We recently took a trip to China to interview top manufacturers of LED components for our upcoming China Quarterly Updates Report. According to these major LED players, we are convinced that several LED trends we predicted in my blog at the beginning of this year did and are continuing to happen.
We have heard from most LED packagers that LED price competition has become severe recently, especially for standardized lighting products (light bulbs and light tubes). It is likely that Seoul Semi started the war. For example, in the first half of this year, a 1W 3030 LED for a light bulb or light tube cost US$0.11~0.13 from Nichia. Seoul Semi cut their price to US$0.075~0.085. Then Nichia followed the price competition and cut their price to US$0.075~0.085 as the ceiling, implying 30% ASP decline. As a result, all Chinese packaged LEDs cannot be sold over Nichia. On the other hand, the price of LED chips has become more stable because there are only a few qualified players in this industry. Most of these Chinese LED packagers use LED chips from Epistar (Taiwan) and Sanan Opto (China). Therefore, the profits of LED packagers have been squeezed in the second half of 2014. We also see some small LED packagers went bankrupt in 2014 due mainly to scales and cost synergy, which is in line with our expectation. Consolidation for the LED package industry will continue going forward. We expect the pricing of LED packages will touch the bottom and stabilize in 2015.
In terms of Chinese lighting applications, everyone complained that China doesn’t have national standards for LED lighting. As a result, low-quality and lower-cost LED lighting products are now the main pricing breaker in the Chinese market. You can always find the cheaper price; however, of course, the quality and uniformity of LED lighting products are low. The lifetime might be only 3 months. Some LED lighting application companies went bankrupt in 2014, and we believe the consolidation will continue to happen in the next 2 years. In 2014, several LED lighting companies in Chongshan Guzhen have shut down because of account receivable and price competition. Some companies’ annual revenues were over US$ 5mn. Therefore, we expect the major LED lighting brands will start to gain market share in the next 2 years because people will realize the quality issue. So far, we have heard that some tier one lighting companies’ pricing has rebounded slightly because customers care about the quality and know the brand value.
The demand of the LED lighting market is still strong in China because of pricing and government policy. It is very likely that the Chinese government will not have any LED subsidy in 2015 because the price of LEDs is cheap enough now. China’s local governments used to set up the Energy Management Companies (EMC) to finance and manage LED lighting projects. We expect the EMC to decrease sequentially because the price of LED lighting has become cheaper and cheaper. Chinese local governments can just purchase LED street lighting or office lighting directly. To sum up, we expect consolidation to continue in 2015 and the pricing to become more stable after consolidation. If China’s government can create national standards for LED lighting, it could be expedite the consolidation. Then, the Chinese LED market will become healthy, and the ASP will become stable. The major LED packagers and lighting applications companies will dominate the Chinese market.
