Status of the LED Industry

LONDON, UK: A new report shows that the emergence of low price LED solutions are pushing technology adoption toward general lighting but cost reduction is changing industry structure and pushing M&A. Excerpts:

General lighting applications have taken off

Growth of the LED industry has come initially from the small display application and has been driven forward by the LCD display application. In 2012, general lighting has surpassed all other applications, representing nearly 39 percent of total revenue of packaged LEDs.

Indeed, the LED TV crisis of 2011 (following an overestimation of the market) had the benefit of decreasing LED prices and intensifying the competitive environment. As a matter of fact, LED-based lighting product prices have decreased more rapidly than expected, increasing the penetration rate of the technology.

Yole Développement estimates packaged LED will reach a market size of $13.9B in 2013 and will peak to $16B by 2018. Growth will be driven mainly by general lighting applications (45 percent to 65 percent of total revenue during this period), completed by display applications.

Other applications are still in motion

Regarding display and other applications, most products currently on the market integrate LED technology. Saturation mixed with strong price pressure and competition from OLED will make most of these markets decline starting from 2013 / 2014. Contrary to general lighting, overcapacity (inducing price pressure) has engendered a decrease in market size more rapidly than predicted.

To keep the momentum, LED-based lighting product costs still need to be reduced

Cost represents the main barrier LEDs must overcome to fully compete with incumbent technologies. Since 2010, the price of packaged LEDs have sharply decreased, which has had the consequence of decreasing the price of LED-based lighting products. However, to maintain the growth trajectory, more efforts are needed in terms of price. LED still has some potential for cost reduction, but widespread adoption will also require manufacturers to play on all components of the system (drivers, heat sink, PCB).

Merger of LED industry with lighting industry has started

Over the past three years (2010 to 2012), the number of mergers and acquisitions (M&A) has continuously grown, reflecting the increased consolidation of the LED industry. During this period, we have listed ~60 significant M&A deals. And 17 additional deals have already been identified during H1-2013. Main objectives of these deals are:

1. Vertical integration

A consistent trend in the LED space, reinforced by the promising boom of general lighting applications. Such deals are motivated by the need for companies to access to new technologies, to close knowledge gaps in the LED supply chain, secure supply.

2. Strategic acquisition

The LED lighting market remains highly fragmented in all regions of the world (i.e., local features of fixtures). In this environment, strategic acquisitions are mainly motivated by economies of scale, desire for improved market share, access to a wider customer portfolio, and increase the sales force.

3. Geographical acquisition

Mergers and acquisitions, rather than organic growth, have proved to be the main market-entry strategy by overseas acquirers. Such deals have been driven primarily by companies seeking access to new markets and local distribution networks. The number of M&A deals is likely to continue to growas LED technology has created a Solid State Lighting (SSL) chasm, modifying all traditional aspects of the lighting industry (light source, system design, test) and forcing supply chain players to acquire new

competencies.

Emerging substrates could change the rules in an industry dominated by sapphire

Sapphire (and SIC) remain the most widely used substrates for GaN epitaxy but many research teams are working on finding better alternatives in terms of performance and total cost of ownership. In that context, Si and GaN are the main new substrates developed in the LED industry:

- Benefits of GaN-on-Si LEDs rely on decreasing manufacturing cost by using cheaper Silicon substrate but mainly by switching to an 8" substrate and using fully depreciated and highly automated CMOS fabs.

- Benefits of GaN-on-GaN LEDs stem from the lower defect density in the epitaxial layers, allowing the device to be driven at higher current levels and to use a lower number of LED devices per system.

However, several barriers need to be overcome:

- GaN-on-Si LEDs are closer to GaN-on-Sapphire LED performance but increased manufacturing yields and full compatibility with CMOS fab still need to be achieved.

- GaN-on-GaN LEDs suffer from GaN substrate availability and its cost.

While GaN (GaN-on-GaN LEDs) holds some potential on specific high-end niches, we consider Silicon (GaN-on-Si LEDs) as the more serious contender as a potential alternative to the widespread use of Sapphire. But the success of GaN-on-Si LEDs will depend on the development of associated LEDs performance and development of manufacturing techniques.