The SSL sector is forecasted to experience long-term growth while being a sustainable and important diversification strategy for the semiconductor value chain. The LED subsector has roughly a 3% penetration rate, but is forecasted to see significant growth over the remainder of the decade. LEDs are taking a foothold in the market because this solution addresses both cost savings and environmental awareness.
Economic slowdowns and bottom-line impacts of a maturing industry have moved the semiconductor and electronics industry to aggressively diversify. Today's diversification strategies include branching into 'sister industries'; industries that can benefit from the process knowledge and equipment cross-overs that semi can offer. Perhaps the most robust 'sister industry' for semi and electronics is Green Tech (e.g., solar photovoltaics (PV), smart metering, demand management for electrical use, energy efficiency, alternative fuel and energy source management (from utilities to automotive), as well as the wide range of electronics recycling and safe waste disposal (reverse logistics)).
In MarketWatch's previous Special Series article on Green Tech trends in semi, available here, we focused on recent changes in legislation effecting the semiconductor and electronics industries. This quarter, we turn our focus to the Green Tech lighting sector (Solid State Lighting (SSL) sector), which is seeing significant growth with long-term opportunities that are attracting more interest from the semiconductor value chain.
The SSL sector is forecasted to experience long-term growth while being a sustainable and important diversification strategy for those along the semiconductor value chain. Not only are there global demands and requirements for nations to reduce their carbon footprints, consumers and enterprises alike are also focused on reducing their energy consumption through trimming electrical use. Today's energy reduction strategies place the latest feature demand sets on electrical products squarely in semi's R&D court, requiring the value chain to provide new, reasonably priced and aggressive energy efficient solutions. These R&D and product opportunities are showing aggressively positive forecasts for sectors such as "LED lighting revenues to approach [US] $2 [billion] in 2017," as reported here by Electronics Weekly.
Solid State Lighting expansion
The SSL sector is not new to our industry, with light emitting diode (LED) lighting having been used in electronics for many, many years. What is new is the increased momentum around LEDs. LEDs are now being implemented as replacement lighting devices for traditional incandescent light bulbs and are aggressively challenging compact fluorescent lights (CFLs) and halogens due to LED pricing drops and increasingly available new form types (that is, shapes, watts, etc.) with improved color (see this report on GE's LED lighting from Electronics EETimes; here for news of Phillips LED lighting from CNET; and this recent article on LEDs and the related story on augmenting LED color from quantum dots from The Economist).
Importantly, the demand for energy efficient lighting solutions is a global demand issue with both mature and emerging economies requiring solutions for consumer and public needs. Furthermore, some emerging markets, like India, require current-variable lighting solutions due to power grid fluctuations; SSL provides just these types of solutions. The end result is rapid development of new designs with falling ASPs due to the broad-based demand (both economies of scale and the requirement of lower pricing to meet price points that meet emerging economies' needs).
Presently, the LED lighting subsector has roughly a 3% penetration rate, but that is set to dramatically increase as price declines and legislation, such as the 9/1/11 European Union (EU) restriction on 60 watt incandescent, favor the rapid adoption of LED lighting in homes, businesses, industry, signage and street lighting (see this review of LED light bulb pricing; this report from LEDs Magazine and this technology blog from The Wall Street Journal on EU bulb restrictions). The cost savings over the long-term are significant drivers for the adoption of LEDs. For example, Credit Suisse analysts estimate that "[US $150-200 billion] per year can be saved globally in electricity bills by switching from inefficient lighting to LED." (Credit Suisse "LED sector initiation," 20 July 2011, p.7)
Support for sustainable growth for the wider semiconductor value chain is found in these proposals for energy efficiency solutions. Japan's "Eco-point Program" is one example of the success of subsidized LED lighting support by governments, see this recent article from LEDs Magazine, showing also that Japan could save up to 9% of total energy use through the switch to LED lighting; that would not only make up for the 7% of energy production lost from the Fukushima Daiichi plant but also save an additional 2% of consumption. Additionally, China's LED market is forecasted to grow 23% in 2011, year-over-year, according to a recent iSuppli report available here. In the case of China, there is a 70% subsidy of the purchase price of the special deposition equipment (metalorganic chemical vapour deposition (MOCVD)) by local Chinese governments in order to help support LED production, as reported in the iSuppli research (see also SEMI's recent "China LED Fab Industry Report" available for purchase here). Importantly, the subsidies are helping to off-set the otherwise high LED production costs. Those subsidies then translate into reduced ASPs along the LED manufacturing supply chain and final cost reductions. Likely these government subsidies are intended to go hand-in-hand with China's expected announcement of new LED and SSL domestic manufacturing targets for 2015 (according to DigiTimes on 8/3/11).
Considering the LED situation for Japan and China together, "the penetration rate of LED lighting in the next 10 years should reach 80%," according to Robert Yeh, chairman of Everlight, as cited by DigiTimes on 7/26/11. However, Yeh underscores that in the case of Taiwan, more subsidies to support LED lighting would better promote reaching the stated environmental policies and goals, as cited in the same DigiTimesinterview. Given the population of China alone, iSuppli research forecasts that "the LED market [in China will] reach [US] $6.9 billion next year on its way to [US] $11.1 billion by 2015, equivalent to a five-year compound annual growth rate by then of 17.7 percent."
