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Technical Insight

China’s LED chipmaking boom fuels global overcapacity

Most of the LEDs that are made in China fall into one of two camps: either low performance, incredibly cheap emitters that backlight keypads and illuminate the likes of toys, children’s shoes and power indicators; or high-end power chips for general lighting that are fabricated through joint ventures with foreign LED manufacturers. Domestic chip production is ramping in both these sectors, contributing to overcapacity in the global market and driving down prices, reports Richard Stevenson.

The LED industry continues to receive tremendous support from governments all around the world. Many of them fund fundamental device research that helps to increase chip efficacy and spur LED penetration into new markets. In some cases, there is also state funding for programmes to introduce device standards, while at the regional level some local governments offer LED makers discounted rates for land rent. If a league table to reflect the extent of government support was constructed, it is a near-certainty that China would be at the top, thanks to great assistance it gives its chipmakers. If they need to invest in new epi-reactors, they are eligible for $1.5 million subsidies on multi-wafer tools, equating to up to 75 percent of the total cost. And to help LED makers flourish financially, they can access low-interest loans, receive tax breaks and pay very little – and sometimes nothing at all – for their land. What’s more, LED chipmakers in China can gain from strong competition between the provinces, which are trying to outdo each other by offering these high-tech firms great incentives to set up there. All these chipmakers could also benefit from the growth of domestic infrastructure for LED production, according to Ross Young, Senior Vice-President of Displays, LEDs and Lighting at IMS Research, a UK-based provider of market research and consultancy to the global electronics industry: “We have seen a number of announcements of Chinese companies entering the sapphire market and I would imagine that there are incentives to get them in.” Many of these entrants are successful polysilicon manufacturers who Young expects to do well in the sapphire substrate market. For metal-organics, gas sources and MOCVD tools Chinese LED chipmakers have to rely on imports. Mirroring the rest of the world, Aixtron is the leading supplier of MOCVD tools. It had 56 percent of the market from fourth quarter 2009 to fourth quarter 2010 - Veeco had the remainder. However, Chinese chipmakers are starting to have other MOCVD reactor manufacturers knocking on their doors. Young believes that Applied Materials has shipped an MOCVD tool to China, and says that the Korean epi-reactor manufacturer Jusung is also targeting this country, following a slowdown in its domestic sales. “And we hear that Taiyo Nippon Sanso is also trying to ship to China,” adds Young. Chinese chipmakers looking to build their capacity may also be able to buy locally soon, thanks to MOCVD development in the country. “We believe that in some cases they may have bought, or had access to, a Veeco or Aixtron tool to study,” reveals Young. “But we don’t believe there is anything commercially available yet in China.” Strong growth in fertile ground As expected, the great set of incentives for pursuing LEDmanufacture in China has driven up the number of playersin this market, some of which have spun out fromuniversities carrying out research into this device. Todaythe number of firms making LED chips, including joint-ventures  with overseas chipmakers, stands at around 60,with most based in the cities of Calian, Hebei, Beijing,Shanghai, Hangzhou, Wenzhou, Nanchang, Xiamen,Shenzen, Dongguan, Xian, Wuhan and Binxian. Keeping track of all these chipmakers is complicated by mergers and acquisitions that can involve a re-launch under a new name. For example, Century Epitech, Nanchang Xinlei and Podium have bocame part of Jiangxi Lianchuang; Longfei and Shanghai Long De Xin have joined forces and become PN Stone; and Shanghai Rainbow and Yangzhou Longyao have come together to form one group. According to Young, the driving force for these moves is a lack of ‘epi-talent’: “When one company has developed the process, and another is struggling but has the tools or capital, it make sense for them to consolidate.”   San’an Optoelectronics, Silan and HC SemiTek are leading the sales of nitride LEDs by Chinese firms, with revenue for the red and yellow cousins based on AlInGaP spearheaded by Changelight. Efforts from them and all the other LED chipmakers in China led to device sales of RMB 4 billion ($ 0.6 billion) in 2010, and revenue is expected to increase to RMB 10 billion in three-to-four year’s time, according to the Chinese media outlet GG-LED. Young believes that the vast majority of these sales are to the domestic market. “Before [these companies] can start aggressively exporting, they will have to make sure they have their IP licenses in place.” Obtaining this crucial piece of documentation can be a lengthy process, due to the number of companies requesting licenses. The Chinese government’s motivation for ploughing cash into its LED industry is its desire to roll out solid-state lighting, particularly in street lighting, across the country.   