Upstream LED Makers Integrate Production to Lower Prices

By MICHELLE HSU

Everlight Electronics in August took a major stake in Tekcore Co., a leading maker in Taiwan of high-luminosity GaN LED epi wafers for LEDs. The significant move by Everlight chairman Robert Yeh, an LED professional with over 35 years of experience in LED packaging, cannot be overlooked as a mere expansion strategy but rather signals the urgency among upstream LED companies to integrate production.

Earlier, Alpha Crystal Technology Corporation and TeraXtel Technology Corporation, under the Hon Hai Group, had just merged with not nearly as much fanfare nor glitch as Everlight’s takeover of Tekcore due to being under the same parent. Observers generally agree the two recent merger and acquisition cases mark the beginning of restructuring amid the upstream LED companies, one that is motivated by discouraging market factors as oversupply and poorer than anticipated demand.

Such production integration via merger and acquisition has dual effect: one to help upstream makers reduce production cost to pass downward such savings to consumers who will enjoy more affordable LED products, and the other to accelerate penetration of LED lighting in the long term.

Oversupply
According to LEDinsight, some 100 billion LED chips will be supplied in 2011, about 12% over annual demand of around 89 billion to possibly compromise corporate earnings. In July, LED chip manufacturers’ sales dropped 8.9% from the previous month or 20.5% from one year earlier, with LED chip packagers’ sales down 4.1% from the previous month or 17.4% from one year earlier.

The surplus supply is mainly due to less-than-expected LED TV demand. Many of the LED chips originally to be for LED TVs are being diverted to production of LED lighting, whose demand is lagging anticipation. The oversupply of LED chips has dragged down LED lighting prices by an estimated 20% on average in the first quarter of 2011, which will keep declining throughout the year.

A LEDinsight survey shows the July price of a 40W-incandescent-equivalent LED bulb dropped to around US$24 on average while that of a 60W-equivaelnt LED bulb fell to around US$45, down 2% and 6% from the previous month, respectively, with price falls being the biggest in Europe. LEDinsight believes lower prices will boost LED lighting sales in the future.

The LED chip oversupply is partly due to excessive investments by companies in related fields, ones who are optimistic about the newly-emerging industry. Taiwanese and Korean companies are the most active investors and their expanded capacities will raise annual production of LED lighting by 25-35% in 2011, which will accelerate the price fall.

The sputtering global economy is sapping global LED lighting demand that was expected to be higher. The exception is in Japan, where sales of LED lighting and other energy-efficient electric products are simmering, stimulated by governmental energy-saving policies to cope with power shortage in the wake of the massive quake and nuclear power plant shutdown in March. The Japanese government issued this summer coupons to the 19 million families in the disaster-struck areas to exchange for energy-saving LED lighting, turning the nation into the world’s fastest-growing LED lighting market.

The Taiwan government has also announced policies to boost LED lighting demand, with one budgeting NT$120 million to replace all the less efficient mercury street-lighting with LED lighting by the end of 2011, creating demand for NT$8.6 billion in LED street-lamps. The Photonics Industry & Technology Development Association (PIDA) estimate that Taiwan’s LED lighting production could rise to around NT$200 billion by 2012, up 32% from this year.

Upstream Materials and Parts
Falling prices of upstream materials and parts have mostly pulled down LED lighting prices. The price of sapphire—the primary material of LED epitaxy—is down to US$16-18 per unit in the third quarter, compared to the peak of US$30 in the fourth quarter last year. Unit price of sapphire soared from US$11-13 in the beginning of last year to US$30 at the year-end. From the first quarter of this year, the price gradually dropped due to falling market demand for LED TVs, with unit price falling to around US$12-16 and may drop to below US$10 by the year-end.

Alpha Crystal and TeraXtel have merged to become Alpha Crystal and a specialist maker of sapphire. Alpha Crystal, dating back to 2007, is the first independent maker of LED-use sapphire in Taiwan and plans to, after merger, expand capacity by 10 times to lead the market. Chairman Lily Kuo is confident of the outlook, believing in a bullish period of at least 15 years for the LED lighting market. Alpha Crystal has merged to become the largest sapphire producer in Asia and the potential to be among the top three globally by 2012.

Kuo predicts the price to bottom in the third quarter and rebound during the fourth quarter, and forecasts lower prices to help boost demand that calls for expanded capacity to support.

Alpha Crystal produced sapphire before the merger for TeraXtel, an LED chipmaker, to process into LED chips. Integrated production results in much higher efficiency and a merger will more than double operational efficiency, perhaps to three or five times, as well as save labor and material cost, says Kuo.

Traditionally, LED chip is made with sapphire or SiC wafer, with the costly materials and complicated processing having pushed up LED lighting prices to hamper popularization of LED lighting.

While Alpha Crystal plans to expand capacity to reduce unit price of sapphire, Bridgelux, Inc., a US-based company established by Taiwan Semiconductor Manufacturing Co. (TSMC) three years ago, announced in mid-August that its GaN-on-Si can replace sapphire at much lower cost. Bridgelux says production cost of GaN-on-Si is only one fourth that of sapphire. Once mass production begins two years later, it will force down again LED lighting prices.

Seeking New Opportunities
Growing popularity of LED TVs used to drive the LED industry, with the former commanding half the global share of all TVs; but weakening demand for LED TVs in the first half of the year motivated LED chipmakers to seek new business opportunities amid the emerging LED lighting industry.

Some observers agree the LED lighting industry will draw increasingly more makers from outside the sector to quickly expand capacity. A notable case is the world’s largest LED packager, Everlight Electronics, which has been expanding its LED lighting business in recent years.

Other upstream LED companies such as Lextar Electronics, Epistar, and Formosa Epitaxy all have taken major moves to expand LED lighting business in recent years. Lextar Electronics has expanded its LED lighting business to generate 50% of revenues, while the other two around 30%. Unity Opto Technology, another optoelectronic company, has followed a different path, teaming up with several leading international LED distributors to expand LED sales in the U.S., Europe, and China, generating in the second quarter one-third of sales from LED lighting.

Lextar Electronics, subsidiary of AUO Optronics Group, is very confident of the LED lighting sector, citing Japan as encouraging example where the March disaster has motivated Japanese consumers to resort to energy-saving LED lighting, which is virtually dominating industrial and commercial lighting there and will soon become mainstream household lighting, with Japan to lead development of the global LED lighting market in the future.