LED industry expansion surge brings overcapacity concerns

Recently, the LED industry has been undergoing intensive and substantial expansion of production. From upstream chips, midstream packaging to downstream applications, various companies are full of confidence and ambition. Behind this, the price reduction of LED lighting products caused by cost reduction has led to an explosion of market demand. Rapid growth in the next few years can be expected. At the same time, generous subsidies have also triggered the urge for rapid expansion of enterprises. However, after the glory, will the industry decline again?

LED ushered in a "big market year"

"This year will definitely be a big market year for the LED industry!" A senior executive of a listed LED company in Guangdong predicted to a reporter from the Shanghai Securities News at the beginning of the year that the same optimism also spread to many LED listed companies that the reporter visited at the beginning of the year. This is not only due to the LED industry's rapid growth in 2 The overall prosperity in 2013 comes from the industry's confidence in comprehensively replacing traditional lighting products.

Data show that compared with the decline in overall industry profits in 2012, the LED industry is beginning to see a rebound in prosperity, and most listed companies that have published annual reports have achieved positive profit growth.

"The rise in demand across the industry in 2013 is the direct reason for everyone's profitability. We judge that this rise in demand will be sustainable in the next few years and will grow very fast. The fundamental reason for our confidence is the cost-effective advantage brought by the falling prices of LED products. It is a certainty to completely replace traditional lighting products." The aforementioned company executives told reporters.

A front-line salesperson from an LED company also told reporters that in 2011 and 2012, every time he attended a large exhibition to introduce the energy saving and various advantages of LED lights to customers, customers showed great interest, but when it came to price, the customers shook their heads and left.

"At that time, 5W LED lamps sold for 60 or 80 yuan, but energy-saving lamps with the same brightness were only about 20 yuan. But starting in 2013, the price of indoor LED products dropped significantly, and now the price of 5W LED lights has also dropped to 20 yuan. The price of outdoor street lights has not dropped as much as indoors, but it has dropped to a level similar to that of high-pressure sodium lamps. Therefore, we have added many new civil and commercial customers in recent times." The salesperson said.

In response to this phenomenon, a brokerage analyst pointed out that this is mainly due to the price of upstream chips falling at a rate of about 30% per year. By the second half of 2013, it will begin to be transmitted to downstream end products, and the overall industry-wide cost decline trend will continue. Therefore, the LED industry has actually entered the stage of comprehensively replacing traditional lighting products.

The decline in product prices directly leads to an increase in demand. According to the forecast of Xiangcai Securities, the LED lighting market size is expected to double to more than 250 billion yuan in 2014 and double to 500 billion yuan in 2015. UBS Securities predicts that from 2013 to 2015, the overall growth rate of the lighting market will be 36%, 37% and 38% respectively. %, among which the residential LED lighting market demand increased by 157%, 90% and 62% respectively during the same period; Qilu Securities also predicts that within 3 to 5 years, the compound growth rate of LED lighting demand scale will reach 30% to 40%, and the penetration rate of lighting products will increase from 10% to 15% to 40% to 50%.

Huge subsidies boost industrial scale

The LED industry, which has recently regained the "favor" of the capital market, still has the aura of a "national strategic emerging industry", which has brought more tangible benefits to related companies: in addition to various tax exemptions and policy incentives, local governments have also launched huge subsidy policies to compete for LED projects, which is considered by the industry to be another major driving force for corporate production capacity expansion.

An analyst at a foreign investment bank told reporters that LED companies are frequently on the list of central-level special funds and awards such as major projects for high-end general-purpose chips for core electronic devices, central fiscal funds, and the 863 plan; in addition, local governments also give companies huge equipment purchase subsidies as conditions for attracting investment.

In 2009, the Yangzhou Municipal Government took the lead in launching a subsidy policy. For every MOCVD machine (LED chip production equipment) introduced by an enterprise, it would be given a financial subsidy of 10 million yuan. Hangzhou City provides subsidies for companies purchasing MOCVD equipment at 40% of the purchase price.

Public information shows that between 2010 and 2012, Dehao Runda’s wholly-owned subsidiaries Wuhu Dehao, Yangzhou Dehao, Dalian Dehao, and Bengbu Dehao received subsidies of 418 million, 25.746 million, 76.6 million, and 75.8 million respectively from the “three science and technology projects.” In the past three years, Sanan Optoelectronics has received nearly 3 billion yuan in government subsidies. The huge government subsidies accounted for a large part of the net profits of listed companies. From 2010 to 2013, the amount of government subsidies received by Sanan Optoelectronics accounted for 60%, 86%, 60%, and 45.7% of the net profits respectively. Taking the Anxi project as an example, in order to win the entry of Sanan Optoelectronics, Anxi County, Fujian Province invested 4 billion yuan in subsidies for MOCVD and sapphire substrate production equipment, totaling 2.2 billion yuan. In terms of land acquisition and relocation, infrastructure and R&D centers, 1 billion yuan was invested in construction, and 800 million yuan was invested in supporting co-construction projects. In the Xiamen 10-billion project launched by Sanan Optoelectronics in April this year, the Xiamen Municipal Government will subsidize the purchase of 200 new MOCVD equipment for Sanan Optoelectronics. Calculated at 5 million yuan per unit, the direct subsidy amount will reach 1 billion.

Great expansion raises concerns about overcapacity

"Government subsidies can be said to have played a role as a catalyst and expansion agent in the process of enterprise expansion of production capacity. Take Sanan Optoelectronics as an example. Xiamen's tens of billions project was originally planned to be implemented in Wuhu. It did not plan to purchase so much equipment at the beginning, and the total investment was only more than 4 billion. As soon as Xiamen's subsidy policy came out, the equipment purchased by Sanan Optoelectronics increased to 200 units, and the total investment more than doubled." The aforementioned brokerage analyst said.

In fact, after several rounds of production capacity expansion, in terms of upstream LED chips alone, the total production capacity of domestic companies has accounted for more than 60% of the world's total. Executives of the aforementioned LED listed companies said that there are currently about 1,500 MOCVD equipment for chip production in the world, while domestic companies currently have about 900 units of equipment. If all 200 MOCVD equipment from Sanan Optoelectronics reach capacity, the total number of equipment owned by the company will reach 350 units, surpassing Epistar Optoelectronics (244 units), Samsung (182 units), and LG (160 units), rising from fourth to first in the world.

In this regard, an industry analyst who has long paid attention to government subsidies reminded that concerns about overcapacity in the LED industry began at the end of 2011, but the release of demand in the past two years has completely reversed the situation. Judging from the current speed of industry development, it may be too early to say that the LED industry has overcapacity. However, if future demand growth is slower than the rate of production capacity expansion, the entire industry will begin to experience oversupply, trigger price wars, and lead to extreme phenomena such as industry reshuffle. The dairy farming subsidies and pig breeding subsidies implemented in the early years are a good reference.