China’s 12th Five-Year Plan, which got under way this year, is expected to give a strong boost to the country’s LED industry.
The plan includes a number of subprojects designed to bolster the development of local emerging industries, and the State Council recently held its 7th environmental protection conference and mapped out the 12th Five-Year Energy-Saving Plan to coordinate among the subprojects. Local enterprises are encouraged to develop energy-saving products through tax incentives, easy credit, and franchise approval.
Kingsun has been installing LED lighting on an EMC basis, a model that has proven popular with operators of factories, supermarkets, offices, hotels, and banks.
Easy credit and tax incentives are essential to local enterprises, most of which are small or medium-sized and hence need more financial support, especially in today’s overall economic slump.
The incentives are also seen as a solution to the current poor market conditions, which can hardly assure product lifecycle profitability to suppliers because of a lack of stimulus measures, sound conditions, and especially proper payment systems. This makes it difficult for local “green” industries to go commercial. Most observers agree that the development of green industries hinges on government stimulus programs that help secure minimum profits until the market becomes mature enough to sustain green industries.
Opportunities in Energy Management
“Since the nation-wide promotion of carbon emissions reduction is among the objectives of the 12th Five-Year Plan, it is necessary to encourage local enterprises to conduct widespread energy-saving activities. Energy management contracts (EMCs) are an ideal option for LED companies that want to take advantage of the related business opportunities,” commented Wang Rongbao, a member of the National Committee of Chinese People’s Political Consultative Conference (CPPCC) and vice president of the All-China Federation of Returned Overseas Chinese.
Boosting the local content of upstream LED production is part of 12th Five-Year Plan.
Carving out profits by providing LED outdoor and indoor lighting on an EMC basis, the Kingsun Optoelectronic Co. has proven that the EMC business model is effective in helping LED suppliers to build business sustainability. Under the EMC model, customers initially sign year-long contracts and the suppliers then help to replace traditional lighting with LED sources free of charge, taking as their compensation the money that customers save on electric bills during the ensuing years. When the deal finally expires, ownership of the LED sources is transferred to the customers, who are also guaranteed long-term maintenance services.
The success of this business model depends partly on the long LED lifespan—five to 10 years--and partly on the sharing of risk, which is especially important for the promotion of LED lighting in commercial buildings such as shopping malls, offices, hotels, and banks. Replacement and maintenance of LED lighting are costly, and this is the main obstacle to the wider acceptance of LED lighting in today’s market.
Kingsun’s chairman, Li Xuliang, noted that EMC is a market-driven business model for the LED industry and is based on three indispensable factors: contract energy management, a sound supply chain, and reliable credit. “Drawing on the EMC model, Li went on, “our company aims to serve as an energy bank that provides customers with economical LED lighting solutions. Having already proven popular in Guangdong, this business model will be duplicated in other provinces in South China.”
Boosting Upstream Supply
Boosting the local-content rate of metal organic chemical vapor deposition (MOCVD) equipment, LED chips, and system integration is also part of the 12th Five-Year Plan and is seen as vital to sustainable development of the LED industry.
As part of the previous Five-Year Plan, the Chinese government already provided subsidies for the procurement of advanced MOCVD equipment from abroad by a couple of local semiconductor equipment companies, one of which was Sanan Optoelectronics, in an attempt to speed up development of the upstream sector. This effort will be continued in the years to come.
China has developed a number of industrial and national standards for LED lighting, but none has been accepted by the market.
Xu Jiantou, chief expert of the National 863 New Material Expert Group, noted that the current Five-Year Plan aims to raise the local-content rate of LED upstream production to 70% in 2015, when output value is expected to reach RMB500 billion. This will present the industry with huge business opportunities.
MOCVD equipment manufacturing has been especially targeted by Chinese officials because the performance of the related production equipment is closely related to LED quality and production efficiency. Although the market is almost completely dominated by Germany, the U.S. and Japan, some Chinese companies have worked hard to squeeze into the field.
For instance, the Jiansu Huasheng Tianlong Optoelectronic Co. has dedicated itself to the development of MOCVD equipment for years, and plans to bring one or two sets to the local market in 2012. The company hopes to gain a 3% share of the domestic market in 2013; an 8.5% share in 2014, and a 15% share in 2015, when output value of the sector will reach RMB900 million.
The Chinese government has been inspired by foreign countries’ successful experience in developing industrial clusters and has set up industrial parks in Guangdong, Chongqing, Hubei, Zhejiang, and Tianjin to encourage more cooperation between LED makers and related suppliers.
Despite its rapid progress in technology and production, China’s LED industry has been troubled by shortages of qualified R&D engineers and chip designers in recent year, a situation that has attracted government concern.
One piece of good news for the industry is that with help of the authorities, the China Semiconductor Project R&D and Industry Alliance, Guangdong New Lighting Industrial Base, and several colleges in Foshan City, southeastern China, recently signed a letter of intent on LED engineer incubation. The signing parties will jointly organize training courses designed to produce qualified workers for the industry.
Establishment of LED Standards
The establishment of a comprehensive set of standards for LEDs is also among the Chinese government’s priorities for the coming five years. Zhang Wansheng, a researcher with the 13th Research Institution of the China Electronics Technology Group, noted that “These standards include industrial standards and national standards; national standards must be completed by industrial standards, which will have to be tested by the market first.”
The 12th Five-Year Plan also aims to fuel market demand for LED lighting by providing more consumer subsidies.
In fact, standards of various kinds were mapped out in 2009 and 2010, but none of them have succeeded in being accepted by the market due primarily to the fact that they are obsolete, being almost unchanged from those for traditional lighting. The Chinese government hopes to draft more suitable standards in cooperation with industry insiders.
In addition to helping companies boost their competitiveness, the Chinese government will also increase subsidies to consumers for the purchase of LED lighting. Indeed, subsidies are seen as an essential means of further enhancing the popularity of LED lighting in China.
The number of sets of MOCVD equipment employed by Chinese companies is estimated to reach 1500-1600 in the next five years, almost equaling the total now installed globally.
However, the rapid growth in MOCVD equipment engaged in production will likely lead to an excess supply of LED chips in the near future. Industry insiders think that it will take three to five years to digest the excess, since the growth in domestic demand is still limited by the high selling prices of LED lighting as well as other factors. The government’s plan to fuel market demand by offering subsidies, therefore, makes a lot of sense.
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