Cree seeks to stay ahead of the pack with five-year plan

28 Oct 2004

Record profit, a five-year investment in manufacturing facilities of $300 million and a sharp rise in its stock price mean that LED maker Cree is one of the brightest lights in the compound semiconductor industry right now. Hamish Johnston quizzes John Palmour, Cree's executive vice-president and director of advanced devices, on the company's manufacturing strategy.

From Compound Semiconductor magazine.

Hamish Johnston: What will Cree spend the $300 million investment on?

John Palmour: Most of the money will go toward expanding facilities for producing the chips. [It] covers the cost of the new building as well as the new equipment over the next five years. There is a significant amount of processing equipment included in that figure.

This investment is necessary because we have been operating at near maximum capacity in the production of LEDs. We expect unit volumes to increase and therefore we must increase our capacity to meet demand.

HJ: Will all of the $300 million be directed at LED activity?
JP: The bulk of the investment is for LED production, but it will also support other areas that are growing. We need more capacity for growing the wafers and the epitaxy here, and some of the new space will be devoted to those applications. We are moving the 3 inch Schottky diode line to our Sunnyvale, CA, facility so we don't need extra capacity for this application.

HJ: How much impact will the switch to 3 inch wafers have on LED manufacturing capacity?
JP: Simply converting to 3 inch wafers would increase the capacity of our existing facilities, but we would still need more processing capability to meet the expected demand. In the next few years we are also looking to expand other facilities in the US and overseas. There are cost advantages to performing some of the more labor-intensive parts of the process overseas and we are constantly monitoring that.

HJ: Why are you packaging in the US rather than Asia?
JP: We package our XLamp product in Durham, NC. It is a very different product from our standard LED chips. Most of our business involves selling standard LED chips to packagers, but we also make a much larger LED chip - called the Power Chip - and this is geared toward solid-state lighting applications. We have set up a manufacturing line in North Carolina to launch the high-power packaged LED, or XLamp, business. We expect the solid-state lighting business to take off, but it will be a while before it is as significant a portion of our business as the LED chip side.

We are now shipping commercial lamp products to customers. Although this is still a small part of our overall business activities, we expect it to grow rapidly.

The same manufacturing line that makes LED chips can also make the Power Chip, which feeds our packaging line. The extra space that we are building is not for packaging XLamps, because that facility is already there and we have the room to double its capacity.

Certainly the hope is that we will run out of packaging capacity very quickly, and we will then evaluate where the best location for additional lines would be.

HJ: How are you reacting to rapid expansion by Asian competitors?
JP: We have a dual strategy. The way that we have been keeping our blended average selling prices fairly even is by constantly improving our high-end LED-chip products in terms of brightness and performance. We compete in the high-end segment, where there isn't so much competition. The high-brightness products can command a higher price, but we are also competing directly on the lower-brightness products that are coming out of Taiwan. We have introduced a new chip called the UT230 [for white and blue cell-phone keypad illumination], which is geared to go head to head with these competitors on cost.

The XLamp is also a high-performance device, but it is a separate product line based on a much larger chip. Taiwan is not yet competing in the solid-state lighting business, and in this sector our competitors are Nichia, Lumileds and Osram Opto Semiconductors.

HJ: Is there the danger of a "bubble" scenario in LED manufacturing?
JP: We are constantly challenging our customers on whether they are over-ordering. Whenever there is a capacity problem it can lead to a bubble because people order more than they need to ensure their supply. We believe that the demand is very real and will continue to grow. The penetration of colour screens into cell phones is still on the increase. The automotive lighting market (daytime running lights and headlamps) has not even begun. We think that a large part of the potential business remains essentially untapped.

There are so many products that are just starting to come out that the potential continues [to grow]. Of course, there are always risks.

HJ: What are the key markets for Cree's LED products?
JP: The cell-phone market is less than 40% of our overall revenue; however, it is probably the single biggest market, mostly in keypad applications. Many of the flashes in camera phones are also LED-based. The automotive market is also strong, and is being targeted by our XLamp product in future daytime running light applications.

Backlighting LCD television and computer screens with LEDs is a new, exciting market for us. There have already been products released using LED XLamp style backlighting.

HJ: Does Cree intend to continue manufacturing non-LED products?
JP: Yes, we will continue to make power devices and other products. The power-device sector is one of our fastest-growing areas. And although it is a relatively small part of our business now, the rate of growth and the total available market make it a key part or our strategy.

HJ: What does the future hold for Cree's LDMOS line?
JP: We are evaluating partnership arrangements for LDMOS and starting to shift some of our development emphasis away from LDMOS and toward wide-bandgap devices. For long-term growth in the RF area we are targeting wide bandgap materials such as SiC MESFETs and eventually GaN HEMTs.

HJ: What role do you see for the recently acquired ATMI GaN substrate business?
JP: The sale of substrates and epiwafers is another key part of our business,so this acquisition is a logical extension of our materials [activity]. We intend to market GaN substrates openly. We are already selling GaN HEMT epiwafers and we will augment this [venture] with the business acquired from ATMI.

At the same time we will be evaluating the use of GaN substrates for a variety of devices, but most notably for blue lasers and future RF devices. This is the long-term plan in regard to how we will use GaN internally.

HJ: Have IP arguments affected your expansion plans?
JP: It doesn't really matter where the product is made - what matters is where it is sold. There are two considerations where IP is concerned. There is the general worldwide market where IP is considered to be an important factor in purchasing decisions. And then there is the Taiwan/China market where IP is not such an important factor. I'd say that outside of Taiwan and China we have had a fair amount of success managing our IP.

Nichia has sued Sharper Image in the US for marketing products with lamps that violate Nichia IP rights. If products are sold outside of the Taiwan/China region then IP is going to be a concern.