Figure 1: Shipments of MOCVD tools have rocketed in recent times to unprecedented levels   This can cut the nation’s electricity needs, reducing demand to build more nuclear power plants. “That’s important for an economy growing as large and fast as that of China’s,” explains Young. Some of China’s chipmakers are fulfilling the government’s wishes, and producing LEDs with a cool white emission of 130-150 lm/W at 350 mA, a performance good enough to cater for general lighting. These firms include SemiLEDs, which has just started installing tools in China to increase its capacity. “SemiLEDs is right up there with its vertical structure with its metal carrier, which does a really good job of getting the heat out,” explains Young. He says that the company decided to expand into China because costs are low, including those for equipment, which is reduced thanks to the subsidy programme. This in turn allows the company to price its products more aggressively. Some other Taiwanese companies are also pursuing joint ventures in China, and producing high power chips with 130-140 lm/W efficacies. These significantly outperform the domestic Chinese companies, which have products below 100 lm/W. These less-efficient LEDs fail to meet the requirements for the country’s solid-state lighting program, and are serving other applications. Failing to hit the big screen The last few years have witnessed an explosion in the number of LEDs deployed in backlighting screens, and some Chinese chipmakers have tried to get into that market. But, in general, there are few success stories and they may miss the boat. According to Young, this market will saturate in 2013: “One issue is that the number of LEDs per panel is going down as efficiency goes up. And TV manufacturers have reduced the brightness to 400 cd/m2 on their entry panels, so they are using less LEDs there.” Today, most of the LED chipmakers in China are shipping to ‘off-spec’ markets, with devices are going into low value- added applications. “These LEDs are not backlighting displays, but backlighting the keyboard on a notebook or a phone,” explains Young, who adds that these chips are also being used in Christmas tree lights, the heel of children’s sneakers and in indicators that reveal whether an electrical item is ‘on’ or ‘off’. The ramping production of these low-performance LEDs in China, plus their high-power cousins, is not welcomed in some quarters. “You have supply growing at a time when demand isn’t there,” points out Young. He says that the 1100 MOCVD tools being installed all over the world in 2011 can meet the anticipated demand right through to 2013 or 2014 – when incandescents are banned and solid-state lighting kick offs. Today it simply leads to oversupply, driving down chip prices. One company already hurting from global LED overcapacity is the US chipmaker Cree, which has failed to hit its guidance in recent quarters and has seen its profits plummet. In 2010 it exported a significant proportion of its high-power chips to China, which is probably the biggest market today for solid-state lighting, due to the street lighting program. Repeating this feat at the same margins is now is far harder, due to downward price pressures on the LEDs. Young believes that excessive MOCVD reactor installments in 2011 along with yield improvements can help cater for demand to 2014. “We think that yield improvements are going to be significant over the next two-to three years. If everyone increases their yields by 20 or 30 percent, that’s [equivalent to] a whole lot of new tools.”   Figure 2: The $1.5 million subsidy offered by the Chinese government for the purchase of multi wafer MOCVD reactors has helped this country become the biggest market for shipments of this deposition tool   Further efficiency gains may result from an increase in substrate sizes. Currently, production is predominantly on 2-inch wafers – it is one consequence of the subsidy plan, which required the purchase of a tool capable of handling at least 31 2-inch wafers. If process engineers can learn to handle the strain associated with the growth of nitride films on sapphire, production can then move to larger wafer sizes, yielding more chips from every reactor. Although there will be overcapacity in the market for the next few years, that does not mean that MOCVD sales will dry up. “Certain tools may become less functional,” explains Young, “and new tools may be brought on the market that are more cost effective.” In addition, some companies will also invest in capital equipment to win market share. The path that China’s LED industry will take over the next few years will be influenced by the twelfth five-year plan, which will be unveiled in a few months. The nation’s leaders want their country to be one of the three third biggest LED manufacturers by 2015, so this technology is sure to feature heavily in the next programme. Young predicts that the next plan will focus on increasing domestic demand for LEDs, and place less emphasis on chip supply. He speculates that this could involve domestic content requirements, which insist that LEDs used in goods are made in China. “So companies like Cree, which isn’t manufacturing the chips in China – although they do package them there – could face some hardship.” Along with greater domestic demand, the Chinese government will want its LED industry to develop more of its own intellectual property, and echo the advances that the nation’s solar industry has made over the last few years. “China was behind in solar, but after they partnered with Australian universities – New South Wales in particularly – they quickly improved the technology and were on the leading edge very quickly,” says Young. “These things haven’t happened yet in LEDs, but I’m sure it’s a goal. And they are going to spend a lot of money trying to make it happen.”  IMS publishes quarterly market reports on the Chinese LED market © 2011 Angel Business Communications. Permission required.

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