China's government has been providing subsidies to help its domestic LED industry. Some firms have been benefitting but others remain in limbo amid rapid product price falls.
Slowing demand for LED billboards
According to sources from China-based firms, the LED sector in Shenzhen, southern China has been the most influential, and in 2011 the total output from the LED firms in that region reached CNY70 billion (US$11 billion), close to 50% of the total output - CNY150 billion - of the LED industry of Guangdong province. Currently, 20 China-based LED firms are listed companies, and almost 50% of them are located in Shenzhen.
The sources noted that the domestic LED market seems to be booming in 2012 due to numerous government projects, but the subsidies have been made available to all firms regardless of their product quality. LED lighting lacks standards, which mean firms with low quality products can still compete in the market using low prices. Though increasing amount of investments have been pouring into the industry, gross margin has been getting thinner. Furthermore, a lot of small-size firms do not have healthy financial structure, and can only last for 1-2 years. Some market observers predict that by 2015, around 30% of the firms will be acquired by peers or exit the market.
In 2012, around 80 LED firms in Shenzhen have declared bankruptcy. One particular example is LED display maker Shenzhen YJG Optoelectronics. Before declaring bankruptcy, YJG had revenues exceeding CNY100 million. But that did not prevent it from going out of business.
Market research in China has noted that the LED billboard market had compound annual growth rate (CAGR) of 28.5% from 2001-2007, and the Beijing Olympics shot up the annual growth of the market to 78% in 2007. The LED billboard market experienced another significant growth in 2010 due to the World Expo in Shanghai. The high growth rate attracted many players to enter the market and soon the market became saturated.
Shipments of LED display billboards from China account for above 70% of total global shipments. Major LED billboard makers in China include Shanghai Sansi Technology, a firm with 2011 revenues of almost CNY900 million, and Shenzhen Absen Optoelectronic.
Turning to the light
The saturated LED billboard market has pushed firms to switch focus to LED lighting products. Absen is one of those firms. The firm has set a 2012 revenue target at CNY1 billion but as of first-half 2012, the firm only had revenues of CNY320 million. It is believed that Absen will only achieve 80% of its target revenues.
Absen announced a plan to provide integrated OEM/ODM services for LED lighting in 2012. The firm plans to increase LED lighting revenues to 50% of total revenues in three years. Absen has been focusing on the domestic enterprise lighting market.
Absen believes low gross margin has become the norm in the LED lighting market. For an average-quality 7W LED light bulb, the material cost exceeds CNY10/unit, and the total cost is around CNY20-30/unit, which means the retail price of a 7W LED light bulb with average quality should be around CNY60/unit, said Absen. Nevertheless, due to lack of standards, many firms have been keen to lower low production cost at the expense of quality, and in China, consumers can find 7W LED light bulbs for less than CNY10/unit.
This is the reason why most LED firms favor the corporate lighting market that has certain set requirements for LED products.
China's electricity prices vary in different regions and for different purposes. On average, the electricity price in China is around CNY0.68-1.00/kWh. For a parking lot that needs to have the lights on 24 hours a day, it may obtain returns on LED lighting investments in eight months. For department stores that use lights for 14 hours a day can obtain returns on LED lighting investments in 14-16 months. In addition, LED light tubes adopt small- and medium-size SMD packaging (due to relatively simpler technology), which is suitable for parking lots and office environments. Currently, the retail price of a 20W LED T8 light tube is around CNY100-200/unit.
Neo-Neon's model behavior
China-based Neo-Neon has been expanding its customer base through ODM/OEM business. By providing a complete production process, the firm allows customers that have the intention of entering the LED lighting market to begin production immediately. Neo-Neon also provides free technology transfer and training that can help customers begin production within one week, according to the firm.
Neo-Neon listed out prices on flyers distributed in exhibitions: for example, the price of chip-on-board (COB) packaged 7W LED light bulb modules is US$1.98/unit while the 10W LED light bulb module is US$2.5/unit. According to the firm, the LED light bulb that adopts COB packaging technology will be introduced to the market in October.
The business model has been helping the firms to expand to markets such as Poland and Turkey. Neo-Neon not only provides LED lighting module, the firm also sent technicians to help customers with production.
Expanding upstream segments
China-based Sanan Optoelectronics is a fast-growing LED chipmaker. With the support of government funds, the firm entered Taiwan to compete with its chief local rival Epistar.
According to Sanan, the firm currently has 144 units of 2-inch MOCVD equipment with capacity utilization rate approaching 90%. The firm's monthly capacity is around 100,000 AlGaInP LED expitaxial wafers and 300,000-400,000 units for blue LEDs. Sanan has become a supplier for Taiwan-based LED packaging firms such as Unity Opto and BrightLED.
Sanan has been expanding capacity and expects that by 2013, annual capacity of LED epitaxial wafers will reach 10 million units and LED chips will reach 30 million units.
Sanan announced in mid-August that the firm has obtained subsidies of CNY12.15 million for sapphire substrates from Anxi County. The construction of the plant is near completion and equipment will be installed with production scheduled to begin in 2013.
Another China-based LED firm, Xiamen Changelight, focuses on red and yellow AlGaInP LEDs, and it currently has 21 units of MOCVD equipment in Yanzhou and seven units in Xiamen with one unit of equipment producing solar products. The firm mainly produces LED display billboards, street lamps and signal lights. The firm indicated that blue LED applications are likely to become the mainstream and will consider adding blue LEDs to its product line.
China has been developing sapphire ingots and substrates. Firms such as Guangdong Saifei Sapphire began production of sapphire ingots at the end of 2011. The firm has the technology to produce sapphire ingots that weigh 100kg. According to Saifei, the firm currently has 80 units of sapphire crystal growing furnaces and is the largest sapphire plant in the Guangdong region. The firm plans to install 800 units of crystal growing equipment that will begin operating in second-half 2013.
Nevertheless, the price of sapphire substrates fell significantly in 2011, and prices did not return to positive-margin levels until recently. The current price of 2-inch substrate is around US$8-9/unit. Saifei has yet to develop highly profitable patterned sapphire substrates (PSSs).
