Looking at earnings results for LED companies, it is apparent that 2013 was a turning point for the LED industry. On a revenue basis, LED package companies are growing and performing better than LED chip companies.
LED package companies have expanded their business model to modules and applications, increasing revenue and profit. LED package companies did not need to make as many investments as chip companies, and since they had lower capital expenditures, package companies were able to invest in new businesses, such as branded products or automotive applications. LED package companies were also helped by government policy interventions, particularly from subsidies for eco-lighting products or energy management contracting (EMC).
The fastest growing market is lighting, driven by subsidies and energy savings. Government policies favoring energy conservation help to drive demand for LED lighting. At the same time, LEDs are becoming more efficient and less expensive. Thus, the penetration rate for replacement lighting tubes reached 6% in 2013, for example.
The biggest areas fueling growth in the lighting application are commercial office and street lighting. Commercial offices and public buildings use many lighting tube products, and in areas such as basements and driveways that stay open 24 hours a day, lighting is their main use of electric power. There is also ample street light demand from emerging countries including Brazil, Russia, and Mexico.
Competitive dynamics in LED chip making mean that these positive trends may not benefit all players. China’s government directly subsidized chip companies, specifically the purchase of chip production equipment, at a level exceeding $50 million. The subsidies gave Chinese LED companies an advantage over Taiwanese competitors. At the same time, the three largest Taiwanese LED companies – Everlight, Epistar, and Lextar – account for more than 70% of Taiwan LED industry revenues. This pressure could drive merger activity over the next few years.