Trade Resources Industry Views Chinese LED Makers Trying to Avoid The "Price War"

Chinese LED Makers Trying to Avoid The "Price War"

Twenty three LED manufacturers have released their financial results as of Aug. 25, 2015. A lot of analysis has been done to understand net profit and sales revenue. LEDinside focus on the most discussed “price war” and have organized related data to make it easier to understand by observing changes in companies’ gross margins.

LED chips report highest gross margin,  followed by LED package with LED luminaires trails last.

From the 23 listed manufacturers, only Jiangmen Sugar Cane Chemicals’ overall gross margin was higher than the industry average. According to incomplete statics, During the first half of 2015, LED chips had the highest gross margin followed by LED packaging and finally LED luminaires. It can be foreseen that LED chips profits will be further compressed in the future, initiating yet another price war.

LED chip is a technical and capital intensive business. In recent years, domestic LED technology is improving, it has seen fierce competition within the industry. Originally, LED chip trends are mainly led by foreign major manufacturers and Taiwanese ones, while recently Chinese manufacturers has gradually taken the lead since R&D is catching up at a fast pace. With the  distance between Chinese and foreign manufacturers becoming less obvious, the gross margin of LED chips will undoubtedly decrease.

As for LED packaging and luminaires that requires lower technical level, the gross margin has gradually been eroded to a low point. Manufacturers that have high gross margins benefited from innovative applications.

Worth noting is two distinctive trends has emerged for manufacturers whose product portfolio consists of LED packaging, LED luminaires and displays. The gross margin of LEDs application of MLS and Nationstar are lower than its LED packaging. The case is opposite for Mason Technology, Changfang Lighting and Ledman. The reason is MLS and Nationstar are establishing distribution channels and developing their own brand. Meanwhile, Changfang Lighting, Ledman and Mason Technology have higher gross margins in LED application, which reflects the company’s prioritization of these applications in the future.

Opting for innovation may be the answer for LED manufacturers trying to avoid economics of scale competitions

In 2015, the gross margin of mainstream LED packaging products dropped even more. According to Luhua Chang, Sales director of Smalite, although there has been huge shipment of the mainstream 2835 LEDs, the profit is unbearably low. It’s merely a form of customer service.

Based on the observation from the gross margins of 23 listed LED manufacturers, it’s found that Nationstar and Shenzhen MTC LED gross margins are lower than the industry average, while Honglitronic has much higher gross margins. The company benefited from its top-grossing automobile lighting business.

This again proves market competition is the decisive element for gross margins. And as the saying goes, the scarcer the item the higher its value. Not many LED companies manufacture automobile lighting products. Honglitronic’s automobile products are competitive not only in its quality, but also market value, which naturally leads to a higher pricing strategy. Conversely, when there are too many competitors, such as LED lighting luminaires in a market, manufacturers such as MLS can only profit from large scale strategy.

How should manufacturers balance between prices and sales in the race for market shares?

The sliding gross margin of the LED industry also implies that scaling up production is the best cost reduction strategy. To raise market share, manufacturers usually will first adopt low-pricing strategy. Pricing strategies will be reviewed accordingly after gaining market share and reorganizing pricing strategies.

LED lighting products are the best example of the price- scale balance. Philips offered more than 30% off on 6.5W LED bulbs while GE Lighting launched the US$ 10 for three Bright Stik LED bulbs campaign. Cree joined the trend by slashing US$ 15 off its BR30 9W LED floodlight which was followed by Osram’s T8 LED tube. Chinese manufacturers, including Opple, FSL, MLS, NVC and Kingsun Lighting also joined the price wars.

LED manufacturers introduced new LED application in innovative application markets at a relatively high price, while gradually penetrating the market. Taiwanese LED market is a good example in this case. Owing to the low price suppression from Chinese manufacturers, Taiwanese companies started to explore emerging blue sea markets including automobile LED lighting, IR LED and UV LED applications.

In short, the market LED market tends to have higher demands for low-priced products, and smaller demands for costly products. Inevitably, LED manufacturers need to find the balancing point between prices and sales to optimize their profits.

Source: http://www.ledinside.com/outlook/2015/9/chinese_led_manufacturers_call_for_economics_of_scale_war_amid_shrinking_gross_margins
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Chinese LED Manufacturers Call for Economics of Scale War Amid Shrinking Gross Margins
Topics: Lighting