Japan is home to two dominant manufacturers of InGaN LEDs, Nichia and Toyoda Gosei, but other companies may be about to enter the fray. Chris Redl of UBS Warburg sheds some light on the Japanese market for blue, green and white emitters.

The demand for high-brightness InGaN LEDs continues to increase, driven by applications such as traffic signals, backlighting for displays in mobile phones and interior automotive lighting. In Japan this market is dominated by two companies, Nichia and Toyoda Gosei, who are estimated to have combined LED revenues of $580 million in the 2001 fiscal year, compared to $103 million just three years ago. Following its agreement to license Cree s LED technology, Rohm looks set to enter the market in summer 2001 (see Compound Semiconductor February 2001, p8). Such is Rohm s reputation in Japan for aggressively driving down prices through its expertise in high-volume manufacturing of high-tech components that Toyoda Gosei stock fell 66% in the month following the CreeRohm announcement. Other companies, including Toshiba and Sharp, have finished development of GaN-based LEDs but are still sitting on the sidelines, apparently awaiting the outcome of the NichiaToyoda Gosei lawsuits. As recently as February 7, Toshiba announced the joint development of white LEDs based on InGaN-based chips fabricated by Toyoda Gosei. The big guns As shown in , estimated revenues for fiscal year 2000 were $407 million for Nichia (whose fiscal year ends in December) and $174 million for Toyoda Gosei (fiscal year ends in March). In fact, Toyoda Gosei recently reduced its fiscal 2000 estimates from 22.5 billion ($195 million) to 20 billion ($174 million). The company cited lower sales volume, rather than lower pricing, as the reason; the lower volume was largely due to a lack of white LED products to compete with Nichia. However, Toyoda Gosei should have mass-production capabilities for its own white LED towards the end of this year. Both Nichia and Toyoda Gosei are investing heavily to continue increasing their production capabilities. Toyoda Gosei has roughly doubled its capacity over the last 12 months, and should have the capability to produce up to 75 million LEDs per month when its new factory is operational. Management expects to grow capacity by around 30% in fiscal 2001, mostly through higher yields. Meanwhile, Nichia has more than tripled its potential capacity via a brand-new factory which will allow the fabrication of around 100 million units per month. The relative fortunes of the two companies have been closely linked to the market for HB-LEDs used as backlights for liquid-crystal displays (LCDs) in mobile phone handsets. In 1999, Toyoda Gosei s revenue showed year-on-year growth of 135%, increasing from $55 million to $129 million for the fiscal year ending March 2000. This corresponded to a strong growth in demand for monochrome displays, which require single-color (blue, green etc) LEDs for the backlights. The cell phone manufacturers also largely required unpackaged chips, which Toyoda Gosei was well positioned to supply. In 2000 the market shifted from monochrome displays towards full-color displays requiring white LEDs as backlights. Nichia enjoys almost total market dominance in this area as it is currently the sole supplier of white LEDs; consequently, the company s revenues increased some 96% over 1999 (compared to 43% for Toyoda Gosei). Market demand Display backlights for Japanese mobile phone handsets make up the majority of overall demand for InGaN-based LEDs in Japan, accounting for 5560% of the output of both Nichia and Toyoda Gosei. Strong future growth is expected from western cell-phone makers, and also from the personal digital assistant market. The traffic signal market is not particularly promising in Japan the country has only 180 000 signals compared to three million in the US. Moreover, existing manufacturers are protected by the government: specifically, retired officials from the National Police Agency, which controls the market, frequently get jobs with signal makers. Automotive manufacturers in Japan have lagged behind their European counterparts regarding the use of LEDs for dashboard backlighting and other interior lighting applications, although this is showing signs of change. By 2003, most of Japan s 11 auto makers should have a higher LED content per vehicle, especially in LED-based tail-lights. The HB-LED market for handset displays has proved to be very aggressive and price-competitive. Emerging technologies such as W-CDMA place stringent demands on battery technology, requiring the use of the highest-efficiency light source for the display. Currently, the HB-LED market for handset displays is estimated at around $350 million, up 200% year-on-year. Roughly 30% of handsets sold in Japan now have full-color displays, and this should increase to nearly 70% within three years. The market is expected to peak at $542 million in 2003, as shown in . After that, displays made from organic LEDs are expected to steal market share from LCDs with LED backlights. Nichia is currently estimated to have a 60% share of the handset market, as it is the sole supplier of white LEDs. Toyoda Gosei has 30%, with Cree taking the other 10%, although this split is likely to change once Rohm enters the market. Law and disorder The current patent dispute between Nichia and Toyoda Gosei, which has taken the form of more than 10 lawsuits between the two companies, is creating a barrier to market expansion and keeping prices high. If the lawsuits are resolved soon, the cost per lumen for InGaN-based LEDs should drop rapidly as other manufacturers enter the market, allowing these products to penetrate new market segments. Although the courts have favored Nichia in the two rulings made to date, six of the seven lawsuits filed by Nichia refer to products that are no longer in production by Toyoda Gosei. The seventh refers to the aluminum content of the electrode materials in Toyoda Gosei s devices, and at the moment Nichia appears to have a weaker case against Toyoda Gosei in this area due to reported requests by Nichia to withdraw some of the sections of the lawsuit. However, Nichia has a range of other patents that could be used as the basis for further lawsuits, particularly in annealing. Several key issues are waiting to be resolved in the patent dispute. For example, will Nichia continue to push for a monopoly, or will it cross-license with other companies? Or will Nichia succeed in its stated aim of putting Toyoda Gosei out of business? Furthermore with such a large market at stake, will Japan s Fair Trade Commission allow Nichia to hold a monopoly, if Nichia pushes Toyoda Gosei out of the market and decides not to cross-license? The lawsuits are time-consuming, and are keeping new entrants out of the market. In the meantime, prices for InGaN-based devices are staying at an artificially high level, and the leading suppliers are generating huge profits. This has funded further expansion, which in turn will make it much more difficult for potential competitors to enter the market in the future. Looking to the future While Nichia currently dominates the white LED market, the recent Toshiba Toyoda Gosei announcement suggests these two companies will provide strong competition within a year. Perhaps more importantly, following its alliance with Cree, Rohm is likely to make inroads into the blue and green LED market, initially at the lower brightness end and subsequently for higher brightness applications. We can also speculate that Nichia may become involved in some interesting developments in the near future. One possibility is that Nichia could make a supply agreement with a major manufacturer, the likely candidate being Sony which, like other consumer electronics makers, requires Nichia s blue lasers to produce next-generation DVD systems with both read and write capabilities. Another possibility is that Nichia could file for an initial public offering; given Nichia s strong market position, the flotation could create a public company worth as much as $5 billion.