LED package manufacturer Everlight and Japan’s largest LED manufacturer Nichia initiated patent wars in Japan, Taiwan, Germany, U.S. and other countries for the past decade, reported Chinese-language magazine Money Weekly. Nichia is one of the top five global LED manufacturers, and spending largely on patent lawsuits against Everlight.  The reason behind these tactics is patents are the only arsenal left for LED Japanese manufacturers that are falling behind Taiwanese and Chinese counterparts production expansion.

Patents are invaluable in the knowledge-based economy

Even OEM leader Foxconn has sold many of its telecommunication related patents to Google. Although, details of the patent transaction were not publicized, it highlights the importance of patents for OEMs.

Patents are a company’s assets in a knowledge-based society, said Terry Kuo, Chairman of Foxconn. Technology companies including Intel, Microsoft and Toyota are all actively deploying patent strategies, especially in the aftermath of the anemic economy. All these will bring structural changes in the industry, while R&D, patent applications and commercialization of products will take five to 10 years. Foxconn’s current business strategy will determine its future outlook.

Starting in 2015, Chinese manufacturers have also realized the value of patents. In the past, China’s domestic market was sufficient enough, and there was even supply shortages for certain products. No one at the time was concerned about patent issues. Clients would buy products as long as it functioned, and had low retail prices. Manufacturers and consumers were accustomed to products quick deterioration, and many preferred replacing broken cheap products with new ones.

However, as Chinese manufacturers expanded production capacity, the market has gradually saturated. Oversupply situations on the Chinese market has forced manufacturers to seek foreign markets. When manufacturers aim to export their products, they find lack of patents have obstructed their access to these markets. International competitors have blocked Chinese manufacturers products from being sold into these markets, due to their patent applications. There is no way for Chinese manufacturers to sell their products, even if the good quality products are sold at very cheap prices.

Japanese manufacturers are turning to  patent wars as Taiwanese and Chinese LED manufacturers continue to expand production capacity.

Xiaomi smartphones slammed by Ericsson patents in India

An obvious case is Chinese smartphone maker Xiaomi and Ericsson’s patent wars in India on July 2014. When Ericsson failed to collect patent license fees from Xiaomi, it took legal action against the company. The High Court of Dehli ruled Xiaomi had infringed Ericsson’s patents on Dec. 8, 2014, and banned smartphone sales. Following the court decision, Xiaomi announced the company would terminate sales of Hongmi 1S and Hongmi Note on its official website in India. Before Xiaomi halted sales, Hongmi’s preorders reached 150,000, according to statistics compiled.

In January 2015, LED package manufacturer Jufei Opto and Japanese LED manufacturer Toyoda Gosei signed strategic supply chain partnership agreement in Shenzhen, China. Jufei Opto acquired Toyoda Gosei’s white LED patents licenses.

Jufei Opto is a manufacturer that specializes in LED lighting and backlight businesses. A senior manager in the company, who declined to be named pointed out Jufei Opto was searching for a solution for Chinese smartphone makers to solve their LED export market bottleneck.

Industry insiders observed, Xiaomi’s failure in India shocked Chinese smartphone makers, who were surprised by the negative impact from lack of patents that they had paid little attention to in the past. However, it cannot be denied the Chinese global LED industry is still a very important market. For the benefit of both companies, Jufei Opto and Toyoda Gosei signed a patent and partnership agreement.

Chinese manufacturers aim to resolve patent issues through acquisitions

Another worth noting event is Go Scale Capital’s acquisition of 80% shares of Philips subsidiary Lumileds. Go Scale Capital has invested in several LED manufacturers including Lattice Power (LED epiwafer manufacturer), TimesLED (LED epiwafer manufacturer), ShineOn (LED package), Dalian Sanwei (LED lighting and thermal dissipation), Sunsun Lighting (LED lighting) and others. Lattice Power has been the most representative out of these manufacturers.

Go Scale Capital’s acquisition of Lumileds has two important implications for the LED industry, according to Roger Chu, Dirctor, Research, TrendForce. Patent barriers preventing Chinese LED manufacturers from exporting their products to oversea markets can be solved. Go Scale Capital can also integrate its resources, and add Lumileds as a new strategic partner.

Traditionally, Lumileds is one of the top five manufacturers with the most LED patents, said Chu. In addition, more than 600 patents have been transferred from Philips to Lumileds, hence Lumileds has a comprehensive LED patent portfolio. If Chinese investors acquire shares, they will be able to have a louder voice in the global LED competition. This is a great opportunity for LED manufacturers to solve patent issues, while expanding internationally.

Although, patents can be transferred through direct transactions, it depends on related patent licensing regulations the two parties signed. It has been proven Chinese LED manufacturers strategies incorporate expanding production capacity, and highlighting importance of patents. Once Chinese manufacturers successfully acquire patents, it will directly impact Taiwanese LED manufacturers, a situation that Japanese LED companies are hoping to avoid.

Following Jufei Opto and Toyoda Gosei’s patent license agreements, U.S. manufacturer GE has also started to license its Mn4⁺ phosphor patents to other Asian manufacturers outside of Japan. It can be observed the patent barrier that U.S., European and Japanese LED manufacturers have established is loosening. When manufacturers acquire more patent licenses, manufacturers without patent licenses will be forced to surrender and withdraw from the market. These developments will spur another restructure in the LED industry.