How should LED companies solve the problem of overcapacity hindering industry development?

In recent years, under the dual stimulation of the market environment and government subsidies, the production capacity of LED upstream companies has continued to expand, and industry competition has become increasingly fierce. Most companies expand production scale to dilute production costs and lower prices in exchange for market share, resulting in continued decline in LED chip prices. In particular, some LED manufacturers rushed to complete machine purchases before the end of mainland China's subsidy policy, which accelerated the release of new machine production capacity in mainland China, worsening the global LED overcapacity situation.

While mainland LED companies are generally increasing their production capacity, Epistar, Samsung Electronics, Cree and other companies have made decisions to selectively reduce production to alleviate the imbalance between supply and demand in the LED industry and the pressure of falling prices. It can be seen that overcapacity has become a major obstacle to the development of the LED industry. However, faced with the problem of overcapacity, how do LED companies break through the siege?

Mergers and acquisitions to enhance competitiveness

The competitive pressure brought about by the market downturn has caused many LED companies to launch a wave of integration and mergers and acquisitions. In 2016, there have been more than 10 mergers and acquisitions integration cases in the LED industry, with an average of more than 3 mergers and acquisitions cases taking place every month, covering all aspects of the LED industry chain.

Mergers and acquisitions can enable the LED industry to develop better. For small businesses, it is undoubtedly a way to "have a big tree to enjoy the shade", while for large companies, it is also a way to expand production capacity at a lower cost and maintain their market position. LED companies can further expand their scale by vertically integrating related companies, thereby reducing procurement costs, forming synergies, and enhancing their competitiveness and industry influence. For example, Huacan Optoelectronics paid 1.08 billion yuan to acquire 100% equity of Yunnan Acrylic Technology, effectively integrating Azurite Technology's sapphire substrate production capacity, and through the acquisition of Ruijing Optoelectronics, it formed an extended development of the LED industry chain such as epitaxial chips, chips, and terminal applications.

Improve the industry system and insist on encouraging innovation

Due to the low entry threshold of the LED industry, a large amount of capital has poured in in the past few years, resulting in oversupply, gross profit margins at all ends of the industry chain have declined sharply, and many manufacturers have faced losses or even been eliminated. According to incomplete statistics, 4,000 LED companies disappeared from the market in 2015. In 2016, the supply and demand relationship in the LED industry will ease, and the phenomenon of overcapacity will become increasingly obvious. We should give full play to the guiding and restrictive role of plans, policies, and standards, strictly enforce access conditions, strengthen industry access management, improve the industry monitoring system and overcapacity early warning system, and strengthen and improve industry management.

When facing problems such as overcapacity, lack of industry standards, and uneven product quality throughout the industry, companies must strengthen product innovation while ensuring product quality. At present, many products in the entire LED industry are highly homogeneous, and innovative applications are the best choice for enterprises to develop everlastingly.

The importance of innovation can be reflected in all aspects of the LED lighting industry. Channel innovation reduces intermediate links and directly opens up the channel between enterprises and consumers, which is conducive to alleviating overcapacity in the industry; product innovation helps enterprises escape the trap of homogenization of industry products; innovation in corporate management models can help enterprises get out of the dilemma of rising operating costs; innovation in financing channels, such as the current online financial financing P2P platform, allows enterprises to obtain more financing channels. Persisting in encouraging innovation and encouraging the research and development and application of new technologies will help revitalize the LED industry.

Increase research and development, from manufacturing to creation

With the market's gross profit margin continuing to be squeezed, obtaining competitive advantage through continuous price reduction is not a long-term solution. In order to cope with price competition, chip companies will spread costs by cutting epitaxial wafers into more small-size chips. However, as the chip size decreases, in order to achieve the same luminous power, the injection current must be increased and the luminous power density must be increased, which places higher requirements on the performance of LEDs.

