Exodus of Chinese LED Chip Manufacturers During the Last 5 Years

News Source: 
National Business Daily

“When I check my phone, there are always a lot of messages from LED manufacturers,” said ETI Chairman Wang Donglei, while pointing to his phone.

During an interview with Chinese media National Business Daily, Wang noted companies mentioned above were upstream LED chip manufacturers. At least three LED chip manufacturers had submitted merger proposals to ETI, said Wang.

This is just the tip of the iceberg of China’s LED chip industry hazards. Back in 2009, there were 62 LED chip manufacturers, but today many of these LED manufacturers have vanished from the market. “Only 20 operating (LED chip) manufacturers remain,” said Jun Ruan, Deputy Secretary General of China Solid State Lighting Alliance. The industry outlook gets gloomier, with industry experts projecting only three to five LED chip manufacturers will remain.

In 2009, China had 62 LED chip manufacturers. At the time 10 LED chip manufacturers were found in Guangdong Province, 8 in Fujian Province, and the remaining chip manufacturers were distributed in Jiangsu, Hubei, Shangdong provinces and other areas.

The number of operating LED chip manufacturers has dropped to a mere 20 this year, indicating 60% of manufacturers have exited the market in the last five years. Not all of these manufacturers have become insolvent, about 10 manufacturers are in a “vegetable state.” Manufacturers in a “vegetable state” are those that are close to bankruptcy, and are no longer manufacturing or only manufacturing in small volumes.

Epilight Technology for instance has halted production for a very long period in 2014. The company started LED facility constructions in 2010. Initially, the company planned to invest RMB 10 billion in a two phase construction project to add 200 MOCVD (45 PCS and above) production lines.

If the company completed the construction project, Epilight Technology would become one of the top two LED chip manufacturers in China with the most MOCVD volume. However, the company has stopped productions from late December 2013 to May 2014. It was not until June 2014 that the company started productions again.

These manufacturers on the brink of bankruptcy are using every possible method to find acquisition partners. At least three LED chip manufacturers want to be integrated into ETI. These chip manufacturers “are not interested in small manufacturers.”

There are usually huge distances between large enterprises and SMEs, due to the latter’s limited R&D investments and small size, said Hang Hua, CMO of Enraytek Optoelectronics. With LED chip brightness increasing every quarter, LED chip manufacturers can easily fall behind competitors if they are incapable of raising LED chip brightness.

Only three to five LED chip manufacturers to remain in the future?

China’s domestic LED market is not large enough to digest 20 LED chip manufacturers production capacity, said Wang. One Chinese LED chip manufacturer is sufficient to meet the market demands, if all lighting products manufactured in the country are for domestic consumption.

However, since Chinese LED manufacturers are supplying global LED lighting demands, current consensus has been China will become the future LED lighting manufacturing base. Prior to this, the LED upstream market has been unable to avoid the general semiconductor industry development rules, and there might only be three to five LED chip manufacturers remaining in the global market, said Wang.

Another manufacturer also supports this view point. LED manufacturers that survive will be those with cost control, technology advantages, reliable product quality, and mass manufacturing capacities, said Zhongyong Jiang, President of Silan Azure. From a market demand perspective, only five LED chip manufacturers will remain in the next five years.

China has more than five LED chip manufacturers, and it can be foreseen future industry restructures will shift increasingly towards listed manufacturers with sufficient financing.

Despite these market signs, many manufacturers have continued to expand production capacity. ETI’s flip chip LED production capacity in Anhui Province reached 15,000 PCS/ month, said a company officer. The company plans to expand production capacity to 50,000 PCS/ month by 4Q15 during second phase of the project. The company’s horizontal LED chip production capacity has also reached 50,000 PCS/ month, indicating its chip production capacity will double in 2015.

HC Semitek and San’an Opto have also announced production expansion plans in 2014.

Manufacturers find it difficult to sell old MOCVDs

It is very difficult for LED chip manufacturers to exit the market in one piece, since it is difficult to get rid of old MOCVDs. Newer MOCVDs have lower price tags and better features, which is the first obstacle that old MOCVDs need to overcome.

New MOCVD equipment retail prices in 2014 are 40% lower than machines in 2011. Old equipment cannot compete price wise, due to new MOCVDs plunging prices. “The key issue here is lower equipment costs, a machine that cost RMB 100 is now down to RMB 70,” said Lianghai Wang, Vice President at Tsinghua Tongfang.

The new machines also have better performance, and higher yield rates than old equipment. New MOCVDs are also more intelligent. A single computer can manage three to four MOCVDs now, compared to manual monitoring in the past where one worker needs to be assigned to each machine. Thus, manufacturers are even more reluctant in purchasing outdated machinery.

The smarter the new MOCVDs, fewer workers will know how to operate old machines. Manufacturers might even have to hire specialists to operate old machines.

MOCVD is an important equipment that is closely related to property and factories. When manufacturers sell equipment, they often will request buyers to also purchase the entire factory. For buyers this is equivalent to establishing a new factory, and can cause many management inconveniences. Additionally, debts are often involved in MOCVD equipments, and further complicated by local government relations. Thus, few buyers are willing to purchase old equipment.

Even if old MOCVDs are sold at a discount of 30% to 40%, most buyers still prefer “purchasing new MOCVDs”. Even ETI is not very interested in vegetable LED chip manufacturers MOCVD. “There aren’t many LED chip manufacturers worth acquiring,” said Wang. “Let’s just wait and see.”

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