The last few weeks have seen a number of interesting
announcements when it comes to the LED-connected markets. If you live towards
the top of the LED food chain, at the replacement lamp, luminaire or application
level, one might tend to tune down the market radar when it comes to the “lower
realms” that include such things as LEDs and drivers, and even more so for
the equipment and materials that are used to to make the stuff. It is good, though,
to flip that radar back on from time to time to make a quick sweep to see what
the happenings ‘down there’ are suggesting about trends up higher in the food
chain. So here’s a quick scan for everyone.

Equipment forecast up…
In an interesting report from market research firm IHS, the team there reports
that in 2013, sales for metal-organic chemical vapor deposition (MOCVD) equipment
will have increased 17 percent, to 221 machines, despite an expected surplus of
LED die exceeding demand by 69%. These are the machines (called “reactors”)
which produce high heat and high pressure that lets injected metals and gasses,
such as “gallium nitride” and “indium gallium aluminum phosphide”
combine neatly on the surface of an “epitaxial wafer” to make it ready
for LEDs to be etched and processed on them. Make sure you caught the part that
said, “…despite an expected surplus of LED die exceeding demand by 69%...”
The report goes on to say that the reason for this glut is, according to analyst
Alice Tao, “The global market for LED lighting is expected to double during
the next three years. The prospect of this massive growth is irresistible to LED
suppliers, who don’t want to be caught short of supply during this expected
boom.” So the great news is that the folks who probably have some of
the most significant skin in the game, in terms of capital investment, are making
the bet that LED lighting can be bigger than we might expect. And this is
a big bet, since these folks might be facing lead time on equipment of a year
before they receive the machine, and maybe up to another year to put it fully
in action. These also aren’t cheap, as they cost into the multi-millions apiece.
(Think about that in terms of just a single machine at $2.5M compares to ramping
up the R&D team with $2.5M more folks).

There is another very interesting thing to note in this report. As you can see
from the chart, there was a major boom in machine sales in 2010 and 2011, driven
primarily by the Korean TV giants ramping up in-house LED lines, team Taiwan keeping
their technology current to meet that LED TV backlight demand, and China going
bug-nuts with government subsidies in order to command that economy to be the
leader in LED manufacturing. As noted some time back, from a discussion with one
MOCVD insider, although there was a huge wave of machines sent to China, the technical
know-how or other resources to put them to use to build LEDs wasn’t always readily
available, and many-many of them ended up sitting in crates waiting for their
day to come. Everyone that could convince the Chinese government that they were
a good (enough) bet for a subsidy figured it was worth a shot. Likely many thought
of them much like an assembly machine that could just as easily put to use when
the real demand was there, but guess what? This kind of technology keeps marching
forward, and the bulk of those machines will be outdated enough that they’ll never
be put to use. Oh well, when you’re China, you can simply claim it was actually
intended to give a boost to the recycling industry.

Precursor forecast
up… Following on the heels of that report, another IHS research company,
Displaybank, has offered a forecast that the annual demand for “precursor”
(the metalized gasses that are the source of the gallium and aluminum and such)
will have risen 114% between 2012 and 2016. Those precursor materials are a key
predictor for the direction and intensity of LED production, and the prediction
says, “there will be a lot more LEDs being produced”. Also bear in mind
that the predicted doubling of the materials should represent substantially more
than a doubling of the total LEDs (really “total lumens”) being produced
since each new generation of LEDs, coming every 8-12 months or so, is producing
more lumens in less chip space, both from efficacy gains as well as from the ability
to drive the little guys harder. Anyone can find the various LED industry prognostications
for the growth in chip volumes and revenues, but when you’re looking this deep
into the chain, where companies are making long term decisions on how much gallium
to commit to from the mines it comes out of, you’re talking about some very useful
validation.

Where will the ‘stuff’ be produced… The stack of leftover
MOCVD machines doesn’t mean that China won’t be a production powerhouse. Many
of the machines were put to use, and in the current Chinese 5-year economic plan,
the command economy has been commanded to consolidate the number of LED manufacturing
companies into a much smaller number, to produce in much higher volumes. More
economy of scale. That precursor article also notes that South Korea, Taiwan and
China together account for 80% of the global demand for those precursors. Asia
baby. And LEDs are really going to begin to move into full commoditization. If
you’re an LED producer, that means you’ll be battling for brand and mind-share,
and if you’re putting those LEDs to work in your lamps or luminaires, you’ll see
an expanding range of even more competitively priced offerings. As long as the
“glut” continues, price pressure is down, down, down. You can also expect
a widening offering in terms of performance. Given that the incandescent competition
is good for not much more than 15 lumens per watt, with CFLs ‘spiraling’ in at
40-60, when it comes to the lamp in the spare bedroom that sees maybe 100 hours
of use per year, given the same quality of light, will the consumer choose the
$15 lamp that is rated for 25,000 hours at 100 lm/w or the 90 lm/w lamp that costs
$5 and only last 10,000 hours (which is 100 years at that
100 hr/yr use)? The market is going to be about choice, which actually bodes well
when it comes to the battle of brands. While there was only room for 4-5 real
brands in the incandescent and CFL space, given the ability here to tune performance
and lifetime to meet differing levels of need, there might very well be room for
substantially more brands in the ‘LED lightbulb’ space. The idea of “spare
room” vs. “garage/porch” vs. “living room reading” types
of lamp ratings may not catch on, but it’s clear there is going to be room for
the attempts to carve out differing niches with creative marketing.

All
quiet on the connected front… While we’re chatting about what’s being talked
about, it also seems noteworthy that we’re really not hearing all that much yet
about what I would call “advanced” lighting solutions. You could also
call that “smart” lighting or “sensor-driven” lighting, that
has the ability to discern more about its environment and self-adjust to either
provide optimal light, or optimal efficiency (or both!). As we’ve suggested in
the past, this coming wave of lighting has some interesting potential to obsolete
literally “everything” that came before it, much as Henry Ford’s Model
T automobile did back in 1908 or smart phones did here in the 2000’s. Same price
point and better capability that provides a payback from making the upgrade…
Uh-oh, lighting on 2-year service contracts? Don’t be surprised.