In Part 2 in our Barriers to Entry posts (Part 1 is here), we’re focusing on a recent report from the industry experts at Yole Developpement. Yole analysts have been keeping a keen eye on worldwide capacity for sapphire crystal growth. According to Yole’s Eric Virey, more than 50 companies have announced their intention to enter the sapphire growth market, with more than 40 located in China. While the capacity plans announced by all of the new companies collectively would add up to triple world demand, Yole believes it is “a situation unlikely to actually materialize.”
Why? These new market players have little or no prior experience in sapphire crystal growth and wafer manufacturing. And, while there are some “turn-key” solutions to lower the barrier to entry, “reaching and sustaining high quality and high yields in sapphire crystal growth still requires significant expertise.” Indeed the learning curve is steep to reach yield levels on par with established Tier 1 manufacturers.
Yole’s report also said that margins in 2010 were favorable to new entrants allowing them to achieve comfortable margins “despite low yields and sub-par technology.” However, with 2 inch pricing at historic lows, Yole calculates that they will lose money at the current market prices while “established vendors with higher yields, large volumes, and a more favorable product mix, including large-diameter wafers, can achieve production cost <$5 that will allow them to maintain positive margins and weather the storm.”
Questions about the barriers to entry and new market entrants from China have been dogging the LED industry. A few industry experts have been taking a look at China and what it means to the industry. Strategies Unlimited analyst Tom Hausken recently wrote a piece for LEDs Magazine about the Chinese LED manufacturing industry. China has been throwing a lot of capital at its nascent LED industry and the world is watching. Tom’s article put some of the talk about the Chinese LED industry into perspective.
According to Hausken, research on the Chinese LED industry by Strategies Unlimited partner GG-LED shows that the Chinese effort goes far beyond MOCVD equipment. The report further calls into question whether the Chinese can match world-class competitors. “The report points out that the real shortage in expertise is not only designing LEDs and operating epitaxy reactors in general research, but particularly in planning and leading enterprises that can match world-class competitors,” wrote Hausken.
According to the report, Chinese investment is overly concentrated in LED epitaxy and chip production due to an outdated perception that the distribution of profit margins in the supply chain were concentrated at the epitaxy and chip layer.
Only time will tell if the Chinese LED industry can get up to speed and become competitive on the world stage. Hausken commented, “There is over-investment in LED manufacturing in China, but what will be the impact? At the very least, it makes the market less certain. A glut will accelerate the trend toward cheaper LEDs and LED lighting, which has been a goal of national policy makers. It may hurt chip makers and vendors of fab equipment along the way,if only by spoiling an otherwise rational market.”
Look for Part 2, Barriers to Entry 2 in a future post.
The world’s most populous country, China, is joining the ban on incandescent light bulbs. The Chinese government has decided to gradually phase out the energy-hogging lighting over the next five years saving the country lots of energy and some pollution too.
China will ban imports and sales of 100-watt and higher incandescent bulbs starting in October 2012. Bans will be imposed on 60-watt and 15-watt bulbs later over the five-year period. China joins theUSand the 28 countries in the European Union among others in phasing out traditional incandescent light bulbs.
Chinais one of the largest users and producers of incandescent bulbs. According to an AP report, 3.85 billion incandescent bulbs were produced in China with more than a billion sold domestically. China’s NDRC says that the move will save 48 billion kilowatt hours of power per year and reduce carbon dioxide emissions by 48 million tones annually once the bulbs are phased out.