With overcapacity and declining profits, when will the LED chip industry bottom out and rebound?

Overcapacity, high inventory, declining corporate profits and even losses... Since the second half of 2018, the LED chip industry has been in trouble. As of August 2019, this situation is still continuing.

When will the industry bottom out and rebound, and how should companies deal with the predicament? Industry insiders believe that in addition to reducing production and clearing inventory, companies must also increase investment in research and development to improve their technology and seize the initiative in the new display field.

The dilemma of production cuts

High inventory and sharp price drops have become common problems in the LED chip industry.

"Some companies are already selling at half price," said Zhang Xiaofei, chairman of Gaogong LED, in an interview with the Daily Economic News on August 29. Huacan Optoelectronics mentioned in its semi-annual report this year that the company's overall gross profit margin for LED chips is already negative.

Why has the industry fallen into such a predicament? Zhang Xiaofei analyzed that in the past few years, after the localization of equipment for producing epitaxial wafers (i.e. MOCVD), the average production cost of LED chips has dropped significantly, and everyone has increased investment to improve production capacity.

While the production capacity of LED chips has increased significantly, the market size has not increased to match it. Zhang Xiaoguang believes that most LED chips are currently used in the lighting field, but this market has grown very little: on the one hand, lighting products have a long service life and it is difficult to see large-scale iterations for the time being; on the other hand, the current chips are being cut smaller and smaller. For example, a chip used to make 10,000 lights, but now it can make 15,000 lights. This also offsets the limited market growth.

Huacan Optoelectronics stated in its 2019 semi-annual report: "The LED lighting market, especially the low-end white light lighting chip market, has entered a mature stage, and prices have fallen significantly."

In such a situation, how should enterprises deal with it? "The inventory is too large and the enterprise's funds are under pressure. They can only slowly reduce the inventory." Zhang Xiaofei believes that enterprises must reduce production at present. However, it is not easy for enterprises to reduce production. Because the maintenance cost of LED chip production equipment is high, reducing production means an increase in average cost. "This is a paradox: if the production capacity is not expanded, the price will not go down; if the production capacity is increased, the result is overcapacity."

In this regard, Huacan Optoelectronics also mentioned it in its semi-annual report. The company said that it adjusted its competitive strategy and production strategy accordingly, and took the initiative to reduce the output of mid- and low-end products, which reduced the company's LED chip capacity utilization rate to 62.5% in the first half of the year, which correspondingly affected the unit cost during the reporting period, reflected in the increase in the average unit cost. The above combined factors led to a significant drop in the gross profit margin during the reporting period compared with the same period last year.

The reporter of Daily Economic News noticed that some enterprises also chose to close factories directly. In December 2018, the management of *ST Dehao drafted a plan to close the LED chip factory. In view of the operating conditions in 2019, in July 2019, the board of directors of *ST Dehao finally agreed and authorized the management to implement the plan in a steady manner to deal with the chip manufacturing business as soon as possible by means of "closing, stopping and transferring", and strive to complete it in the third quarter of 2019.

Enterprises compete to develop new display fields

Some companies have already reduced production or closed factories, so when will the industry improve? Zhang Xiaofei said he "can't see" for now. As for whether it can bottom out and rebound in 2019, Zhang Xiaofei thinks it is unlikely, "the production capacity is there, but the demand side has little or no growth."

What other breakthroughs are there for enterprises? Many companies mentioned new display fields such as Mini LED and Micro LED .

On August 29, Sanan Optoelectronics staff said in an interview with the Daily Economic News that in the future development of LED technology, the current popular Mini LED and Micro LED are very efficient and energy-saving; LED agricultural lighting is also a hot topic, UVC deep ultraviolet is also the future development direction, and the laser lighting market is also growing. These are the technologies and industries that Sanan Optoelectronics focuses on.

HC Semitek said in its semiannual report that in the next phase, it will work closely with end customers to continuously improve and optimize the performance, reliability and yield of Mini LED products, and further reduce costs, striving to accelerate the explosion of the Mini LED market. In terms of Micro LED, the company has conducted corresponding technical research and reserves from epitaxy to chip end.

However, Sanan Optoelectronics also admitted that Mini LED and Micro LED "still have some problems". Zhang Xiaofei also believes that the new display field has great room for growth in the future, but there are still technical difficulties such as mass transfer.

An industry insider who has been paying close attention to LED chips told reporters that this is a way for the chip industry to get out of trouble in the future. But he further questioned whether domestic companies have advantages in Mini LED and Micro LED technology? Where is the breakthrough point?

Regarding the above issues, Zhang Xiaoming believes that the gap between domestic and foreign companies is not obvious. "At present, they are all in the research and development stage." Zhang Xiaofei said that it mainly depends on who will have the advantage after the application is released.

Although there are doubts about both the Mini LED and Micro LED fields, Zhang Xiaoming and the above-mentioned industry insiders said that for LED companies, the most important thing is to encourage R&D investment and cultivate talents - R&D is a long-term work, and companies need to accumulate long-term technology.

The above-mentioned industry insider also proposed that the current government subsidy mechanism could be improved to change the current situation of overcapacity in the LED chip industry. The above-mentioned person said that there are subsidies abroad, but the subsidy method is different from that in China. Domestic subsidies are at the upstream, while many foreign subsidies are at the consumer end and at the basic technology end.

According to the financial report, Sanan Optoelectronics had government subsidies included in its current profit and loss in the first half of this year amounting to 424 million yuan, while the company's net profit attributable to shareholders of listed companies in the first half of the year was 883 million yuan; Huacan Optoelectronics had government subsidies included in its current profit and loss in the first half of this year amounting to 118 million yuan, while the company's net profit attributable to shareholders of listed companies in the first half of the year was a loss of 532 million yuan.