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China-driven LED capacity boom continues - analyst

10 May 2011

Shipments of key LED manufacturing equipment have slowed for the first time in nearly two years, but China maintains aggressive investment.

Chinese companies are expected to continue investing heavily in LED manufacturing equipment this year and next, regardless of an expected reduction in government subsidies.

While spending on MOCVD reactors – the equipment used to deposit light-emitting semiconductor material on top of wafers – in the rest of the world steadily falls away from historic highs, China will represent 75% of the world market for the tools this year.

The figures feature in the latest report on the LED market by analyst Ross Young at the research and consulting firm IMS Research. MOCVD reactors are the single most important piece of equipment used in LED production, and give a clear indication of future manufacturing capacities.

Those reactors typically ramp to high-yielding volume wafer production around six months after delivery. After nearly two years of growing demand for the tools, LED manufacturing capacity is growing extremely quickly. The investments have been focused almost exclusively on gallium nitride wafer production, with the resulting chips subsequently used in white LEDs, in applications such as TV backlighting and general illumination.

And although that spike in demand has now plateaued, there is little sign of a slowdown in China: “We are not seeing [MOCVD] installations being pushed out in China,” said Young. “We expected to see some delays, but we have only reduced our 2011 forecast from 1097 to 1089 reactors.”

Subsidy impact
The reactor demand from China has been largely prompted by generous subsidies supporting the development of a huge LED production infrastructure – with up to half of the cost of each $2 million reactor from Veeco Instruments or Aixtron met by the government.

In the opening calendar quarter of 2011, unit shipments of MOCVD reactors fell for the first time since mid-2009. Shipments to China dominated demand for GaN LED production tools, accounting for 74%, or around 140 reactors. And although 23 different Chinese firms received tools, just one of them – namely San’an Optoelectronics – purchased about 40 of those tools.

As the additional equipment comes on line over the next few months, it is likely that the additional capacity will continue to push down the price of white LEDs – a trend that has impacted LED makers outside of mainland China, such as Cree and SemiLEDs, recently.

Young is confident that the boom will be maintained for some time yet, despite expectations of reduced subsidies in China: “A number of companies provided us with their 2012 plans, regardless of whether or not there are MOCVD subsidies,” he said. “Other incentives and the prospect for rapid growth in LED lighting are proving powerful enough to enable continued investment in LED capacity in China in 2012.”

Ultimately, the analyst expects China to account for three-quarters of total MOCVD reactor shipments this year, equivalent to more than 800 reactors. Meanwhile, shipments to Korea and Taiwan, currently the main centers of global LED production, are falling – indicating a major change in the center of gravity of the industry.

Sapphire wafer constraints
• Further evidence for the continued rapid growth of LED production volumes came last week, in the form of fast-growing sales at the Illinois-based sapphire wafer producer Rubicon Technology.

The company reported a 29% sequential increase in revenues, a result that CEO Raja Parvez described as “an exceptional start to the new year”. Rubicon specializes in high-quality six-inch substrates – a size format that many of the world’s leading LED makers, including Philips Lumileds, Cree and Osram Opto Semiconductors, are rapidly adopting.

By fabricating chips on the larger wafers, more high-quality emitters can be fabricated in a more cost-effective manner – another trend that is helping to push down the dollar-per-lumen cost of solid-state lighting. Jeff Tsao from Sandia National Laboratories sees 2012 as a key year, in which LED lighting becomes directly cost-competitive with compact fluorescent lamps, and a transition to six-inch wafer production is regarded as a way to accelerate that trend.

With a strong demand pull and competitive advantage – it leads the market in six-inch sapphire production and is in the process of expanding its manufacturing capacity – Rubicon has been able to increase selling prices in recent quarters. In the first quarter of 2011, it made a pre-tax profit of $20.3 million on sales of only $38 million, indicating that commanding market position.

“Our customer base continues to grow and we are aggressively adding capacity to meet their needs,” added Parvez. “While we were capacity-constrained in the first quarter, we expect a significant increase in revenue from six-inch polished wafer sales in the second quarter.” Rubicon said that it expected to post sales of up to $43 million for the second quarter of 2011.

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