Interview with chairman of EpiTop Optoelectronic Co. Liang Xudong-- boosting sales by solid production and slow-paced business management

The impact of the European debt crisis has affected LED market demands and resulted in a short-term oversupply; the rapid production of China’s LED chips has put product price in not only a sharp decline but also a possible further decrease. The LED market shifted tremendously in 2012; many LED chip manufacturers faced cash flow issues and deficit, and industries started to steadily integrate. A minority of Chinese industries have introduced new technologies, new products, or new methods in order to seize the market. Mr. Liang Xudong, the chairman of EpiTop Optoelectronic Co., Ltd.-- one of the upstream manufacturers of semiconductor lighting that gained profit in 2012-- was interviewed by LEDinside on issues regarding the LED market and industrial innovation.



Established at the end of 2010 with a registered capital of 176 million RMB, EpiTop is a high-tech enterprise and also a joint investment of a number of countries and strategic investors, with the total investment up to 2.37 billion RMB. The company is dedicated to full-color light emitting diode LED epitaxial wafers, chips, lighting products, as well as the research and development, production and sales, construction and installation of lighting projects.



Possessing 10 of Veeco’s latest MOCVDs and the supporting wafer production line, EpiTop has an epitaxial wafer annual capacity of 800,000, and an ultra-high brightness LED (including blue, green, red light) chip capacity up to 50 billion. If overseas listing is successful, the number of MOCVDs would be over 100, and the ultra-high brightness LED epitaxial wafer production would reach 5 million.

This fledging company has managed through the turbulent 2012 by new technology, a detailed grasp of cash flow, and slow development while other companies were suffering profit decline. They have achieved over a billion dollar annual sale and a full-year profit excluding various subsidies, and at the same time scored the top three in the domestic white lighting chip market.

In 2013, sales have continued to increase; the number of orders in January exceeded that of December 2012, and orders in February were only slightly affected by the Chinese New Year. In general, the market has a relatively strong demand for the company’s products. EpiTop plans to double the sales of 2012 and exceed over 300 million dollars in 2013. Chips and epitaxial wafers are expected to bring 250 million RMB in revenue.

Keeping a foothold in innovative technology, adhering to the concept of differentiation



EpiTop is an innovative company with new equipments and a solid, experienced team. EpiTop purchases the latest equipments and produces differentiated and innovative products, and their team is composed of veterans in the industry. Liang Xudong believes that as a new business platform supported by an experienced team, they are able to produce both diversified and innovative products.

Product differentiation and innovative technology are the two weapons that could deal with the market downturn and prepare for the future market rejuvenation. During the production phase from 2011-2012, EpiTop invested heavily in the development of differentiated products; ever since their new product was released, supply was unable to meet the significant market demand. According to Mr. Liang, EpiTop will continue to focus on innovation and differentiation in the future.

EpiTop suffered the LED market downturn during the production phase in the first half of 2012; in fact, they received nearly none orders from April to May. However, they still set high brightness products as their long-term goal and continued their research in costs and technologies. When the market rejuvenated around July-August, they received orders from downstream lighting industries including display devices, backlights, and solid-state light sources, and sold 100,000 epitaxial wafers in October.

Mr. Liang indicated that according to statistics, funds invested in R & D accounted for 8% of the total sales in 2012, approximately 8 million RMB. They have achieved breakthrough in various manufacturing technologies and the research in new materials (especially products with ultra-high brightness and luminous efficacy); they have also received national patent for more than 40 innovative production methods for ultra-high brightness epitaxial wafers with luminous efficacy of more than 160 lm/W.

Slow operation, harmonious development



Chinese electronic manufacturers often gather a lot of funds, rapidly increase production, largely purchase equipments, and frequently build factories in order to excel in capacity and take the market with cost advantage. EpiTop, however, has chosen to slowly heat up the business, a strategy that differs significantly from others. In fact, there has been no rapid expansion since the establishment of this company. Still running the 10 latest MOCVDs, they are seeking the opportunity to increase 10 more this year. It is expected that they would increase 10 machines each year.



Mr. Liang indicated that MOCVDs and chip manufacturing equipments are updated too frequently, and worn out or phased out equipments are also major issues among chip manufacturers. In order to meet market demands and company requirements, they chose a practical strategy: set a long-term goal for the business, keep a good cash flow, then steadily and gradually make progress in each development stage.

