The Greater China LED industry went through consolidation in 2012 and many tier-two and tier-three firms exited the market due to continuous net losses. The effects of the consolidations will show in 2013.
Since newcomers in China expanded capacity aggressively disrupting industry balance, most Taiwan-based upstream LED chipmakers suffered net losses in 2012.
China's LED industry has been suffering too. Some China-based LED firms with annual revenues exceeding CNY100 million (US$16 million) filed for bankruptcy in 2012. The oversupply conditions will not be solved in the short run, therefore, the industry will likely see more consolidations.
Taiwan-based firms consolidate
Suffering from two consecutive years of non-operating losses, Taiwan-based upstream LED chipmaker Epistar acquired Huga Optotech. Despite the fact that Huga's gross margins have reportedly been improving, the low- and medium-power market has been filled with China-based peers, hence competition is tough. Huga is unlikely to return to profitability until the second half of 2013.
The LED subsidiaries of AU Optronics (AUO), Lextar and Wellypower, announced plans to merge in second-half 2012. Furthermore, downstream Edison Opto became a member of the board of directors of tier-two LED packaging house Lumenmax in the fourth quarter of 2012 and plans to build a strategic alliance with the latter firm.
Most of the consolidation between Taiwan-based firms focused on expanding economies of scale and reducing costs instead of vertically integrating the firms' businesses.
China-based firm builds distribution channels
China-based LED firm Electech became a shareholder of distribution firm NVC Lighting. Electech announced in December 2012 plans to procure 11.81% of NVC Lighting shares worth HKD950 million (US$122 million) from an investment company, adding to its 8.24% share holding procured from the open market, Electech now holds a total of 20.05% of NVC Lighting shares. In the past, Electech focused on the production of light sources from LED chips to packaging applications.
Through the procurement of NVC Lighting shares, Electech is able to extend and secure distribution channels, and this is what Taiwan-based firms lack.
It has been difficult to enter the China market hence Taiwan-based LED chipmaker Formosa Epitaxy announced in 2012 it will have China-based Sanan Optoelectronics become its biggest shareholder. This type of cooperation is a first in Taiwan's LED industry.
This strategy is bold and innovative but as high-brightness LED process technology is no longer an industry secret, it is unlikely Taiwan's technological advantages will last. Therefore, the cooperation may elevate Taiwan-based firms' industry position but may also pose risks.
