Taking a page from the books of major international players, makers are investing in epitaxy wafer and chip fabs to gain better control over the component deficit.
Driven by the shortage in chips and epitaxy wafers, China's LED industry is slowly taking steps to create a supply chain that unifies both upstream and downstream processes.
|The model GPW082-01 LED backlight from Xiamen Guangpu measures 3.5in. It has a viewing area of 71.08x53.56mm and brightness of 4,000cd/sqm.|
Mainland China is home to roughly 2,000 suppliers involved in various LED-related sectors such as package, backlit screens, lamps and accessories, including the base, shell and wire, but less than 10 percent can produce chips and other types of core raw materials. While there are now a growing number of businesses engaging in the R&D and manufacture of LED chips, few have succeeded in producing a sizeable output with stable quality. As a result, most downstream suppliers continue to incorporate imported chips. Package maker Shenzhen Smalite Optoelectronics Co. Ltd, for instance, sources more than 90 percent of chips from Taiwan or the US.
This setback is only encouraging companies to improve the integration of the supply chain. In fact, this is one of the measures international LCD panel makers have taken to ensure consistent LED supply. Samsung set up Samsung LED, while AOC has Lextar.
One of the manufacturers of gallium nitride-based blue light epitaxy wafers and chips in the mainland, Epilight Technology Co. Ltd invested 10 billion yuan ($1.47 billion) in an LED project in Hefei, Anhui province, in June 2010. The annual output is estimated to reach 42 billion units by 2011 and 200 billion units by 2013. The facility is also anticipated to serve as the city's main source of G6 or G8 TFT-LCD panels.
Even local TV manufacturers are taking this step. Hisense, TCL and Skyworth all have joint-venture LCD module fabs with panel suppliers such as AUO and LG Display.
Some LED package makers such as Xiamen Guangpu Electronics Co. Ltd, meanwhile, are engaging in downstream applications. The supplier hopes manufacturing the finished products as well can yield higher returns.
There are some limitations, however, to the speed with which businesses can fully integrate upstream processes into their production facilities. Ninety percent of the MOCVD machine supply globally comes from only two enterprises: Aixtroon in Germany and Veeco in the US. This means these two companies can control the cost and output of the units. It is said their production schedules are filled to 2011.
Presently, only an estimated 500 of these major LED chip production machines will be used at factories worldwide this year. That represents a 92 percent increase over the 260 units in operation in 2009.
Sapphire substrates, a key material in LED chips, come from a handful of sources in the US, Russia and South Korea. Through the pace of their expansion plans, such suppliers could also decide how soon the supply-demand situation improves.
Some companies, including Xiamen Overseas Chinese Electronic Co. Ltd, believe this apparent monopoly of key equipment and materials is the main reason for the current shortage, not soaring demand for large LED-backlit devices. At present, the market share of LED TVs is still around 20 percent, which is within the 20 to 30 percent target released at the start of the year. The growth of LED TVs has not exceeded projections so the demand should still be reasonable.
With demand outstripping supply, the cost of key materials such as sapphire substrates and MOCVD sources rose by about 20 percent in Q2 2010. This, in turn, pushed up LED chip and epitaxy wafer quotes 10 to 20 percent. At Shenzhen Smalite, the cost of manufacturing high-powered LEDs has increased by a similar percentage as a result. Most downstream suppliers, however, cannot afford to raise quotes due to intense price competition. Some have started negotiating with their clients, but any upward adjustments will be limited to 10 percent.
Lead times are delayed as well, often by roughly two weeks. Chip companies either cannot deliver on time or send out only a portion of the agreed volume. Many are prioritizing orders as well, accomplishing those from buyers who have committed to procure a set number of units over a period spanning at least one year.
Despite the shortage, tier 1 suppliers are not as affected as small and midsize makers. This is because they usually source from more stable distribution channels, which generally do not cater to the smaller businesses that do not place large orders. Even so, these big manufacturers are still feeling the heat from the shortage. Xiamen Overseas Chinese Electric Co. Ltd believes the pressure to ensure stable supply is what pushed many tier 1 TV makers to invest in upstream processes. The other effect of the component deficit is that the cost of LED-backlit panels has stopped its fast decline. Since April, quotes for such displays dropped only 1 to 3 percent, compared with the 5 to 8 percent reduction for CCFL versions.
LED Insider market analyst Roger Chu believes the shortage is likely to ease during Q4 2010. Production schedules at several major Taiwan-based chip makers are filled until Q3, but the fourth quarter is generally the lean period for LCD TVs.
But suppliers such as Xiamen Guangpu do not think the situation will improve soon. The LED industry has grown very fast in recent years and is not likely to slow down in the months ahead, which can only add to the supply-demand pressure.
Note: This article "China sees vertical integration as key to LED chip shortage" was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.
All price quotes in this report are in US dollars unless otherwise specified. FOB prices were provided by the companies interviewed only as reference prices at the time of interview and may have changed.
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