Catching the company flatfooted, two of Corning's Taiwan customers cut orders for flat-panel liquid crystal display screens. The glut-inspired move forced the tech glass maker to trim fourth-quarter LCD sales projections Thursday.
Display glass surpassed fiber-optic cable this year as Corning's largest source of revenue, and investors didn't appreciate the bad news, sending the shares down 8% Thursday.
Corning now projects fourth-quarter LCD sales will be flat to up 3% vs. the previous quarter's levels. Just over two weeks ago, the company had expected growth somewhere between 3% and 10%.
The fact that Corning is a poor predictor of its own business isn't really a surprise. For a good portion of the boom years, the company maintained that it had more fiber-optic cable orders than it could fill. Corning executives were still
talking about big fiber demand even after it was clear that phone companies had shelved their ambitious network expansion plans.
Corning has since de-emphasized its optical-fiber efforts, taking a big writedown last quarter to adjust the fallen value of that business. But if big telco demands proved hard for Corning to anticipate, imagine how challenging the consumer electronics industry must be.
Vowing not to be fooled again, CFO Jim Flaws pledged last year that sudden changes in demand for display glass wouldn't catch the company by surprise the way the fiber cable collapse did. Corning says it learned its lesson from the disappointing days when customers discovered they had a surplus of so-called dark fiber, or unused cables, in the ground.
Addressing analysts on a July 2003 conference call, Flaws said "there actually are no dark displays." He went on to add that "unlike the fiber market," the LCD market is tracked by a variety of market researchers.
"We believe we have a very good line of sight where the end products are going and the pace and demand from these reputable industry sources," Flaws said.
That view apparently still isn't clear enough right under Corning's nose, in Taiwan, where a couple customers are buried in glass.
The Taiwanese LCD surplus comes at an awkward time for Corning, which is in the middle of a $328 million expansion of its LCD production facility in Taichung, Taiwan. And Corning isn't the only LCD glass maker with expansion plans. No. 2 display screen player
said it will spend $5 billion on a new LCD production plant in South Korea.
Oddly, Corning recently had offered assurances about the health of its display glass business and its ability to adjust quickly to any changes in the market. Just last month, Corning said that as retail prices for LCD screens hit historic lows, it would stimulate higher glass sales.
On the flip side of that, Corning said if its customers, the LCD screen makers, were to cut production to reduce the surplus and stabilize prices, it could vary the pace of its own expansion.
Corning fans say the order reductions came late in November and didn't give the company enough time to adjust its production.
In spite of Thursday's selloff, Wall Street seems to view the setback as a temporary problem. Industry observers and investors say consumer demand for high-definition LCD TVs and flat-panel computer monitors will grow as prices fall. "TVs you could only drool at last year" are almost affordable this year, says one New York money manager with no Corning position. He says he expects demand to grow considerably as the prices for big HDTVs fall below $1,000.
Corning shares dropped 94 cents to $11.90, while those of rival LCD glass maker LG Philips were up 6 cents to $17.76.
While the flat-screen mania seems to be gathering momentum, suppliers like Corning are in for a wild ride as manufacturers frantically change their ordering patterns.
So maybe the real difficulty for Corning will be in refraining from making bad predictions.