Chinese LED Industry in Deep Waters, Only a Handful of LED Manufacturers to Remain

Was the company revenue performances only bad for the first half of 2015? Or has it been the case for three consecutive quarters? Only LED manufacturers know how they fared this year.

“The (Chinese) LED industry is in deep waters, and only a few manufacturers will survive in the next few years,” said several industry insiders during recent interviews with LEDinside’s editorial team in China.

With the LED industry entering a mature phase, painful situations have become unavoidable. Price wars are escalating, product quality issues are increasing instead of diminishing, and growing numbers of mergers and acquisitions are intensifying industry restructure. In September these “negative energy” incidents are expected to reach the explosive limit. To escape the brewing crisis in the LED industry, manufacturers are searching for a chance of survival.

Price wars taken to “new heights”

Price wars are nothing new in the industry, but ongoing pricing strategies are being taken to a whole new level. Previously, “childish strategies” were implemented by SMEs that were taking advantage of cost differences between larger players to “slash product prices.” However, at this stage price war participants have become large enterprises that once swore they would never participate in price wars.

Philips is a prime example. The company launched two-packed LED bulbs priced at US $4.97, and many large brands followed suit. GE for instance launched a three-packed LED bulb GE Bright Stik LED for US $10 in August this year. Cree also announced it will be lowering prices of its 75W BR30 LED 9W floodlights, and retail prices dropped from US $20 to US $15. The company’s second generation LED bulb prices were further slashed to US $10.

Even more shocking is Chinese LED manufacturers “tacit tube light price cut agreements”. Opple Lighting announced its 1.2 M LED T8 tube lights will be retailed for RMB 9.9, even Foshan Lighting’s 1.2 LED T8 tube lights prices were down from RMB 13.5 to RMB 9.98 (a discount price offered to clients that place more than 3,000 tube light orders). MLS has come up with the lowest priced RMB 8.8 retail price for every LED T8 tube light, while TUS Lighting announced its unified retail price on the distribution market will be RMB 9.9 for its 16W Xiaowei LED T8 glass tubes. Tube prices have been further lowered. On June 4, 2014, lighting industry insiders leaked on Chinese social media platform Weixin, Huaqiang Lighting’s LED T8 tube lights shipment costs was down to RMB 6.8.

Media reports later followed up on the news, and found the tube procurement prices had to meet “certain conditions.” Yet, most manufacturers had broken out in cold sweat over the news. If shipment prices are lower than RMB 10, how can manufacturers profit? Larger manufacturers are taking advantages of economics of scale in these price wars, but how can SMEs rise up to meet these challenges?

New tide of layoff 

How can the LED industry be spared from layoffs sweeping over the globe?

Market rumors have pointed towards Lite-On’s intended layoff of employees in certain business departments, while GTAT announced plans of cutting 40% of its staff. Sharp also announced it will be restructuring and cutting jobs in the process, making the next LED industry layoff not far from the horizon.

The industry has been particularly shocked about Epistar’s layoff. The Taiwanese LED chip manufacturer announced on Sept. 17, 2015 it will be laying off 76 employees in three phases in its factories in Hsinchu in Northern Taiwan. Shortly after the announcement, the number of job cuts was raised and the extent of impact affected directors, assistant managers, and other mid to high rank officials. The company’s newly acquired subsidiary FOREPI will also cut 39 jobs, in addition it preplanned slashing 65 jobs from its factories based in Southern Science Park in Taiwan bringing the total job cut to 180. About 3% of Epistar’s work force will be laid off. This is also Epistar’s largest job cut since it was founded.

Is Epistar’s lay off a work force adjustment or forced slim down because of market conditions? It is far too early to comment. However, slammed between Chinese manufacturers and international manufacturers, Taiwanese LED manufacturers to a certain degree are fighting for survival. Moreover, the waning economy and poor economic outlook has made layoffs the most reasonable option. Chinese manufacturers are not finding it any easier. Online market rumors noted a manufacturer in Foshan finances are stranded and is on the brink of bankruptcy. Many LED manufacturers are already slashing jobs or putting employees on unpaid leave.

