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March 10, 2004...The following is a guest editorial: by Dr. Robert C. Walker, Principal, YEBY Associates and Consultant to Strategies Unlimited

Significant discussion has ensued over the last several months about the production of high brightness LEDs in non-Japan Asia. Some of this has been generated by Nichia's recent legal actions against Epistar and Everlight, and Osram's recent licensing of technology to Lite-On and Everlight. Some has been generated by recent data published in Strategies Unlimited's report on "Asian Producers of High Brightness LEDs (Taiwan, South Korea, and China)." As a principal author of this report, some clarification and insight on the key conclusions may be useful in promoting an informed discussion. When I use the term "Asia" below, I am specifically referring to Taiwan, South Korea and China, and excluding Japan.

Key conclusions of the report are the fact that Asia-based producers were responsible for the production of more than 13.4 billion InGaAlP chips (red-orange-yellow) in 2003, up 25% from 2002, representing 80% of the world's production. More significantly, production of GaN LEDs was in excess of 3.4 billion qualified chips, up 7 times (600%) from 2002 and representing 40% of the world's production. In 2001 Asia accounted for <5% of the world's production of qualified GaN chips.

In our report, we sought to count the total production of qualified High Brightness LED chips. Qualified means that the LED chip has been tested and passed certain quality criteria, such as wavelength, power, operating voltage or lifetime. Producers in China and Taiwan produce billions of more "off-spec" GaN chips that are sold for toys, key chains, etc. These off-spec LEDs are excluded from our numbers. Thus, although some of the dramatic increase in production is due to vastly increased capacities and revenues, a key component is the fact that many of the dozens of Asia-based producers have improved their technology and products, and can now compete in the markets that we define as "qualified."

It is important to realize that there is still a wide breadth of unequal products that still constitute "qualified" LED chips. It can range from a 2 mW blue LED used in a high-end indicator light to extremely bright 15 mW LEDs for automotive applications, or a large-area, high-power chip for lighting applications. Thus, although Asia-based producers make 40% of qualified chips by number, they are still operating at the lower-to-mid range of quality, and thus do not account for such a large share of global revenues. It is also important to realize that this does not (yet) indicate a "shift" of production to Asia - all global producers of GaN LEDs are showing robust growth, from Japan to the US to Europe. A strongly rising tide raised many boats in 2003.

Another key issue centers on the IP concerns. To a large extent, Asia-based GaN LED producers have been limited to selling within "Asia" (e.g. Taiwan, South Korea, and China) - there are several reasons for this, but IP concerns are one of the significant ones. This has led to a "sub-market" for GaN-based LEDs: a low-to-mid-range Asia market with severe price competition that runs alongside both a non-Asian market and a high-end market. How prices in this sub-market affects prices in the non-Asian or high-end market are not well understood, but there has certainly been some independence between the two markets. How the licensing agreements and other events will affect the global market dynamics is yet to be seen.

The production capacity for GaN-based LEDs in Asia is increasingly dramatically. Most of the companies are running at near capacity, and are profitable. As of today, the capacity of just the epi-based producers in Asia stands at more than 800 million qualified chips/month, and will surpass a billion chips/month by the summer. That is enough capacity to produce significantly more than the total global consumption of GaN chips in 2003. Whether or not this will lead to a collapsing bubble later in the year, or will be met by strong market demand is yet to be seen. History is not much of a guide here. Predictions of a bubble in InGaAlP LED production back in 2000 were right on, and the industry has just now recovered. Predictions of a GaN LED bubble in mid-2003 could not have been more wrong, with the exception of some severe price cutting in the spring.

Finally, a few other points are important to keep in mind. Asia is not just a production base for LEDs, it is a key market for them. Samsung and LG were market leaders in popularizing blue keypads and full color displays. In addition, the Asia-based producers are quickly improving their technology, measured both in terms of LED performance as well as yields and productivity. But the non-Asian based producers are certainly not standing still, and rumors abound of unexpectedly significant increases in LED performance that have been achieved in the labs of some of the major global players. In any case, the next several years promise to be an exciting one in our industry, with global competition within the industry enabling the emergence of a truly competitive solid-state lighting industry.

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Dr. Robert C. Walker Authors Our Guest Editorial

Cutting Through the Buzz on Production of HB-LEDs in Taiwan, South Korea and China