Spending on LED fab manufacturing equipment will decline 9.2 percent in 2013 as the industry faces weak long-term demand and consolidates manufacturing capacity.  According to the SEMI LED/Opto Fab Forecast, spending on LED fab manufacturing equipment will drop to $1.68 billion in 2013, down from $1.85 billion in 2012.  Global LED manufacturing capacity will continue to grow this year, reaching an estimated 2.57 million 4” inch wafer equivalents, a 24 percent increase over 2012.  The outlook for equipment spending in 2014 is currently projected at less than $1 billion, as manufacturers assess an uncertain competitive environment and potential alternative manufacturing strategies.

Underlying the softening in manufacturing investment is weak long-term demand for package LED components.  Despite growing demand for solid state lighting systems, total demand for packaged LEDs is at or nearing its peak.  Last year, Strategies Unlimited forecasted that demand for LEDs would peak in 2012 or 2013 at approximately $13.3 billion, declining to less than $13.0 billion in 2014.  Recently, IMS Research forecasted that LED demand would peak in 2015 at nearly $14 billion before declining through the remainder of the decade.

Among the reasons for weak long-term demand is the LED count per device is dropping fast and the long-life of LED-based lighting systems radically reduces the replacement lamp market. For LED manufacturers, average selling prices continue to drop, especially in high-growth mid- and low-power segments serving the lighting industry.

With excess manufacturing capacity continuing to place price pressures on LED components, manufacturers will be cautious in embarking on major new manufacturing investments.  Low fab utilization is also delaying the transition to 6” sapphire wafers. In addition, new GaN on silicon products are just now reaching the market, creating further uncertainty.  Last month, Toshiba announced the beginning of production of white LEDs using GaN on 8” silicon substrates, utilizing depreciated IC fabs with modern automation tools.  Working with technology from Bridgelux, Toshiba has reportedly indicated they will eventually ramp to 10 million units per month.  German-based Azzurro Semiconductors announced that Taiwan LED leader, Epistar, has successfully migrated their LED structures to its 150mm GaN-on-Si templates and the company is feverishly working on 200mm technology.  Philips, OSRAM, and Samsung are all actively exploring GaN on silicon technology.

GaN on silicon could be a game-changer in the LED market, but its impact is still uncertain.  Yole Developpement estimates that significant cost benefits can only occur if equivalent yields to sapphire processes can be achieved, and that production utilizes fully amortized 200mm lines.  Sapphire wafer prices have significantly declined over the past 18-months, lessening the benefits of a move to silicon.

Apart from major substrate technology changes, manufacturing spending will increasingly be focused on yield rather than capacity and throughput. Equipment, materials and technology suppliers who can deliver an ROI through improved manufacturing yields can still prosper in the weakened market. 

China Pursues Leadership

China’s 12^th Five Year Plan took effect in 2011 and renewed the country’s commitment to LED and solid state lighting technologies.  While the massive MOCVD spending of 2010/2011 has significantly declined, China remains the leading region in manufacturing investments. China will be the largest market for LED fab equipment in 2013 with projected spending of $667 million, approximately 40 percent of the total worldwide spending and almost double Japan’s spending, the second largest region.  In 2011, China spent over $1.2 billion on LED fab manufacturing equipment.

China’s generous national and local subsidy programs behind the massive industry development (China now has 82 LED fabs, up from only 16 in 2006) have all but disappeared, but the country remains committed to developing all sectors of the LED industry. China is a major consumer of LEDs in signage, mobile displays, TVs, and lighting that utilize low and mid-power LEDs that Chinese suppliers specialize in.  Energy conservation through solid state lighting is a national priority.  Most observers predict a consolidation of the China LED industry, with perhaps one of two companies emerging as global powerhouses.  While much of China’s LED capacity is dormant, in transition or reliant on older technology, companies such as SanAn and ETi will invest new and upgraded manufacturing technology over the next two years. 

Industry Structure Implications

Another troublesome aspect of the LED industry is that nearly 70 percent of the LED market is supplied by only ten companies, most of whom are directly involved in manufacturing lighting systems.  Increasingly, the LED components may be seen as loss leaders offering little incentive for manufacturing investments.  With falling ASP’s, soft demand, vertically integrated customers, and increasing supply of quality products from China and elsewhere, the outlook for continued LED manufacturing investments will be limited for the foreseeable future.