UBS Outlook for LED Chip, Package, and Light Source Manufacturers in 2014

LED package industry anticipated to integrate in the next two years. LED light source sector focuses on consumer channels and brand building. Chip production in 2013 was limited. LED lighting to grow rapidly in 2013-2015, benefiting manufacturers with newly expanded production capacity....

UBS-logo

LED chip supply and demand has balanced out, increase in shipment volume and gross profit possible in the future.

Expansion of chip production in 2013 was limited and around 20-30 percent produced was invalid. With LED lighting rapidly growing, supply and demand for the domestic LED chip industry has already balanced out. We anticipate that LED chips will increase both in shipments and gross profit in 2014. Leading manufacturers with advantages in scale and cost and with government backing have the potential to increase competitiveness.

LED package industry anticipated to integrate in the next two years

The structure of the LED package industry is disorderly. Within the next two years, the industry is predicted to begin integration. The manufacturers that will come out victorious are those with the production scale suited for handling lighting demands and who have a close cooperation with downstream and upstream companies. The current stage looks favorable for manufacturers specializing in package production.

LED light source sector focuses on consumer channels and brand building

For the LED light source industry, market looks optimistic for stable growth-oriented companies with better production scale, production quality, production control, and brand building. Future sales channels will become more diversified.

The LED chip and lighting source sector is the most likely to produce large manufacturers. LED industry supply chain includes the sectors of chips, packaging, light source, and fixtures. The preconditions for a business to be able to produce a large manufacturer include product standardization and large scale production capabilities. The sector also requires large demand. Looking at the entire supply chain, upstream chip and downstream light source sectors have the possibility to produce large manufacturers.

Chip production in 2013 was limited

The Chinese government offered a lot of backingto the LED industry from 2010-2012. Blind investment in the LED chip industry led to a surplus in supply.

Around 20-30 percent of MOCVD production is invalid. China has over 1000 units in total but only around 700 units are used for production. The main reason for this is that MOCVD technological advancements have been rapid over the past two to three years. Older second hand units cannot compete. At the same time, prices have dropped dramatically. Leading manufacturers who are expanding production can receive subsidies which mean they will not consider purchasing older MOCVD units.

Local Chinese governments after 2013 will no longer blindly support all LED chip manufacturers, but rather select a small percentage they find to be higher-caliber. Due to this, production expansion in 2013 was very limited for the LED chip industry, with only leading manufacturers able to expand during this stage, which mainly depended on volume of demand. According to public information released by market listed companies, HC SemiTek was the main company to expand production capacity. After the company became listed in 2012, they initiated large scale production expansion. San’an Opto anticipates beginning expansion towards the end of 2014.

LED lighting to grow rapidly in 2013-2015, benefiting manufacturers with newly expanded production capacity

Domestic LED chips have already reached a balance between supply and demand in 2013H1, with utilization rate for leading manufacturers reaching more than 90 percent. This could cause a structural shortage of supply for LED chips in 2Q14.

Over the past few years, LED chip luminosity has increased 20-25 percent every year. If prices remain the same, then LED chip profit margins will increase. We therefore estimate that LED chips will see an increase in shipment volume and net profit in 2014.

Competition drops for small manufacturers in LED chip sector

It is estimated that after 2014, small manufacturers with 40 MOCVD units and below will experience production difficulties. Main reasons include:

1. 1. Strong demand from upstream LED chips and tight supply of sapphires resulting from increased demands for application in iPhone home buttons. Only large manufacturers can guarantee suppliesfor upstream material companies.


2. 2. The lowering of local government support for second and third tier LED chip manufacturers.


3. 3. The high technical barrier for LED chip production and increased focus on product stability and consistency. A constant production operator and team of engineers are needed for technical support. Only large manufacturers are able to constantly provide R&D.

The LED package industry is estimated to start integrating within the next two years with manufacturers specializing in packaging estimated to come out on top. Over the past two years, the LED package industry has clearly benefitted from lowered prices of LED chips. As integration in the LED chip industry is drawing to a close, LED package industry will benefit less and less from price drops in LED chips.

