The Chinese central government’s policy to terminate LED industry subsidies will be extended to local governments, according to a latest Chinese-language UDN report.

The Chinese government has issued massive subsidies to local LED manufacturers in the past, which led to the imbalanced oversupply situation, said an industry insider. Once the Chinese central and local governments cancel LED subsidies, Chinese LED manufacturers will find it difficult to survive. Chinese manufacturers current strategies of headhunting of Taiwanese engineers, and cutthroat price wars are expected to ease, thus restoring fairness to the Cross-Strait LED industry.

In a recent statement issued by China’s Central Government to regulate government subsidiaries, the statement highlighted certain local governments have been issuing financial subsidies in the form of taxes or other forms subsidies to promote local economic development. Although, these subsidiaries have urged industry developments, it has also disrupted market order and affected macroeconomic policies. Some of these subsidies have even violated international agreements the Chinese government signed or caused trade conflicts. Thus, the central government will require local governments to submit all subsidiary project applications to the central government for review before March 2015.

The Chinese government’s decision to regulate local government subsidiaries is not surprising, said Figo Wang, Senior Analyst of LEDinside. “The current Chinese government has gone from quantitative easing monetary policies to tightening monetary policies, and has been scaling down on large scale government projects,” said Wang. “It has been more than five years since China’s LED subsidiary policies were implemented, and it is about time market regulations were formed.”

This view was also shared by Roger Chu, Research Director of LEDinside. “Certain local government finances have been strained from issuing LED subsidies,” said Chu. For instance, Wuhu City, located in Anhui Province, China has seen financial resources shrivel up as large subsidies are issued to San’an Opto and ETI. The statement issued by the Chinese Central Government highlights improving local governments’ budget deficits, and avoiding international trade conflicts, explained Chu.

Both analysts noted the reduction of subsidiaries in the LED industry would benefit the LED market, as uncompetitive LED players are removed from the industry. This perspective was also shared by other industry players that believed the policies will aid the Chinese LED market to eliminate manufacturers without the technology capacity. An LED package manufacturer even projected 85% of Chinese LED epiwafer companies will become insolvent without government subsidies.

Since the Central Government statement mentioned the central government will be inspecting and reviewing subsidiary projects in March 2015, to acquire subsidies some LED manufacturers will quickly expand before the deadline, said Epistar Chairman B.J. Lee.

“Large LED manufacturers will be speeding up expansion plans, and enter a last production expansion peak,” said Chu. Future LED manufacturer expansions are expected to wane. China’s largest LED manufacturer San’an Opto for instance plans to add at least another 100 MOCVDs, and local Suzhou and Tianjin governments have been issuing a lot of new subsidies to the company at the end of 2014. Other LED manufacturers with large scale expansion plans include Changelight and Aucksun, which plan to add 50 MOCVDs each to their existing produciton lines.

"The new subsidiary regulations will raise the bar for future subsidiary applications, and prevent potential new players from entering the market," said Wang. San’an Opto has already issued a statement saying the company will receive subsidies already signed and approved by local governments, but not for new subsidies.

(Author: Judy Lin, Chief Editor, LEDinside)