China sees vertical integration as key to LED chip shortage

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Last updated: 26 Apr 2011

Taking a page from the books of major international players, makers are investing in epitaxy wafer and chip fabs to gain better control over the component deficit.

Driven by the shortage in chips and epitaxy wafers, China's LED industry is slowly taking steps to create a supply chain that unifies both upstream and downstream processes.

Mainland China is home to roughly 2,000 suppliers involved in various LED-related sectors such as package, backlit screens, lamps and accessories, including the base, shell and wire, but less than 10 percent can produce chips and other types of core raw materials. While there are now a growing number of businesses engaging in the R&D and manufacture of LED chips, few have succeeded in producing a sizeable output with stable quality. As a result, most downstream suppliers continue to incorporate imported chips. Package maker Shenzhen Smalite Optoelectronics Co. Ltd, for instance, sources more than 90 percent of chips from Taiwan or the US.

This setback is only encouraging companies to improve the integration of the supply chain. In fact, this is one of the measures international LCD panel makers have taken to ensure consistent LED supply. Samsung set up Samsung LED, while AOC has Lextar.

One of the manufacturers of gallium nitride-based blue light epitaxy wafers and chips in the mainland, Epilight Technology Co. Ltd invested 10 billion yuan ($1.47 billion) in an LED project in Hefei, Anhui province, in June 2010. The annual output is estimated to reach 42 billion units by 2011 and 200 billion units by 2013. The facility is also anticipated to serve as the city's main source of G6 or G8 TFT-LCD panels.

Even local TV manufacturers are taking this step. Hisense, TCL and Skyworth all have joint-venture LCD module fabs with panel suppliers such as AUO and LG Display.

Some LED package makers such as Xiamen Guangpu Electronics Co. Ltd, meanwhile, are engaging in downstream applications. The supplier hopes manufacturing the finished products as well can yield higher returns.

There are some limitations, however, to the speed with which businesses can fully integrate upstream processes into their production facilities. Ninety percent of the MOCVD machine supply globally comes from only two enterprises: Aixtroon in Germany and Veeco in the US. This means these two companies can control the cost and output of the units. It is said their production schedules are filled to 2011.

Presently, only an estimated 500 of these major LED chip production machines will be used at factories worldwide this year. That represents a 92 percent increase over the 260 units in operation in 2009.

Sapphire substrates, a key material in LED chips, come from a handful of sources in the US, Russia and South Korea. Through the pace of their expansion plans, such suppliers could also decide how soon the supply-demand situation improves.

Some companies, including Xiamen Overseas Chinese Electronic Co. Ltd, believe this apparent monopoly of key equipment and materials is the main reason for the current shortage, not soaring demand for large LED-backlit devices. At present, the market share of LED TVs is still around 20 percent, which is within the 20 to 30 percent target released at the start of the year. The growth of LED TVs has not exceeded projections so the demand should still be reasonable.


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Posted: 11 October 2010, last updated 26 April 2011

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