Manufacturers specialized in packaging to come out on top

The LED light source sector focuses on consumer channels and brand building. The structure of the industry is more disorderly than the packaging industry layout. Stable growth-oriented manufacturers with definite production scales, quality production, production control, and brand building are to fare best. LED lighting source channel construction is more varied than that of traditional lighting source channels. LED light source manufacturers specializing in electronics will seek out traditional sales channels that are not light fixtures, such as the electronics market, household appliances, and electricity suppliers.

Electricity supplier channels help lower cost of electrical current. The difference between LED lighting factory price and retail price is currently huge, mainly due to cost of electrical current. LED lighting companies are establishing electricity supplier channels and starting direct marketing to lower sales costs, which boosts LED lighting penetration rates.

Government support for LED lighting is huge, both nationally and locally. In Guangdong Providence for example, policies require that office lighting is switched to LEDs within the next 3-5 years.

Central and local government subsidy policies for LED lighting energy consumption includes commercial subsidies of around 10 percent and civilian used subsidies of around 30 percent.

We are optimistic about the following three sectors：

1. 1. LED chip sector: optimistic about leading companies who can increase shipment volume and net profit.


2. 2. LED package sector: Optimistic about manufacturers specializing in packaging. Those that will come out on top after integration remains to be seen.


3. 3. LED light source sector: Optimistic about growth-oriented manufacturers with stable growth, definite production scales, quality production, production control, and brand building.

UBS Outlook for LED Chip, Package, and Light Source Manufacturers in 2014

Epistar chairman: consolidation among Taiwan- and China-based LED chip makers by 2015

Epistar chairman Lee Biing-jye says there will be consolidation among Taiwan- and China-based LED chip makers by 2015. Reshuffling in the LED chip manufacturing industries in Taiwan and China through merger may happen faster than originally expected and larger makers will merge with smaller...

consolidation-among-Taiwan-and-China-based-led-chip-makers

Epistar chairman Lee Biing-jye says, “there will be consolidation among Taiwan- and China-based LED chip makers by 2015.”

Reshuffling in the LED chip manufacturing industries in Taiwan and China through merger may happen faster than originally expected and larger makers will merge with smaller ones, leaving only two Taiwan-based makers and three China-based makers by 2015, according to chairman Lee Biing-jye of Epistar.

As continued improvement in technology keeps decreasing production costs, prices for LED chips are estimated to drop by 10% each year in the near future, Lee said. In addition, progressive development of LED chip technology is likely to reduce room for LED packaging and thereby lead to LED chipmakers merging with packaging houses, Lee pointed out.

Epistar has set aside funds for vertically combining LED packaging houses and/or downstream LED product makers through a stake investment over the next three years, Lee indicated.

Epistar suffered a net loss of NT$1.117 billion (US$38.5 million) in 2012 due to non-operating net losses of about NT$2.0 billion from stake investment in fellow maker Huga Optotech, Lee noted. However, Epistar expects 2013 business operation to turn profitable.

Epistar expects capital expenditure of NT$3.0 billion in 2013 and will set aside a larger budget for 2014, Lee said. Epistar plans to add 30 MOCVD sets in 2014, Lee indicated.

Epistar chairman: consolidation among Taiwan- and China-based LED chip makers by 2015

MOCVD precursor demand for LEDs to more than double to 69 tons over 2012-2016

Displaybank: Global demand for precursor material used in manufacturing light-emitting diodes (LEDs) will more than double from 2012 to 2016 as the market for LED lighting booms. Precursors are core materials that ensures optimal light efficiency for each epitaxial layer in the key MOCVD process for manufacturing LED chips. Global shipments of MOCVD equipment are rising, with shipments expected to climb by 17% in 2013. The largest buyers of MOCVD equipment – South Korea, Taiwan and China- China is expected to make up 45% of global demand for precursors in 2016.