Other than maintaining the quality of products and steadily managing the business, EpiTop has also put great effort in social responsibilities such as environmental protection and business culture. They indicated that although currently the government is not strict on environmental protection, they still discharge effluents following the most rigorous international regulations. They have spent huge amounts of money on advanced exhaust processors and sewage processors such as the burner-based exhaust processor which costs 100,000 more than regular processors.

Lateral and vertical integration

LEDinside believes that in the next few years, oversupply and price decline will cause a structural integration in the LED supply chain; in other words, lateral restructuring and vertical penetration of the upstream and downstream enterprises will become future market trends. Mergers and acquisitions (M&A), the search for cooperation partners, and vertical integration are all strategies considered by the company.

Currently supported by international funds, EpiTop has adopted a variety of cooperation strategies to acquire related companies. This is only their first lateral restructuring; in the near future, they may act more aggressively.



The entire LED industry is still in a period of integration, and numerous M&A opportunities would be available in the next few years. By estimating fields including purchase price, customer base, and human resources, EpiTop plans to arrange funds and teams in the next two years for M&A and the cooperation with related industries.

Other than lateral integration, EpiTop also plans to initiate vertical integration in 2013. Not only are they planning to launch products such as special chips made of new substrate materials in the second half of 2013, they also plan to work with packaging manufacturers and introduce unique packaging technologies while being involved in lighting products as well as the backlight industry. EpiTop will establish branches in Chongqing, Shanghai, and Beijing in order to stimulate downstream production; in addition, special chips produced by OEMs will be promoted and also expanded to industrial lighting fields such as landscape lighting and street lighting.

EpiTop indicated that they will not compete with downstream customers during the vertical integration process; they repeatedly stressed that the purpose of such expansion was to expand business and distribute risk. They will not only avoid overlapping business, but also provide downstream clients with relevant cooperation opportunities.

LED Market Q&A



Q: What are your opinions on the current market overcapacity and wafer price decline?

A: It seems that to special industries in China, overcapacity is inevitable. The current LED market is indeed facing oversupply problems, but the fundamental reason is that demands have not yet fully emerged.

Backlight LED product demands are steadily increasing, but general lighting fields are yet to be fully developed. This explains why hundreds of MOCVDs were shipped since the development of domestic LED industry but only a mere 100 machines were effectively used.

The decline in the price of chips and epitaxial wafers is not necessarily a bad thing for the entire industry. Declined price may stimulate product penetration as well as general lighting market demands, and thereby foster the development of the industry.

Q: If LED chip price continues to fall, how can industries gain profit?

A: Under price pressure, the cost and brightness of LED chips must be improved in order to gain profit in future competitions in the market.

There is still room for further cost reduction. The use of innovative substrate materials, price decline in MO source, gas and other raw materials, and research and development in the epitaxial growth process could all greatly reduce manufacturing costs. Judging from the present situation, these improvements may reduce costs by more than 20 percent.

On the other hand, brightness and luminous efficacy have remained major focuses of EpiTop and the LED market. The luminous efficacy of chips produced by EpiTop is now up to 160lm/W, and if manufacturing technology and substrate materials are improved, luminous efficacy could be even greater in the future. 



Q: Do you have any thoughts on the pressure brought by LED industries in Europe, US, South Korea, and Japan when they transferred to China, and also the competitiveness of China’s existing chip products?

A: LED industries in Europe, US, South Korea, and Japan seldom enter the Chinese market. Several Taiwanese manufacturers that entered the Chinese market have brought pressure to Chinese industries by taking up the market and forcing Chinese manufacturers to improve their manufacturing technologies, product brightness, luminous efficacy and yield rate. However, they have also introduced advanced management concepts and manufacturing processes as well as talented people to Chinese industries.

Under this pressure, Chinese LED manufacturers are gradually catching up with international leading industries. In 2009, the performance of Chinese epitaxial products were 2 years behind that of Taiwanese epitaxial products; two years later, qualified Chinese manufacturers are already producing products with qualities similar to or even better than that of Taiwanese manufacturers.
 

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