Top manufacturers listed in product recalls

Product recalls occur every year, but what is different this year is many large LED manufacturers can be found on the list.

Large players such as Cree announced it will be recalling 700,000 LED T8 tube lights over fire hazards. This was followed by IKEA’s call back of 440,000 LED night lights, due to electric shock hazards. German manufacturer Osram also announced it will take back 55,000 LED T8 tube lights over burn hazards. Mitsubishi subsidiary Verbatim also summoned back its Classic A 6W and 9W LED light bulbs, due to electric shock hazards. On a side note, Philips took back some 370,000 halogen lamps earlier last month.

Embarrassingly, most of these international brand recalls involved Chinese manufacturing. For instance Philips halogen bulb recall and Cree’s LED T8 tube light products were all made in China. When international OEMs outsource their products to Chinese manufacturers to lower labor costs, they also are subjected to product quality risks. Chinese manufacturers have launched their branding strategies much later than other competitors, and if they cannot raise their product quality how will they be able to “export their products”.

Chinese manufacturers gain access to oversea markets through acquisitions

China’s LED industry is entering the international market through acquisitions, such as Chinese consortium headed by Go Scale Capital acquisition of an 80.1% stake in Philips Lumileds. Kaistar’s acquisition of Bridgelux. Shanghai Feilo Acoustics plans to acquire Osram’s spun off LED lighting business and others. Chinese financial companies and manufacturers are starting to appear on international manufacturers businesses buyers list.

Will acquiring international companies LED businesses, and integration achieve benefits of 1+1>2? It is still too early to say, and requires further observations. Behind Chinese manufacturers global strategy is whether international manufacturers related businesses should be separated. Philips spun off Lumileds, Osram sold its luminaire business, and even Samsung has withdrawn from the international LED lighting market to focus on the domestic Korean market. Whether these large players are being cornered by China’s intense pricing strategies to the point of surrender, or observing ongoing price wars cold eyed all require further observations.

Chinese LED manufacturers overtly concentrated

China’s upstream, midstream and downstream LED manufacturers are all participating in an “expansion celebration”.For instance, San’an Opto raised RMB 3.51 billion to invest in LED epiwafers and other projects, while ETI invested RMB 4.5 billion on LED chip projects this year. Xiamen Xindeco also invested RMB 1.3 billion in the deployment of its “IoT+” project, which covers LEDs. MLS too has raised RMB 2.3 billion to expand its production capacity, while Hongliopto raised RMB 700 million to expand SMDs. Chanfang Lighting has invested more than RMB 910 million on lighting energy saving projects based on public–private partnership (PPP).

“I’d rather die than not expand,” is no longer a joke in China’s LED industry. Ongoing fierce price wars are making economics of scale to achieve profitability increasingly evident. SMEs that are unable to achieve economies of scale can only search for effective diversification and niche markets to avoid withdrawal. However, this is still a fairly difficult situation. The best option for the market in general is to reduce production capacity to boost profitability. Yet, for individual manufacturers the top choice is to expand production capacity to force competitors without matching capacities to exit the market.

More industry bankruptcies lined up

One LED manufacturer in Shenzhen closed down after accumulating millions of Renminbi in debt, while a Foshan manufacturer shut down after its debt mushroomed to RMB 180 million. Similar incidents as these have increased over the past year.

“It doesn’t matter what the retail price of your products are anymore, most importantly is the payback,” said the heads of several manufacturers. “It has become a norm in the industry, where manufacturers are unable to collect debt.” It has formed a terrible cycle where large volume of debts owed between one manufacturer and another cannot be recovered. Many times manufacturer A owes B, B is indebted to C, and C has taken a loan from D, which creates breakdown vulnerability in the financial chain.

After years of soaring growth in the LED industry, market growth has eased. Issues previously concealed by the industry’s high growth rates are starting to show in the difficult global and domestic macroeconomy situation. Large scale restructures are also eliminating less competitive manufacturers and leaving fewer players in the market. This is the “growing pain” and “path” manufacturers must take to fully mature.

(Author: Sophie Liu, Editor, China, LEDinside// Translator: Judy Lin, Chief Editor, LEDinside)

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