After 2014, China will boast the world's largest LED epitaxy and chip production capacity base. However, China LED fabs are mainly concentrated on blue/green GaN LED manufacturing, and most of the capacity focuses on small and medium size chip products in terms of technical and process capability. The fierce price war in this market has led to low profit levels for many companies, and even the closure of a number of domestic LED chip manufacturers. Consequently, many domestic LED fabs are in a weak position, even though in general the LED lighting market has great potential.
Some LED fabs in China which lack productivity and core technology competitiveness will gradually be phased out due to the fiercely competitive market. According to SEMI statistics, the China LED fab industry experienced a rapid increase in past years and — had a total of 76 LED epitaxy and chip fabs (excluding companies that declared projects without actual installation progress) at the end of 2011.
However, starting in 2012, the number of China fabs could decline. Manufacturers will exit primarily from the results of financial losses and conflict between the investors and the management/technical teams. At present, we observe that a few LED Fabs may exit due to the above reasons as early as the end of this year. Based on our estimation, 30 to 40 percent of China LED fabs will suspend operations or be acquired by 2015, while only a few of them will dominate in various segments. Only companies boasting the advantages of scale productivity and patented core technology as well as a progressive mindset will be successful.
The Downturn of New MOCVD Market
The new MOCVD tool market in China grew rapidly and reached a peak in 2011, when China MOCVD installation ranked as the first in the world and occupied more than a half of the total quantity shipped in the world. However, tool installation and utilization were low at some manufacturers, in the worst cases, some “new comers” had utilization at only 20 percent. Future demand was seriously overdrawn during this pre-phase MOCVD installation boom, and the MOCVD market in China is expected to be at a low level over the next three years. In _2012, China's new MOCVD installation is expected to be about 40 percent of the 2011 level.
In addition, it is possible with the closure of some LED fabs over the next few years, a potential secondary MOCVD equipment market could emerge that will bring some pressure on the new MOCVD installation market.
Another trend growing in China fabs involves the wide use of Patterned Sapphire Substrate (PSS) in GaN epitaxial processing. Based on SEMI China statistics, overall PSS penetration in China’s LED epitaxial Fabs is close to 80 percent (for more detail, please refer to “Report on Material Market of China LED manufacturing Industry 2012" available in October from SEMI). PSS can effectively improve the brightness of LEDs, but it’s not the only way. Some domestic enterprises in China have selected a "shortcut." PSS is a patented technology, but many companies see little choice but to use it. A considerable number of manufacturers manufacture smaller chips for some specific applications due to the price pressure so as to increase the output of single epitaxial wafer, and PSS helps to compensate for loss of brightness brought about by size reduction.
