Bright Market Outlook Prompts Taiwan's LED Makers to Boost Production

Jan 04, 2012 Ι Industry In-Focus Ι Electronics and Computers Ι By Ken Liu, CENS
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Taiwan's light emitting diode (LED) makers are shifting production into high gear in preparation for a predicted market upsurge in the next few years.

Digitimes Research, a market consulting firm that tracks information-technology markets, estimates that the global market for LED light bulbs will rise to 2.5 billion units in 2013, up from 596 million this year. Over the same period, the number of LED streetlights will increase to from 2.2 million systems to 9.8 million systems.

Taiwan’s LED makers are ramping up production to meet an anticipated market revival. Pictured here is an optoelectronics trade show in Taipei.

Digitimes predicts that the LED lighting market will expand at a compound annual growth rate (CAGR) of 97.4% between 2009 and 2013, much higher than the 62.6% CAGR for the LED backlight market. This year alone, LED products are projected to make up10.6% of the global lighting market with total revenues of US$15.4 billion.

The outlook is also bright for LED backlights. According to Merrill Lynch, LED-backlight TV shipments will reach 191 million units in 2013, accounting for 83% of all TV shipments worldwide. Merrill Lynch estimates that shipments will top 143 million units next year, up 66% from this year's projected 86 million units and representing a market penetration of 67%.

The optimistic market outlook has encouraged the Epistar Corp., currently the world's No.1 blue-chip supplier by volume, to speed up its capacity expansion. In late September this year the company began volume production at a US$120 million joint venture plant in Changzhou, mainland China, which it operates together with LED packager Lite-On Technology Corp. of Taiwan and TV maker Konka Group Co. of China

Epistar holds a 60% stake in the venture, which is its first overseas investment and the biggest maker of epitaxy wafers and chips in mainland China. Lite-On owns a 30% stake while Konka holds 10%. Epistar Chairman B.J. Lee points out that to sharpen the company's competitiveness at the global level, the Changzhou venture is furnished with technologies as advanced as those the company uses in Taiwan.

Epistar and Lite-On executives explain that the venture is designed to run a maximum of 60 metal oxide chemical vapor deposition (MOCVD) chambers, with half of that number set to be installed in the first stage. Epistar executives point out that the venture delivers chips to Lite-On, which helps its customers stay competitive with cost-effective packaging. Konka will build the packages into its TVs as backlights.

The venture, which now has 250 employees, will complete its final expansion in 2013.

This is Epistar's first joint venture with a packager and end-product manufacturer, assuring it a steady source of orders.

Switching to LED Lighting
The venture could switch its output to chips for lighting purposes as the demand for LED lighting grows. Epistar's vice president, J.Y. Fan, believes that lighting will emerge as the foremost LED application next year.

Fan believes that the current oversupply of backlight chips will compel LED makers to shift their emphasis to lighting products, which are much more profitable as the market is still in a state of infancy. Also, the excessive supply has driven down the prices of LED devices, thereby reducing production costs for lighting products.

In addition to the Changzhou joint venture, Epistar has opened shops in Shenzhen, Guangzhou, Xiamen, and Jining to take advantage of lucrative business opportunities in the mainland.

The mainland's 12th Five Year Development Plan, which is guiding the country's economic development from 2011 to 2015, involves eco-friendly projects including LED lighting that will produce total revenues estimated at RMB3 trillion (US$468 billion at US$1:RMB6.4).

According to the China Optics and Optoelectronics Manufacturers' Association, the mainland' LED industry in 2015 will generate five times the RMB100 billion (US$15.6 billion) in revenue that it recorded last year.

Moreover, the mainland, which has been labeled a price spoiler because of its practice of undercutting prices in various markets, has slashed subsidies to LED epitaxy-wafer makers for expansion on the mainland, which is conducive to market order. According to LEDinside, another Taiwan-based market consulting firm that tracks the LED industry, this cut has compelled the mainland's epitaxy-wafer makers to slow down expansion projects and trim the additional number of MOCVD chambers to be installed from the originally planned 600-650 to an estimated 400 this year.

