Insights Into LEDs & Lighting, from Strategies Unlimited
China's strength is that it is applying its capital to jump-start these industries from top to bottom: from refining the materials and manufacturing components to assembling and installing systems. Unlike many smaller countries that must enter competitive export markets to obtain foreign currency, China has a large domestic market from which it can build a more complete supply chain to launch its export businesses.
The LED industry has closely watched China's voracious acquisition of MOCVD reactors, raising concerns of over-investment in manufacturing, or more bluntly: a bubble. We wrote about this earlier this year with the conclusion that, while there will certainly be a shakeout among Chinese low-end LED suppliers, high-end foreign suppliers are years ahead, so the impact on them will be minimal. Foreign suppliers are even benefitting from the situation by expanding some lower-end production into China.
Our recent report on the Chinese upstream LED industry by our partner GG-LED shows that the Chinese effort goes far beyond MOCVD equipment. Planned investment in new projects related to LED manufacturing amounted to nearly $17 billion in 2009-2010, with over $10 billion of that amount for chip manufacturing. Investment was not only subsidized by regional governments in a competitive "keep up with the Joneses" frenzy, but has taken in many companies from outside the LED industry, with dreams of cashing in on IPOs on the Chinese stock market just like Western speculative bubbles.
Chinese investment is also active in the equipment and materials used for fabricating LEDs. Investors committed over $3.4 billion in 2009-2010 to 22 companies to increase production of sapphire wafers, and China hopes to turn from a net importer to a net exporter of sapphire wafers by the end of this year. The sole Chinese supplier of metal-organic gas for making LEDs is among the top five producers in the world, and ramping quickly.
There is over-investment in LED manufacturing in China, but what will be the impact? At the very least, it makes the market less certain. A glut will accelerate the trend toward cheaper LEDs and LED lighting, which has been a goal of national policymakers. It may hurt chipmakers and vendors of fab equipment along the way, if only by spoiling an otherwise rational market.
For the Chinese government, it amounts to a massive investment in R&D for LEDs. The investment is partly the result of China's coherent national strategy, included in the country’s 11th Five-Year Plan, but also the result of many Chinese local governments acting in their own interests, listed in detail in the report. It may not be the most efficient use of capital, but when viewed as a national energy policy, it will bring substantial leverage to China at relatively little cost compared to other large government programs.