Leading U.S. LED manufacturer Cree surprised the LED industry on Aug.26, 2014 with the announcement of an investment partnership totaling US $83 million to purchase 83 million Lextar shares at a price of NT$30 (US $1.00) per share. The company also stated the partnership included long-term LED chip supply agreement and royalty-bearing license agreements for certain Cree LED chips. Why has Cree decided to invest in Lextar now?

“The general trend in the LED lighting market is intensifying price competitions, which makes it difficult for leading U.S. and European manufacturers, such as Cree and Osram to compete with Asian manufacturers,” said Roger Chu, Research Director, LEDinside. “It is very difficult for them to compete against Taiwanese and Chinese manufacturers in product prices, especially against heavily subsidized Chinese manufacturers.”

Cree’s major business is LED packaging, a market where shares are increasingly encroached by Asian manufacturers. Package products make up around 40 to 50 percent of the Cree’s manufactured goods, followed by end-market products 40 percent, explained Chu. Prices in the package market have declined, turning client’s focus on light quality, price and light sources. As a move to keep price competitive and cut production costs, the company would need to turn to less costly LED chip supplies.

For instance, Cree’s product portfolio in the past has focused on more lucrative but costly high-power LEDs, which is starting to lose the price competition against low-mid power LEDs made by Asian manufacturers. “The trend in the industry is shifting towards low or mid power LEDs with higher Cost/Performance ratio (C/P),” explained Chu. “Cree is very aware of this trend and has allocated OEM orders to Taiwanese manufacturers.”

To ensure market competitiveness, Cree has been cooperating with Taiwanese manufacturers since 2013. The company has transferred OEM orders to strategic business partners including Lextar and Epistar, noted Chu. Cree is not the only Western manufacturer seeking strategic alliances in the Asian region; though, other manufacturers such as Philips Lumileds has been working with Taiwanese manufacturers.

“Cree’s investment in Lextar is a strategy to secure an economic LED chip supply from a manufacturer that could fully support them,” analyzed Chu. Lextar’s vertical integrated production line covers upstream to downstream products including chips, light sources, package, light modules and luminaires. The company has long been an OEM for Cree and Osram, and currently has 70 to 80 MOCVDs that have reached full utilization rates. Lextar intends to expand production capacity later this year, and a partnership with Cree would help Lextar secure an export market, commented Chu.

According to the announced partnership the two companies will be mostly cooperating in sapphire-based LED chips, which is mostly applied in blue LED chips. The extent of the cooperation, however, could be further expanded in the future to include package or other end products. “Since Lextar has a comprehensive production line, Cree might be working with the Taiwanese company in other downstream products in the near future,” said Chu. “This is a possibility that should not be ruled out.”

Cree’s investment in Lextar is not expected to be implemented till sometime in 2015, after Taiwanese Ministry of Economic Affairs (MOEA) authorities approve the investment proposal.

(Author: Judy Lin, Chief Editor, LEDinside)