2013 Review: China LED Policies Show Excessive Subsidizing Trend

Good government policies can help propel an industry forward but bad ones can hinder development. Although China’s policies are aimed at developing the LED industry, the subsidies have gotten out of control recently, said LEDinside Director Roger Chu. These policies can pose long term issues for the LED industry, as the government continues to issue subsidies despite  oversupply situations.

An overview of important Chinese government policies througout 2013. (Data compiled by LEDinside in Dec.2013)                                          

Chinese LED industry threatened by over subsidizing

China has become the global LED manufacturing powerhouse but most of the  industry’s development is based on large government subsidies. The effect of issuing large subsidies to companies has been similar to building the industry on lands subject to massive landslides. “The intent behind China’s policies is to support the industry’s development, but there has been an overlap  of investments from the central and local governments causing excessive subsidies”, explained Chu. Once subsidies are removed, many small to mid-sized companies are suddenly unable to survive as witnessed by  the recent bankruptcy waves.

According to reports by Xinhua News Agency, more than 100 LED companies in Guangzhou and Southern China had declared insolvency as of July 2013. The reports found that the two main causes behind these bankruptcies were:1) the termination of government funded bank loans to the LED and PV industries and; 2) ending of MOCVD subsidies. LED market demands were also slightly affected by the end of China’s one year electronic appliance subsidy program in June 1, 2013.

Since 2012 the Chinese LED market has witnessed the ill-effects of over subsidizing, but the Chinese government has shown no signs of stopping market interference. Earlier in Feb. 2013, China’s National Development and Reform Commission (NDRC) placed the LED industry and green technologies high on its development agenda. The 2013 lighting plan released in Feb. 18, 2013 was a joint announcement made by NDRC and six other government agencies, including China’s Ministry of Finance and major technology agencies Ministry of Science and Technology and Ministry of Industry and Information Technology.

The plan aims at increasing China’s domestic LED wafer production to above 80% and make important technological breakthroughs in GaN LED wafers. Similarly, the Chinese government made clear its ambitions of reducing its reliance on foreign imports by supporting domestically manufactured MOCVD equipment, key materials and detection equipment to reach above 70% market share by 2015. To support these ambitions, another generous round of equipment subsidies has been issued to domestic LED companies. The latest benefactor of the MOCVD equipment subsidies has been San’an Opto, which received a hefty RMB 80 million (US$ 13.18 million) from Xiamen government in early December 2013. China’s Ministry of Industry and Information Technology (MIIT) has also approved HC Semitek’s application of RMB 6 million MOCVD subsidies in early November this year.

Another goal mentioned in the 2013 LED plan is the elimination of 60W incandescent bulbs by 2015. This is an obvious policy to pave the way for LED adoption. Other ambitious targets include increasing LED lighting market value by 30% in 2015 to reach RMB 450 billion (US$ 74.11 billion). The government also showed intentions of establishing lighting standards that will help fix LED product quality issues. On Aug. 27, 2013, NDRC again highlighted LED industry development as part of China’s efforts to meet green house gas emission reduction targets.

While the LED light plan eventually hopes to create an industry where  10-15 leading companies will control core technologies and make high quality LED products, whether it is reasonable to inject more funds into an already overheated market has raised questions from industry insiders. NVC Lighting Chairman Wu Changjiang has been quite vocal about the effects of government intervention that creates a culture that discourages innovation. Wu criticized companies that were focused on lobbying, and urged for less government intervention.

Besides investing heavily in LED manufacturing, the Chinese government is also supporting LED streetlights. The government made LED street lights an official procurement item for the first time in Jan. 2013. The procurement project is expected to benefit 84 companies in 30 cities and provinces. The project listed 251 types of LED street lights and tunnel lights, 177 downlights, and 30 types of self-ballasted reflective LED lights on its procurement list.

In stark contrast to China’s manufacturer subsidy policies, the U.S. and EU are more focused on subsidizing consumers, said Chu. For example, San’an Opto’s Xiamen’s recent MOCVD subsidy of about US$ 13.18 million in December alone exceeded the U.S. government’s two year US$ 10.1 million subsidy to Cree, Eaton, OLED Works, Lumileds and PPG combined. The subsidy San’an Opto received for a single project was nearly double of the combined subsidies the five U.S. companies received. This attests to the Chinese government’s over-intervention in the LED market.

Shenzhen government’s inconsistent policies

Shenzhen, a major LED manufacturing base in China, has shown some inconsistencies in its policies this year. The Southern city first cancelled its 2009-2015 LED subsidy program in mid-March 2013 without any explanation. Local media 21st Century Media report noted the government was concerned the LED industry was following in the footsteps of the PV market, which collapsed after the government withdrew financial support. Shenzhen’s brief termination was welcomed by Taiwanese manufacturers in mid May 2013, with many believing  the Chinese government was returning to more rational economic practice and on the right track to reducing market intervention. Chu’s analysis was different, noting the brief termination was probably the government’s preparation for a policy change.

The termination was relatively short-lived and reinitiated in Aug. 15, 2013. The Shenzhen government completely overturned its previous decision and decided to launch a three year LED promotion program. Although, some LED manufacturers were sacrificed during the few months after March, the surviving companies have been able to thrive. Political motives were cited behind this move, with an NBD.com report noting the original 2009-2015 LED project was the legacy of former Guangdong mayor Xu Zongheng, who was in office from 2005-2009. Xu’s political career was cut short by corruption charges. Guangdong committee ruled continuation of his policies as unnecessary since the policies failed to achieve desired results during the four years of implementation.

Even if Guangdong province gave up completely on subsidizing the LED industry, other provinces and cities will be eager to pick up where it left off. The LED industry remains promising . Two months after Guangdong halted its LED project, Fujian announced the implementation of its LED project in May of 2013which was expected to increase the LED industry annual market value to RMB 50 billion. Dongyuan also announced plans of investing in the LED industry a month later, and proposed an incentive of covering 70% of manufacturers interest payment on loans over a period of 3-5 years. Both have been eager to show their ambition of attracting manufacturers and developing local LED industries.

Old habits die hard

The subsidy culture in China’s LED industry has led to some under-the-table practices. A report by Chinese Business News pointed out it has been difficult for Chinese LED manufacturers to avoid unwritten market rules, such as collusion. Li Xinghua, the head of Guangdong Provincial Department of Science and Technology (GDTSC)was charged with corruption and temporarily suspended from his post on July 26, 2013. Li, oversaw LED streetlight biddings and was reported for favoring certain companies.

The government’s favoritism has also attracted criticism from those in the industry. The same report noted corruptive practices were unavoidable as only 2-3% out of around 60,000 Guangdong LED manufacturers was granted government subsidies. NVC Chairman Wu also criticized some companies of taking on more than they could chew. He noted these companies had taken on large streetlight projects even when their production capacity could not meet government demands.

China’s subsidies are acting as a double-edged sword. On one hand the subsidies are required to stimulate market development, but the resulting excess could hurt the industry’s competitiveness significantly. The Chinese government will need to scale back on subsidies and interference for the LED industry to remain competitive in the long run. More work is also needed to ensure overlapping subsidies from local and central governments are reduced so resources are not wasted in the wrong areas.

(Author: Judy Lin, Editor, LEDinside)

Related Article2013 Review: Are EU and U.S. 2013 LED Policies Setting up Tech Barriers?

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