With AU Optronics (AUO) depending on high levels of bank financing for its proposed 7.5G LCD panel fab project in China, the Taiwan government is reluctant to approve it, according to sources in the banking industry. Since bank loans come from people's savings, the Taiwan government is worried about possible impacts if AUO's investment in China turns unprofitable.

It has been nine months since the Taiwan government lifts a ban on the island's panel makers setting up LCD production plant in China and only one maker - AUO - has applied. Many industry observers are wondering why the Taiwan government has not approved AUO's application, as Samsung Electronics and LG Display (LGD) reportedly have already received approval from the China government.

Some rumors have claimed that the Taiwan government plans to allow the project after the elections at the end of November. However, the Ministry of Economic Affairs (MOEA) has denied the rumors, saying AUO's China investment project has nothing to do with the upcoming elections.

Still some others have speculated that AUO's US$3 billion budget for the China project is meant for setting up a 8.5G plant instead of a 7.5G plant because the investment amount for a 7.5G should only be about US$1.2 billion.

AUO's major domestic competitor Chimei Innolux (CMI) has not submitted an application to build an LCD fab in China, but rumors have spread that CMI plans to construct a 8.5G plant in Chengdu, China. According to speculation by some market observers, CMI, seeing the delay in AUO's project, knows that its application might also be delayed and has decided to adopt a difference approach to China investment. The observers claimed that some CMI employees have resigned, only to be rehired by the company's China-based subsidiaries, paving the way for CMI's LCD panel project. Other rumors have claimed that Foxconn Electronics (Hon Hai Precision Industry) will invest US$10 billion to set up an 8.5G plant in Chengdu, China.

But in reality, the Taiwan government and panel makers need to carefully assess the possible difficulties in investing in China.

In October 2009 a host of media reports indicated that Korea- and Japan-based panel makers were eager to build production plants in China. LG Display announced the signing of an MOU with the government of Guangzhou, southern China for LCD panel production, while Samsung was looking to work with the government of Suzhou, eastern China. In the face of the changes in the industry, Taiwan's MOEA realized it was time to revise its policy and it lifted the LCD panel ban in February 2010.

There are conditions for Taiwan panel makers investing in China, including promises not to reduce the size of employees or investment in Taiwan. However, there is no clear stipulation concerning how funding is raised.

AUO submitted its application to MOEA in March 2010, right when demand in the panel industry was booming, and AUO even hired more employees for the company's expansion projects at the Central Taiwan Science Park (CTSP). But demand and prices have since then dropped sharply, affecting AUO's profitability and finances. Now the government needs to see whether panel makers should be encouraged to invest in China when their utilization rates and profits are dropping.

Overall demand in the panel industry has been hit by rising inventory levels. Recovery of demand may be slow and makers may have to reduce their work force. But that may not be the case in China due to the strong growth in its TV market expected in the next few years. Panel makers need to establish themselves in China as early as possible in order to have a significant share of the market. The China market would be a major revenues driver for AUO and CMI in the future.

But for the Taiwan government, the LCD panel industry is so important that it needs its makers to keep their roots in Taiwan. They may expand their operations worldwide, but their revenues and job opportunities should remain in Taiwan. The Taiwan government does not want its LCD panel makers to operate like its notebook makers who only keep R&D teams in Taiwan with volume production all taking place in China.