On the one hand, as the power density increases, the luminous efficiency of LEDs decreases, which requires the use of structures with better performance during LED epitaxy to offset the decrease in luminous efficiency. On the other hand, the decrease in LED light efficiency under high power density also means that more heat is generated, which places higher requirements on the heat dissipation performance and reliability of LED chips. If a company just blindly reduces the chip size without supplementing it with supporting epitaxy and chip design and development, it will not only lose the competitiveness of the product, but also cause the product to operate at overpower, creating potential safety hazards.

In the context of industry reshuffle, the LED industry will enter a "rational" stage from the previous "swarm", and technology research and development has become an important means of enterprise transformation. To this end, enterprises should be encouraged to increase investment in research and development and increase the technology content in products to increase the added value of products.

For example, the "Silicon Substrate High Efficiency Gallium Nitride-Based Blue Light-Emitting Diode Project" completed by Jingneng Optoelectronics (Jiangxi) Co., Ltd. and China Energy Jinghe Lighting Co., Ltd. together with Nanchang University won the first prize of the National Technology Invention Award; Qinshang Optoelectronics and Tsinghua University completed the "Construction of a three-dimensional free optical surface for regulating light behavior and its "Application in Semiconductor Lighting" project won the 2014 National Technology Invention Award, etc. These all reflect the company's emphasis on technology research and development, increase research and development, build an innovative value chain system with independent intellectual property rights, and build innovation and research and development capabilities into the company's core competitiveness, thereby realizing "Made in China" to "Created in China".

Take the high-end product route and strive to segment the market

Faced with the LED lighting "Red Ocean" market where price wars are intensifying, LED companies should strive to develop in the "blue ocean" of segmented high-end fields by improving technology. For example, high-end application markets such as automotive lighting, LED-FLASH flashlights for smartphones, ultraviolet LEDs, and special wavelength LED lights for plant lighting. For example, Yuanrong Technology acquired Jason Electric to focus on the field of deep ultraviolet LED; Huacan Optoelectronics has also deployed in high-margin market segments such as small-pitch display chips and flip-chip chips, and has achieved good results.

In recent years, price wars have caused profits to plummet, and the high revenue situation brought about by the huge demand in the general lighting application market is actually just an illusion. To this end, the LED products produced by enterprises must not only meet the needs of existing market segments, but also make technical reserves to meet the needs of future emerging markets, respond to market changes at any time, and provide customers with non-homogeneous products. Only when products adapt to the market can they go a long way.

Strengthen patent protection and expand overseas markets

The “One Belt, One Road” strategy proposed by the Chinese government provides a favorable policy environment for domestic LED upstream companies to “go global”. At present, the domestic LED replacement market is becoming increasingly saturated, LED chip production capacity is overcapacity, and small and medium-sized LED companies generally have operating difficulties. Emerging markets such as India, Southeast Asia, and Russia have entered a period of strong demand for LED replacement. The implementation of the "One Belt, One Road" strategy will drive the infrastructure construction of countries along the route, and LED products will have a broad market by then.

However, most of the core LED patents are currently monopolized by international giants. Domestic LED companies "going global" not only have to pay high patent licensing fees to the international giants who control the core patents, but also face patent litigation that may come back at any time. To this end, domestic enterprises need to be aware of intellectual property rights and use intellectual property rights as a means of self-protection; the government or industry alliances need to guide the domestic LED patent layout at a macro level and help companies supplement patents in a targeted manner.

It can be seen that while LED companies are actively exploring overseas markets, they need to strengthen product quality control, improve technology patent reserves, improve after-sales service levels, establish corporate brand images, and make China's LED illuminate the "One Belt, One Road" initiative.

Summary: LED overcapacity is a double-edged sword, which will not only bring about a series of problems such as "price war" and "business bankruptcy". At the same time, it will also prompt mid- to low-end companies to reshuffle. Some LED companies with substandard quality, weak capabilities, and weak financial strength will gradually withdraw from the market, leaving behind only large and powerful companies. Therefore, the development of LED companies needs to strengthen their own technology and enhance their own strength through continuous reform and innovation in order to withstand the storm.