The merge between Taiwan’s top LED chip manufacturers Epistar and FOREPI will no doubt be remembered as one of the most significant events in the LED industry in 2014. Market rumors about the two companies potential “marriage” first surfaced in 2007, but has been repeatedly denied by Epistar. The company’s last minute press conference announcement about the merger on June 30, 2014 sent shockwaves throughout the industry, especially among Taiwanese media that grilled the company for acquisition details since May this year.

Industry insiders explained the announcement was sudden since the acquisition talks were made in haste, and briefly took place during June 2014. The speed that Epistar concluded its stock swap deal with FOREPI indicates urgency the company faces in expanding production capacity, due to order demands from the market. Back in April this year, Taiwanese LED manufacturer Harvatek Chairman Billy Wang was quoted by a Chinese-language Liberty Times report saying, “People have to beg Epistar for (LED chip) supplies, and need to wait up to two months before orders are delivered.”

Epistar production capacity gap issue resolved after merge

One of the immediate benefits of the merger is it provides quick solution to Epistar’s production capacity shortage issue. The company faces a 35 percent production capacity gap in 3Q14. Although, the company has already pumped out 0.95 million LED chips onto the market in first half of 2014, it is still 0.3 million chips short. Without the merger to absorb FOREPI’s production capacity, the shortage situation will be aggravated during the industry’s conventional peak season in fourth quarter, said the company's Spokesperson Rider Chang.

“After the merge with FOREPI, Epistar's total MOCVD equipment will reach 438 units,” noted Joanne Wu, Assistant Manager, Research Division, LEDinside. Other Taiwanese reports including China Post noted Epistar is expected to crank up total MOCVDs to 500 later in the year. The Taiwanese reports imply continual equipment expansion after the merge, which contradicts with analysis made by GF Securities Analyst Xu Xingjun, who believes Epistar has no intention of investing in new MOCVD equipment.

In terms of employees, Epistar’s 1,500 staff combined with FOREPI’s 400 will create a strong research pool of 1,900 staff, according to the China Post report. Epistar said earlier this could help concentrate the two companies R&D resources and eliminate any overlapping R&D projects and investments. The concentration of patent numbers to 3,000 after the merge will also work in Epistar's favor, giving it a technology competitive edge, and insulate it against patent lawsuits from other competitors. In the field of patent wars, Epistar has already built a stronghold up an extensive protective network with numerous patent license agreements with top manufacturers including Osram, Philips, and Toyoda Gosei.

Will a bigger Epistar be better for the industry?

Costs effectiveness has been the center strategy in Epistar's acquisitions. The recent merge with FOREPI is currently the most economical solution for the company to cover production capacity gap in a relatively short time frame, said Chang. This is not the first time that Epistar has chosen to acquire an existing LED Taiwanese manufacturer to bridge production capacity gaps. In 2009, when the company decided to absorb Huga Optotech, it was trying to compensate production capacity shortage caused by Samsung's LCD backlight orders and Taiwan's LED streetlight orders, according to a UDN report. The company has acquired a total of six LED Taiwanese manufacturers in less than a decade including FOREPI, Huga Optotech, United Epitaxy, South Epitaxy, Epitech, and Highlink Technology.

As Epistar becomes a LED conglomerate in Taiwan, some believe it will undermine the industry’s competitiveness. The concern is not unfounded. Epistar’s global market share will reach 15 to 20 percent after acquiring FOREPI. Moreover, the Taiwanese LED chip enterprise together with major Chinese rival San’an Opto already holds a 50 percent LED chip market share in China, one of the biggest global LED markets, according to an earlier LEDinside report.

The merge has been consistent with projections made by LEDinside analysts in late 2013 that the LED industry playing field will increasingly be dominated by major players, as large manufacturers become even bigger. However, it also indicates the trend that the market is becoming an oligopoly. LED chip market Herfindahl-Hirschman Index (HHI) calculations made by LEDinside research team generated a figure of 0.146, suggesting the market is an oligopoly. While this indeed indicates downstream clients will have fewer supply options, making the upstream industry less competitive, it might be a good sign for the industry in the long run.

Here’s why. The integration of LED Taiwanese manufacturers’ resources can make the country’s manufacturers more internationally competitive. Previously, most Taiwanese manufacturers were SMEs with limited number of patents to compete with large international manufacturers. By integrating R&D and patent resources, Taiwan’s LED industry stands a higher chance in the global LED market.

Another benefit with the reduced number of LED competitors is the possibility of increasing profitability. With intensive market competition coming from the heavily government subsidized Chinese LED industry, LED chip prices have been driven so low that some have lamented profitability is now calculated in nickels and dimes. With fewer competitors on the market to divide market share and compete for orders, the surviving manufacturers could drive up profitability.

San'an Opto unlikely to impact Epistar operations in any way

San’an Opto will be impacted by Epistar and FOREPI’s merge, but probably not in the Chinese manufacturers favor. Although, the Chinese manufacturer is FOREPI’s largest shareholder and has a 19.9 percent stake, even if it chose to swap all its shares in FOREPI for Epistar’s it will not have a significant stake in the later company. The share swap rate is 3.34 FOREPI shares for every Epistar stock. Even if San’an Opto converts all its FOREPI shares into Epistar share before Dec. 30, 2014 and becomes the second largest shareholder, it will only have around 3.1 percent of company shares, hardly enough to impact Epistar’s management. San’an Opto’s stake is about half of that of the Taiwanese company’s largest shareholder Wan Hai Lines, who has a seven percent stake.

Moreover, San’an Opto is unlikely to grab a seat at Epistar’s nine member board, according to Chang. The Chinese company will not only be facing challenges from other Taiwanese board members, who could form a coalition at meetings, it also faces potential intervention from the Taiwanese government. Taiwan’s Investment Commission, an arm of Ministry of Economic Affairs (MOEA), previously barred the Chinese company from interfering in FOREPI management. When San’an Opto tries to grab an Epistar board seat it will probably face a similar outcome.

To sum up, the recent Epistar and FOREPI merger is an economic solution to solve the former company’s production capacity shortage issues. Although, the merger indicates the LED chip industry is shifting towards an oligopoly structure, it will help boost Taiwanese LED industry’s international competitiveness. LED chip manufacturers might also be able to raise profitability with fewer competitors in the industry. Lastly, San’an Opto will have little impact on Epistar’s management even if it converts all of its FOREPI stocks. The company will have an insignificant share in Epistar, and will have to battle the invisible hand behind Taiwan’s economy before it can become a board member.

Read More: 

1. Epistar Merger with FOREPI to Ease LED Chip Price Falls, says TrendForce
2. Epistar and FOREPI Merger to Bring New Golden Era to Taiwan LED Industry
3. Epistar Acquires FOREPI to Solve Supply Shortage Issues
4. LED Industry More Concentrated After Top Manufacturers Merge
5. Major Int’l Financial Institutes Give Thumbs Up to Epistar and FOREPI Merger
6. San’an Opto Weighs Options After Epistar Aquires FOREPI
7. B.J. Lee: San'an Opto Poses No Threat to Epistar
8. [Breaking News] Epistar Acquires FOREPI

Author: Judy Lin, Chief Editor, LEDinside