South Korea is also aggressively supporting LED lighting adoption with a recent program that "aims at achieving 100% adoption rate for LED lighting in Korea's public sector and 60% penetration of all lighting applications nationwide by 2020. The government will fund US$185 million in 2012 and 2013 to support energy-efficiency rebates." (See the DigiTimes review of Information Network's forecasts from 8/2/11). And, as noted earlier, the EU has engaged its next implementation phase of incandescent light bulbs. As of September 1, 2011, the EU has blocked the import or production of 60-watt or higher incandescent bulbs, which intentionally favors SSL options (see this discussion by Financial Times, registration required).
Importantly, the recent growth in the SSL sector, particularly for LED lighting, is translating into revenue growth for the semi industry as well. Not only does LED lighting provide important diversification opportunities for the maturing semi industry, there are important cross-over points for much of the semi value chain (from substrates, semi equipment, MOCVD capacity, LED wafers, as well as packaging and IC drivers for LEDs, among others). Furthermore, in order to sustain the double-digit growth semi has grown accustomed to, the broader category of Green Tech is a critical industry growth strategy and opportunity. LED lighting is, from the consumer's perspective, a rather simple, broad-reaching and affordable energy efficiency solution, meaning it should see rapid adoption once price-points are met. According to the 8/2/11 DigiTimesarticle, Robert Castellano, president of The Information Network was quoted as saying, "LEDs are creating a niche market for conventional suppliers of semiconductor processing tools and a lucrative market for MOCVD suppliers."
Backlighting for displays still important, but fading
Across the board, forecasts call for significant growth in SSL, particularly LED lighting. However, while we had been experiencing good growth for LED backlighting in displays, those gains are slowing. Credit Suisse's recent LED sector report presents the following growth estimates:
Lighting LED bare-die demand to grow at CAGR of ~90% between 2010-2015, as it is expected to rapidly penetrate Outdoor, Commercial, Industrial and Residential lighting markets (in that order). We estimate "Backlighting" LED demand to grow at CAGR of ~23%, with strong near term demand from LCD TVs. (ibid, p. 9)
Beyond lighting, LEDs do continue to hold a growth position for market share in the display sector because of the new, wider form-factors (e.g., AMOLED's potential for flexible displays and color (see Samsung's Wave 3 reviewed here by PCWorld)). Perhaps most importantly among form factors is the demand for touchscreens, lower heat dissipation in components, and reduced power consumption for devices; all demands that are met or improved by LED technology. It just so happens that those devices demanding these features are also those that are in the greatest demand presently: smart wireless devices (SWDs), such as smartphones and tablet PCs. But the demand for better displays with great energy efficiency extends to signage, automotive lighting, cameras, photo displays, and other LED-based and LED-backlit displays.
Although LED lighting has been gaining in market share recently, LED backlighting of LCD TVs has been the source of most LED display-related volume. However, as LCD TV penetration rates are showing slowdowns, and increases in energy efficiency requirements and demands gain in strength, demand for LED-based TVs (e.g., OLED and AMOLED) is seen as sector growth opportunity, particularly if pricing can drop to meet levels appropriate for consumers today (see also this MarketWatch Commentary post on LEDs and displays). DisplaySearch recently released 2Q11 LCD TV shipment data here showing the following slowdown for LCD TVs:
LCD TV shipments worldwide grew at least 20% each quarter in 2010, but so far have only risen 9% Y/Y in Q1'11 and 6% Y/Y in Q2'11. The slowing growth has impacted both developed and emerging markets, with LCD TV units falling 5% and rising 19% respectively, both well below the rate of growth a year earlier.
One important result of the slowdown has been the pull-back by manufacturers of LCD TVs, particularly those to mature markets but all global sectors are being impacted (see this research from iSuppli). The concern is inventory levels; no one wants to be caught with too much inventory in the channel in a demand-sparse market. As a result, there is little price easing in LED backlighting, among other component pricing, because of the lack of economies of scale and order visibility. Unfortunately, the lack of component ASP reductions are keeping LCD TV pricing stable, further hurting the ability to sell in a demand-sparse market. The DisplaySearch research explains the LED share increase despite LCD TV demand weakening:
LED share increased from 18% of LCD TV shipments in Q2'10 to more than 43% in Q2'11, but still carries a 74% average premium across all sizes, though this is down from a 120%+ premium a year ago. Critical LED backlight cost breakthroughs have been slow to materialize.
Although the entire TV sector is seeing demand and sales weakness presently, there is continued growth to be had from the global replacement of CRT TVs for thinner and more energy efficient TVs (i.e., LCD, OLED, Plasma). With size, weight and always-on features necessary in the highly competitive and demand-rich SWD sector, the LED subsector is a critical component to these devices and to maintaining healthy balance sheets for supply chain partners.
The growing importance of Green Tech for semi
Lighting and displays could not be more central to electrical and electronic use today. Furthermore, everyone everywhere is concerned with their use and costs of energy. As a result of this energy efficiency awareness, components and devices that optimize energy efficiency are in the top demand category for the entire range of markets: residential, commercial, industrial and extending to municipalities and governments. Energy efficiency in our electrical use is being realized in lighting from LED improvements and with that increased LED adoption, there are favorable ASP declines.
The LED lighting sector is forecasted to see significant growth over the remainder of the decade because of the replacement of incandescent light bulbs and CFTs. LED lighting provides important cost savings through reduced electrical consumption without the heat emissions and with long-life spans per bulb. These energy efficient features are attracting demand from all market sectors. LED lighting is taking a foothold in the market because this solution addresses savings and environmental awareness demanded from businesses and local governments for outdoor lighting solutions and is quickly moving into the demand by residential customers to (easily) reduce their electrical consumption. The reasons for widespread interest in energy efficiency opportunities vary from simple cost-management to environmental impact reduction, but all paths to success are lit by the semiconductor industry.