OLED TV panels we can produce. We have to ultimately reach economy of scale but we're not there yet. This isn't something that a panel maker can do single-handedly. Participation from multiple players is needed for addressing problems like cost reduction and product competitiveness. I believe other panel-makers are working on developing OLED panels as well. It's just a matter of time before competitors jump in.
LG Display is also working hard to expand its OLED manufacturing capabilities and increase production yields. In addition to more than tripling production at its current Gen-8 OLED manufacturing line by the end of this year, just last month LG Display announced it will invest a whopping 10 trillion won, or $8.5 billion, to shift LCD manufacturing operations to OLED over the next three years.
In the end, the impending MOUs with Chinese manufacturers should not only help ensure LG Display to fully utilize that increased capacity, but -- as its CEO pointed out above -- also accelerate market awareness and demand for the cutting-edge sets in a way that LG Display couldn't possibly think to accomplish on its own.
Steve Symington owns shares of Universal Display. The Motley Fool owns and recommends Universal Display. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.