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TAICHUNG, Taiwan (Dow Jones)--AU Optronics Corp. (AUO) has cut its production of liquid-crystal displays because of bloated inventories, a move that will likely bring more stability in LCD prices by the third quarter if other companies follow suit, according to a company executive.

"If you have inventory, that may delay by a couple of months a recovery in the sector," Hui Hsiung, executive vice president of AU Optronics, told Dow Jones Newswires on the sidelines of an analyst meeting Tuesday.

"You have to have discipline every month to adjust inventory. Our loading last quarter was 95% but recently we modified that to 90%," said Hsiung, who also serves as a member of AU Optronics' board. "If others follow, that will help prices stabilize by the third quarter." [ 14-06-06 0044GMT ]

AU Optronics is the world's third-largest maker of LCDs by revenue behind Samsung Electronics Co. (005930.SE) and LG.Philips LCD Co. (LPL) based in South Korea.

Hsiung said a pile up of panel inventory due to high plant loading led to a bigger-than-expected decline in panel prices recently and urged other panel makers to stop building up inventory during periods of oversupply.

"Supply and demand balance can be maintained during a period of overcapacity if fab loading is reduced by only 5% to 10%," he said, adding that a slight reduction would only increase unit fixed costs by 2% to 3%.

Hsiung's comments came after flat-panel-display maker LG.Philips LCD Co. (LPL) lowered its outlook for the second quarter because of high panel inventories. LG.Philips LCD President Ron Wirahadiraksa said Monday the company will review its total capacity plans for this year.

LG.Philips LCD's announcement came after AU Optronics also cut its second-quarter forecasts last week, saying overall shipments would come in lower than previous expectations, while average selling prices would fall by more than 10%.

Hsiung declined to comment on whether AU Optronics would post a loss in the second quarter amid sharp panel-price declines, but he said the company is making efforts to cut manufacturing costs to prevent margin erosion.

He said further mergers and acquisitions are needed in the LCD industry to help stabilize prices, pointing to its recent acquisition of Quanta Display, which is expected to close in October. In April, AU Optronics agreed to acquire smaller Taiwan LCD maker Quanta in a stock swap valued initially at about $2.2 billion. AU Optronics' market share in 2005, if Quanta was included, would jump to 20.2%, trailing LG.Philips LCD Co.'s 21.3%, and Samsung Electronics Co.'s (005930.SE) 20.8%, according to U.S. market research firm iSuppli Corp.

"We think M&A is more efficient than organic growth. It should help improve stability in the industry," he said.

He also said investment in eighth-generation facilities that produce panels measuring 50-inches or above diagonally doesn't need to be rushed.

"This technology may not be the best," said the executive, adding that AU Optronics is carefully considering its future investment plans beyond 7.5 generation facilities.

-By Yun-Hee Kim, Dow Jones Newswires; 852-2832-2330; yun-hee.kim@dowjones.com

-Edited by Theresa Davidovitz [ 14-06-06 0114GMT ]