China’s LED Chip Capacity Expansion Halts Price Hikes, Tight Supply

Rising LED chip prices, experienced over the past 18 months, are coming to an end in the fourth quarter of 2017 thanks to production capacity expansion by Chinese suppliers. The largest Chinese LED chip manufacturers including San’an Optoelectronics and HC SemiTek have recently lowered their prices, signaling an end to price hikes and undersupply in the market, according to LEDinside, a division of TrendForce.

LEDinside expects the LED chip market will return to a supply and demand balance in 2018. However, it also could lead to a temporary oversupply situation in the next two years, according to Figo Wang, LEDinside’s senior analyst.

In 2015, the prices of LED chips in China fell sharply causing a surge in orders in 2016, explained Wang. To meet demand, Chinese chip suppliers decided to increase their capital expenditures at the same time that other chip makers were cutting their production investments, and in some cases dropping out of the LED market, he said.

Chinese LED chip manufacturers have continued to invest in 2017. Wang said new MOCVD (metal-organic chemical vapor deposition) expansion plans are primarily from San’an Optoelectronics, HC SemiTek and Aucksun.

San’an Optoelectronics, HC SemiTek and Aucksun have increased their production capacity for 2-inch equivalent epitaxial wafers by 1.3-million, 1-million, and 0.83-million pieces, respectively, in 2017.

As the market enters into a supply and demand equilibrium, Chinese LED suppliers will likely adjust their chip prices for lighting applications and digital displays. This is expected to result in stable pricing or slight price fluctuations, according to Wang.

“After this round of large-scale expansion, the production capacity of the three industry leaders will exceed 1 million pieces per month, increasing the industrial production concentration,” Wang said in a statement. “It can also improve the supply structure and prevent excessive price competition.”

In addition, Wang said the new MOCVD systems have higher production efficiency, which lowers the cost by 30 percent.

“As a result, major players like San’an Optoelectronics and HC SemiTek will enhance their cost competitiveness while other suppliers that cannot afford the production expansion will be marginalized in the market,” Wang added.

LEDinside expects the new processing operations will drive China’s market share for global MOCVD capacity to 54 percent. The number of MOCVD chambers (based on the standard K465i design) installed worldwide will total 401 in 2017, representing the largest chip capacity increase since 2011, according to Roger Chu, research director of LEDinside.

“LEDinside believes the rapid and subsidized capacity expansions that is taking place in China is now squeezing heavily on the profit margins of long-established LED companies working on the global market,” said Chu in a statement. “These international majors in turn have scaled down their own manufacturing or increase the share of outsourcing. Either way, Chinese LED companies will benefit and become even larger.”

However, Chinese manufacturers aren’t the only ones investing in LED chip production. Osram announced in November that its new LED chip factory in Kulim, Malaysia has started operation on time. In addition, Osram said the production systems for 6-inch wafers at the new facility produce 125 percent more LED chips per wafer in a single cycle. The factory can be expanded in two additional stages.

Osram also has started production capacity expansion at its facilities in Regensburg, Germany and Wuxi, China.

During an earnings call in July, Olaf Berlien, chief executive officer for Osram Licht AG predicted a “balanced situation in 2017,” but he also noted the possibility of allocation in 2019 because of high demand for LEDs and many of the older 2-inch and 4-inch MOCVD equipment, particularly in China, are being retired this year.

“That means over 60 percent of the whole capacity is moving out because it doesn't make sense to produce on a 2-inch machine,” stated Berlien in July. “So on the other hand . . . we are looking forward that new investments will happen. It can't only be at Kulim. Two Chinese LED producers announced that they will implement between 15,000 and 20,000 wafer starts per week capacity in the next years.”