Mainland LED chip manufacturers use low-price tactics, and Taiwanese companies are struggling to cope

If you ask why LED chip manufacturers' profits fell in 2012, the answer you will get is mostly "chip prices fell too fast." The reason for this is that in recent years, Chinese mainland chip manufacturers represented by Sanan Optoelectronics and Elec-Tech have entered the market at low prices, making it difficult for Taiwanese chip companies such as Epistar to cope.

　　Statistics show that in 2012, among the seven listed chip companies in Taiwan, except for Optoelectronics and Optronics, which specializes in the high-power stage lighting market, the rest of the manufacturers all suffered losses.

　　As a leading chip company in Taiwan, Epistar maintained profitability despite the overall poor industry conditions in the past few years. However, Epistar was eventually "lost" due to the heavy losses of its two holding companies, Taigu and Guangjia, and the impact of low-priced chips from mainland China.

　　According to the financial report released by Epistar, its sales volume dropped from approximately NT$19.766 billion in 2009 to NT$17.532 billion in 2012. Its gross profit also dropped from approximately NT$7.081 billion in 2009 to NT$2.715 billion in 2012. Its net profit even recorded a loss of NT$1.203 billion in 2012.

　　Low-price impact from mainland manufacturers

　　According to statistics from Gaogong LED Industry Research Institute (GLII), in 2012, the price of LED chips in mainland China continued the trend of a sharp decline in 2011, with the average price falling by 32% year-on-year, and the price of some products falling by as much as 50%.

　　According to some packaging factories, Epistar's chip prices dropped by about 20% last year, while Sanan Optoelectronics' chip prices dropped by more than 25%, especially since Sanan Optoelectronics' "sale" campaign began at the end of 2011. At the same time, the emergence of price butcher Dehow Runda has also led to a sharp escalation of the chip market price war.

　　The root cause of the chip price war is not only the oversupply of production capacity itself, but also the sharp price cuts of downstream LED display screens, backlights and lighting products.

　　LED display screens were the most brutal battlefield of the "price war" last year. GLII statistics show that the price of LED display screens continued to decline in 2012, with a year-on-year decrease of 15%-20%, while the gross profit margin of LED display screens sold through channels dropped to 10%-15%.

　　"The price of LED display components dropped by 50% last year, and we must rely on greater production capacity to increase sales." Wu Xianghui, general manager of Amp Optoelectronics, once said that for mainland customers, we use Silan Mingxin chips, while foreign customers mostly use Epistar chips. "The price difference between the two is about 5%-10%."

　　The LED lighting market grew rapidly last year. Looking at LED indoor lighting in mainland China alone, statistics from Gaogong LED Industry Research Institute (GLII) showed that the market size reached 33.5 billion yuan last year, an increase of 80% year-on-year.

　　Among them, the price of LED bulbs in mainland China continued to decline in the first half of 2012, down 8%-10% from the same period last year. For example, the price of a 3W LED bulb was 10 yuan per piece, and some have reached 8 yuan per piece; the price of a 5W LED bulb was 21 yuan per piece, and some have reached 18 yuan per piece.

　　According to the information collected by local stations, the price of LED bulbs in the second half of 2012 dropped by at least 20% compared with the first half of the year.

　　Even though the price has dropped so quickly, the market penetration rate of LED lighting was only 7% in 2012, with price being the biggest influencing factor.

　　Last year, many companies vigorously promoted affordable lamps at all costs, and the average market price was even close to 3 yuan/W. The transmission effect of downstream prices on upstream was very obvious, especially in mainland China, where a large number of packaging factories began to switch to cheaper mainland-made chips in order to seize market share. After all, compared with Taiwan, Europe, the United States, Japan and South Korea, mainland-made chips still have a price difference of about 10%.

　　High-end market relief

　　Faced with the current market conditions, Epistar must solve two problems to turn losses into profits. One is to increase sales, and the other is to reduce the losses of its two holding companies, Guangjia and Taigu, as soon as possible.

　　After visiting several mainland LED packaging listed companies, we learned that Epistar's products are currently generally used for export or for special customers with higher quality requirements.

　　Because overseas customers still value chips, phosphors and structures the most, Epistar's patent licensing with major international manufacturers makes lighting products based on Epistar chips more recognized by foreign customers.

　　Simply put, Epistar's products are more advantageous in areas with higher technical requirements. This is because the lower the technical difficulty, the smaller the gap between domestic chips and Epistar, and the more obvious the price disadvantage will be.

　　On April 23, Cree released its third quarter (January to March 2013) financial report, showing that its revenue increased by 23% year-on-year (1% quarter-on-quarter) to US$348.9 million, and its gross profit margin also rebounded, and its operating conditions were higher than market expectations.

　　"The market is clearly still oversupplied this year, especially in the low-end market. However, the high-end market is still in short supply, and the unit price of chips will be relatively good, which can be seen from Cree's financial report. Epistar will further develop its high-end products this year, hoping to use this as an opportunity to increase revenue." Wang Junbo, deputy general manager of Jingyuan Baochen Optoelectronics (Shenzhen) Co., Ltd., said that in addition to the above measures, Epistar will also work hard to establish a deeper cooperative relationship with customers this year.

　　"It's a flat world now, and it's not realistic to seek long-term differentiation, because differentiation will soon disappear due to plagiarism." Wang Junbo said that the long-term development of chip companies needs the promotion of downstream LED lighting. What Epistar can do now is to improve the cost performance of its own products and help customers improve the cost performance of their products.

　　It is understood that at the beginning of this year, the Changzhou plant of Jingpin, a joint venture between Lite-On and Epistar, will add 8 MOCVD machines to expand the production of LED lighting. Combined with the scale effect of Pan-Jingdian formed by Guanggai machines, it is expected to further reduce chip costs.

　　As for the drag on the performance of Taigu and Guangjia, Wang Junbo said that Epistar only holds a stake in Taigu, but does not hold a controlling stake. Guangjia has already stopped producing some chip models that are not cost-effective through the integration of technology with Epistar, and its losses are shrinking month by month.

　　In fact, from the financial reports of mainland listed chip companies such as Sanan Optoelectronics and Dehow Electronics in recent years, we can see that apart from the huge government subsidies, their main businesses are almost all loss-making or low-profit.

　　"Epistar does not receive any government subsidies and is a Taiwanese company, so it is not easy for it to gain a foothold in the mainland market." An industry insider said that last year local governments in mainland China had reduced subsidies for upstream projects in the hope that mainland chip companies would be able to freely participate in market competition.

　　On the other hand, the quality of mainland chip factories has also improved rapidly in recent years. Many chip factories have expanded production capacity, reduced costs and improved quality by continuously absorbing talents, participating in shares, acquiring, etc. However, judging from the current market situation, the confrontation between mainland chip factories and Taiwan chip factories cannot be eliminated in the short term. Who will win this war may have the answer in the next two years.