Industry Leaders Back Epistar’s Production Reduction

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Leaders in the LED industry have been supportive of Epistar’s decision to scale down production capacity, the Taiwanese company has frozen nearly a quarter of its production capacity and initiated the largest scale down since its founding, reported China Times. This move could lower increasing cost pressures from depreciating old equipment, but at several large manufacturers shareholder meeting last week, Everlight Chairman Robert Yeh and Unity Opto’s Chairman Alpha Wu supported Epistar’s move, and from a chip buyer perspective announced chip prices had reached rock bottom.

Yeh is known for his executive abilities in the industry, he noticed old MOCVD equipment are uneconomic, consume too much gas, have low efficiency and incur heavy losses. It would be better to reduce production slightly, and phase out old equipment.

Everlight has mostly been using Epistar’s LED chips, and prices have been stabilized. Some low priced chips have even rebounded, but it will be difficult to implement a steep price hike, at least “it will not plummet any further,” said Yeh.

Wu noted Epistar has shutdown operations of certain furnaces, and installed new ones to reduce costs. The chip factory produces required gases, and equipment costs are relatively high. Reducing production can cut costs, raise operation efficiency, a development that should be viewed positively by the industry. He noted this is the industry’s worse situation, and the economy had reached bottom by fourth quarter of 2015.

Epistar started to freeze about 25% of its production capacity since 2015, which is the greatest production reduction in history. The company’s operating blue LED chip MOCVDs dropped from 450 to 375, if calculations are based on EPI-wafers more than 1 million are in operations, and the utilization rates rebounded to 90%, while the company slashed 25% of its own production capacity. Epistar’s initiated production capacity surpassed San’an Opto’s by more than 300 MOCVDs.

Since Epistar stated it would be reducing production chip prices stabilized, but still exceeded demand and supply by 20%, said B.J. Lee. This is mainly since LED lighting value amounts to 45% of the industry value, and backlight exceeds 70%. Low lighting prices have hurt the industry, and in the short term it will be difficult to balance the supply and demand.

Many electronic industries including DRAM, LCD and EPI-wafers view costs as the key to reducing production, once prices fall below cash costs, it will be insufficient to covering material costs. To prevent bleed outs, companies usually will initiate production reduction plans. Based on previous examples, when the economy has dropped to the bottom, electronic manufacturers usually will slash production capacity, which usually drives stock prices up. However, Epistar’s production reduction did not stabilize its stock prices, which many financial analysts believe is mainly because other competitors have decreased production.

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