LEDinside points out that the reasons behind the subsidy cut are oversupply, a high defect rate, and operating losses suffered by the mainland's homegrown LED epitaxy-wafer makers.

Epistar's vice president of finance and accounting, Rider Chang, says that LED prices began rallying this September. This is a welcome change; in August, the company's capacity utilization rate fell to 60-70% and its average selling price (ASP) slipped by 10-15%.

Rush orders have helped push up selling prices; since early September orders have surged for Epistar and Everlight Electronics Co., Taiwan's No.1 LED packager and Epistar's strategic partner. This overturns the past experience of the third quarter usually being a lukewarm season for the LED industry.

Everlight executives note that demand for the company's LED packages for lighting, infrared products, and small and midsize backlights is picking up. In response to the robust influx of orders, the company recently projected third-quarter revenues at NT$4.1-4.2 billion (US$141-144 million at NT$29: US$1). Revenues for September are estimated at NT$1.4-1.5 billion (US$48.2-51.7 million).

The company estimates that its lighting operation grew at a quarterly rate of 20% in the third quarter, and that lighting's contribution to the company's total revenue will grow from 8% now to 10% in the fourth quarter.

Lucrative Opportunities
Everlight President P.Y. Liu feels that global markets will offer lucrative opportunities for LED lighting over the next two years. He predicts that the penetration of LED lighting will reach 50% in Japan, and that in Europe it will double from the current 10%, within two years.

In August, Everlight recorded revenue of NT$1.3 billion (US$46 million), inching up 0.52% from a month earlier but down 17.19% from the year before. Behind the year-on-year decline was customers' high inventories of backlights, which deferred fresh demand. Liu believes that the inventories will take at least three months to digest and that the company's revenue growth in the fourth quarter will be driven mostly by lighting products and small- to midsize backlights.

The Unity Opto Technology Co., which reportedly controls the largest share of the global market for TV-use LED backlights, has also been inundated in a flood of orders. The company's chairman, C.H. Wu, was occupied throughout September by meetings with mainland Chinese customers on how much materials inventories his company needs to replenish them, and with South Korean customers on when to ship orders.

Wu points out that inventory backlogs at South Korean TV makers have been almost depleted, and that mainland China's TV market will likely pick up next year. He predicts that the backlight market will be revitalized in the next quarter. “Unity is definitely busy into the first quarter of next year,” he comments.

Wu believes that global demand for LED TVs has been tepid for most of this year because of undersold code cathode fluorescent-lit (CCFL-lit) TVs, which limited the penetration of LED-lit TVs to 40% rather than the expected 50%. However, improved manufacturing techniques have recently brought down LED-backlight prices to near the level of CCFL-backlight prices, boosting the acceptance of LED backlights among TV makers. No.1 LCD-TV maker Samsung, for instance, will cash in on the price slump to roll out low-priced TVs by the end of this year.

The Walsin Lihwa Corp.'s LED-epitaxy venture in the Xian Hi-Tech Industries Development Zone, in China's Shaanxi Province, came on stream this September. The US$127 million venture is the electric-cable maker's first LED facility since it announced its entry into the clean-energy sector two years ago.

The venture is designed to have an annual output of 150,000 4-inch epitaxy wafers using 20 MOCVD chambers, and will bring Walsin Lihwa an estimated NT$1.3-1.5 billion (US$43-50 million at NT$30:US$1) in annual revenues. Industry executives estimate that the company will realize a profit from its LED investment in one or two years.

The Arima Optoelectronics Corp., another Taiwanese LED maker, is starting up production in Shaanxi, the heart of mainland China's coal country. The facility there began volume production in late September, handling almost all processes from raw materials and epitaxy-wafer manufacturing to chip slicing and packaging.

Taiwan is currently the world's biggest LED producer by volume. LEDinside predicts that the anticipated market comeback will bring a new round of competition that will winnow out the weak companies. It feels, however, that most Taiwanese manufacturers will survive the competition thanks to their long-established operation in the industry, which has equipped them with unmatched flexibility in adapting to the market cycle.
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