The Chinese central government recently issued a statement requesting local governments to stop issuing LED chip and wafer subsidies or offer favorable tax conditions.

Soon after the announcement, upstream LED chip manufacturers San’an Opto and HC Semitek’s stock prices plunged 0.7% and 1.4% respectively, according to a Nanfang Daily report.

“San’an Opto has not received any official notices yet, but its expected tightening of subsidies will become the general trend in the LED industry,” said Qingru Wang, Secretary of the Board, San’an Opto. Large volume of LED chip equipment imports in the Chinese market, and strong local government support has led to rapid industry expansions. Statistics indicate over the past six to seven years, more than RMB 10 billion was invested in MOCVD imports for LED chip production expansions. Local government financial subsidies alone amounted to 70% of the investments.

“(The new policies) will not affect ETI,” said Fei Deng, Secretary of Board, ETI. According to the company, it completed production expansion plans and investments before 2012. Since then, the company has channeled finances to building NVC Lighting’s downstream distribution channels and company branding. The Chinese government has mainly been subsidizing upstream MOCVD equipment for LED chip production. In a second ETI interim shareholder meeting held on Feb. 11, 2014, the company board decided to terminate financing for LED epiwafer projects, and MOCVD procurements. In contrast, San’an Opto and HC Semitek continued to build up production capacity. In January 2014, HC Semitek announced plans of investing RMB 305 million to expand LED chip production by 15.4 billion PCS. In April 2014, San’an Opto established a new subsidiary in Xiamen, and invested RMB 10 billion in 200 MOCVD purchases for the new company arm.

Government subsidies continue to consist a lion’s share of San’an Opto revenues, as shown in the company’s financial reports. To illustrate, the company received RMB 458 million subsidies, which amounted to 44.21% of the company’s net profits in 2013. Despite receiving RMB 135 million subsidies, HC Semitek even reported a net loss of 862 million.

The termination of government subsidies will have a greater impact on new market players in the LED industry, but San’an Opto has already acquired a certain status in the industry, said Wang. “Whatever impact the policy might have will be a positive one,” said a spokesperson for ETI. With the removal of LED chip subsidies, the LED chip market will be able to return to norm in 2015. Company operations are also expected to benefit from rebounding LED chip prices.