Global demand for precursor material used in manufacturing light-emitting diodes (LEDs) will more than double from 2012 to 2016 as the market for LED lighting booms, according to a new report ‘Precursor for LED MOCVD-Market and Industry Analysis’ from Displaybank (now part of market research firm IHS).

The market for precursors used in metal-organic chemical vapor deposition (MOCVD) for LED manufacturing will more than double, rising by 114% from 32 tons in 2012 to 69 tons in 2016.

MOCVD_LED_Precursor_Demand_Forecast

“The boom in the precursor market reflects the rising operating rate of MOCVD as the LED lighting market grows,” says HIS’ senior LED analyst Richard Son.

Precursors are core materials that ensures optimal light efficiency for each epitaxial layer in the key MOCVD process for manufacturing LED chips. Of the major precursors, which include trimethylgallium (TMGa), trimethylindium (TMIn), trimethyl aluminum (TMA), triethylgallium (TEGa) and C2Mg2, TMGa is the most widely used and commands about 94% of total demand.

Global shipments of MOCVD equipment are rising, with shipments expected to climb by 17% in 2013. The largest buyers of MOCVD equipment – South Korea, Taiwan and China – account for about 80% of global demand for precursors. China, which is generating the highest growth in MOCVD equipment installation among the three countries, is expected to make up 45% of global demand for precursors in 2016.

In the nascent stage of the LED market, Dow Chemical Co was the unrivaled leader in the precursor market. However, with the recent growth in precursor demand, new players have been investing in R&D and manufacturing facilities while aggressively breaking into the market with low prices for similar-quality product, says the report. Such developments will intensify competition further among precursor makers, it is reckoned.

MOCVD precursor demand for LEDs to more than double to 69 tons over 2012-2016

MOCVD Metal-organic Chemical Vapor Deposition - LED Wiki

Metal-organic Chemical Vapor Deposition, short for MOCVD, is a chemical vapour deposition method used to produce single or polycrystalline thin films. The MOCVD machine is the most critical equipment in LED chip production processes. MOCVD is also known as organometallic vapour phase epitaxy (OMVPE) or Metalorganic vapour phase epitaxy (MOVPE). It is a highly complex process for growing crystalline layers to create complex semiconductor multilayer structures. – LED wiki

In contrast to molecular beam epitaxy (MBE) the growth of crystals is by chemical reaction and not physical deposition. This takes place not in a vacuum, but from the gas phase at moderate pressures (10 to 760 Torr). As such, this technique is preferred for the formation of devices incorporating thermodynamically metastable alloys, and it has become a major process in the manufacture of optoelectronics.

a-made-in-China-MOCVD-machine

Basic principles of the MOCVD process

In MOCVD ultra pure gases are injected into a reactor and finely dosed to deposit a very thin layer of atoms onto a semiconductor wafer. Surface reaction of organic compounds or metalorganics and hydrides containing the required chemical elements creates conditions for crystalline growth – epitaxy of materials and compound semiconductors. Unlike traditional silicon semiconductors, these semiconductors may contain combinations of Group III and Group V, Group II and Group VI, Group IV, or Group IV, V and VI elements.

For example, indium phosphide could be grown in a reactor on a heated substrate by introducing trimethylindium ((CH3)3In) and phosphine (PH3) in a first step. The heated organic precursor molecules decompose in the absence of oxygen – pyrolysis. Pyrolysis leaves the atoms on the substrate surface in the second step. The atoms bond to the substrate surface and a new crystalline layer is grown in the last step. Formation of this epitaxial layer occurs at the substrate surface.

Required pyrolysis temperature increases with increasing chemical bond strength of the precursor. The more carbon atoms are attached to the central metal atom the weaker the bond.The diffusion of atoms on the substrate surface is affected by atomic steps on the surface.

The vapor pressure of the metal organic source is an important consideration in MOCVD, since it determines the concentration of the source material in the reaction and the deposition rate.

mechanism-of-the-metal-organic-chemical-vapor-deposition-of-gallium-arsenide

MOCVD Metal-organic Chemical Vapor Deposition - LED Wiki