In December 2014, the Chinese government announced it would no longer be encouraging local governments to issue financial subsidies to LED manufacturers. The announcement which could have brought a sigh of relief to foreign competitors, had come perhaps a bit too late for some. Yet, it is probably too early to make the Chinese government as the scapegoat for the woes of the LED industry. Here’s why.

Representatives from Chinese and foreign LED manufacturers gather at Guangdong International Lighting Exhibition (GILE) 2015. (LEDinside)

Chinese subsidies are the cause of market oversupply?

A misconception on the market is the Chinese government subsidies issued to the LED industry contributed to oversupply situations. It should be considered as one of the parameters for evaluation, but not the sole factor. Supply and demand situation in the LED industry tend to be cyclic with occasional fluctuations, said LEDinside analysts.

The Chinese government started handing out handsome MOCVD subsidies from 2009 onwards, yet oversupply situations emerged in 2011, causing the LED market to hit rock bottom in 2012. The market recovered in 2014 and reached a healthy balance in supply and demand. However, over capacity issues rose again in 2015. Oversupply situation in 2015 is indirectly linked to Chinese government subsidies, though. The Chinese government halted subsidies as of 2014, and any approved subsidies in 2015 were applied before the announcement.

“Weak international market demands, and LED market’s maturation has affected demand growth, putting manufacturers in a more difficult position,” said Figo Wang, Senior Analyst, LEDinside.

As projected by Epistar Chairman B.J. Lee in late March 2015, market demands in the backlight industry waned significantly this year. LCD TVs shipments in second quarter of 2015 was down 6.4% from the prior quarter to 48.25 million sets, due to slowdown of the Chinese economy, according to recent research reports from WitsView, LEDinside’s sister research department at TrendForce. The research department also noted the Greek debt crisis, and depreciation of emerging market currencies eroded LCD TV manufacturers’ profits.

The weaker LCD TV market greatly thwarted traditional LED backlight manufacturers’ performance in 2015, leading to declining backlight demands. Epistar took the greatest blow as demands from traditional backlight clients shrunk. Gross margins dropped to a mere 9.24%, a decline of 12% compared to the same period in 2014. The company posted a loss of NT $320 million (US $10.11 million) last quarter.

Even more worrisome is the present global economic situation. Philips financial report for second quarter of 2015 clearly reflects the impact from the economic situation; the company sales dropped in emerging markets including China and Russia where it previously enjoyed high growth rates in 2014. China’s dire economic situation was aggravated by the stock crash in June. The global economic downturn has significantly hurt manufacturers’ demands.

Only top manufacturers are benefiting from LED subsidies

A prevalent argument in the LED industry has been the Chinese government’s MOCVD subsidies created unfair market competition conditions. In the LED chip market sector for instance, San’an Opto basically can sell LED chips at much lower prices because the government covered most of its MOCVD costs. Worth noting is the Chinese government financial subsidies is concentrated only among tier-1 manufacturers. San’an Opto for instance received the most subsidies this year taking RMB 170 million, followed by ETI ranks in second with RMB 70.6 million. What people often miss is the much smaller LED manufacturers that shut down in China, and have not benefited from the subsidies.

Smaller manufacturers buckling under the pressure to pay off debts has become a common phenomenon in the Chinese industry. “Some people (in the LED industry) that I dined with before have committed suicide recently,” said a LED industry insider recently in an interview with LEDinside. “It just really affects you.” Other manufacturers have made a run for it, leaving behind a financial mess, such as Zhong Gang, Chief Executive Officer (CEO), Lihefeng Photoelectric Technology.

The uneven distribution of government financial resources led many industry insiders to speculate only a few LED chip and phosphor manufacturers will remain in the future.

Did China’s Halt of LED Subsidies Come Too Late?

The timing of China’s LED subsidy termination depends on whose viewpoint you take. From international manufacturers’ perspective the timing might have come a bit too late. International manufacturers have seen LED bulb prices and profits plummet, following the rise of Chinese and other Asian manufacturers. Intense price wars have hurt lighting manufacturers’ profitability. Cree for instance reported its first loss in nine years, stating its second quarter revenue profits slid 12% to $436 million compared to the year before. Declining profits was a result of the company’s decision to spin off its LED business.

To prevent further losses, European and U.S. manufacturers sold their lighting businesses. Traditional lighting manufacturer, such as Osram decided to spin off its traditional and LED luminaire businesses in April 2015. Cree also announced it will be splitting its more profitable RF business from LED this year. Even U.S. LED package manufacturer Bridgelux was acquired by China Electronics Corporation (CEC) in July 2015. There is no doubt these restructures are shifting the LED industry east, and consolidating China’s position as a global LED manufacturing base with an expanding LED patent portfolio.

A source from a leading Chinese manufacturer offered a very different analysis. “Chinese government subsidies were invested to help the industry take off, and to bring the industry to the same level of competition of other manufacturers already ahead in the game,” he said. “Mature markets, such as Taiwan do not need government subsidies to support its LED industry.”

The timing of the halted subsidies comes at a time when the Chinese LED market is maturing, and smaller manufacturers have withdrawn from the market. The policy will benefit China’s LED industry the most. The average gross margin of 23 Chinese LED manufacturers during first half of 2015 was 23.50%, according to data compiled by LEDinside. However, the irreversible damage of low LED prices will make it fairly difficult for manufacturers to profit in the short run.

(Author: Judy Lin, Chief Editor, LEDinside)