At a recent DOE SSL workshop, LED and OLED lighting manufacturers came together to discuss the state of solid state lighting.  This conference, where presentations are made by those directly involved in development and production of SSL lighting give their assessment of where the industry is, and the problems facing the industry.  When we look at the results on the OLED lighting side, it is obvious that the ‘’Chicken and egg” situation that has plagued the industry for years remains the single biggest stumbling block to rapid expansion.  That said, we see the industry ready to ‘hatch the egg’ in the next year or so, which will move OLED lighting further toward commercialization than any other time in the industry’s history.

Much of our optimism comes from the potential that LG Display’s (LPL) OLED lighting G5 fab and equipment will bring to the industry, but at the same time, we caution investors that in the case of OLED lighting, capacity could grow more quickly than demand, an unusual circumstance for a new technology.  LGD, as part of its G5 lighting fab project, is building a high capacity production tool and line that can produce 15,000 sheets/month.  When the line is in full production, the math would look like this:

15,000 Sheets/month

1.2 m2/sheet = 18,000 m2/month

60 panels/m2 = 1,080,000 panels/month

80% yield = 864,000 panels/month * 12 months = 1,036,800 panels/year

While this is highly commendable and better capacity than seen previously, it was pointed out by another OLED lighting producer that this is more than 100 times current demand, and while it seems to solve the ‘chicken and egg’ problem, it means the industry has to significantly grow demand in order to justify such new capacity.  As OLED lighting has the ability to be shaped into a wide variety of forms, many of which were impossible with other lighting modalities, the ability of the industry to create new demand has possibilities.  That said, the lighting industry is not one known for rapid adoption of new technologies and formats, leading us to temper our optimism a bit in regard to timeframe, but the major step taken by LG Display, first in consolidating OLED lighting into LG Display, and taking the initiative to develop the first real OLED lighting mass production tool is very encouraging, hopefully similar to the risk Samsung Display (pvt) took when it opened its first small panel OLED production line years ago.

Back in June of 2015, Corning (GLW) announced it was planning to build a 2nd glass facility in Chongqing, China, an area ripe with display and mobile device companies.  The new factory, which is based on Gen 8.5 substrates, held its opening ceremony yesterday to mark the beginning of production.  This plant is Corning’s second in China, with the 1st in Beijing, ostensibly supplying China’s largest LCD producer, BOE (200725.CH) and others.

The Chongqing area, known as the ‘land of laptops’ is the home to many electronics producers including BOE and HKC (190.HK) and is under 200 miles from Chengdu, another area where a number of Chinese display plants are located.  The plant will likely serve the lower portion of China, with the 1st plant serving the northern regions.

Back in November of last year, we noted that Apple (AAPL) had chosen three South Korean companies to supply the flexible PCB boards for the iPhone 8(aka iPhone X), beating out Taiwanese and Japanese rivals.  The three companies mentioned, Interflex (051370.KS), BHE (090460.KS) and Samsung Electro-Mechanical (009150.KS), were, in theory, chosen for their expertise and cost structure, but hints that their experience in the OLED space for Samsung (005930.KS) and LG (066570.KS) might have helped them win the business.

Now it seems that Samsung Electro-Mechanical and LG Innotek  have been selected to supply dual camera systems for LG Electronics, Samsung Electronics, LeEco (pvt), and are in talks with a number of Chinese brands that are interested in developing dual camera phones.  While Samsung Electro-Mechanical saw a loss in the 4th quarter due to the Note 7 recall, it has been supplying dual camera systems to Xiaomi (pvt) and LeEco since 3Q 2016, and as mentioned above, is in talks to supply similar product to Huawei, Oppo and other Chinese smartphone vendors, and expectations are for 2017 sales to double in 2017.

LG InnoTek, who was the 1st dual camera system supplier back in 2011, has been supplying Apple since 3Q 2016, and has posted record results in 4Q 2016, also driven by LG’s G6 smartphone pre-release production.  Overall, estimates for dual camera smartphones come in between 250m and 350m units for 2017, and with such high visibility devices being produced by the two South Korean companies, they both should see significant incremental sales in 2017, as the concept of improved rear camera capabilities becomes a marketing tool for high-end smartphones going forward.

According to Digitimes, supply of low to medium power LED chips has fallen short of demand by 30% to 50% as demand for LED lighting continues to increase.  This has prompted Chinese producers to order 120 MOCVD tools, with 60 to 80 coming on line in 1H 2017 and the balance in the back of the year.  As we have noted over the last few months, chip pricing has improved as utilization rates rise, with the outcome a push toward additional capacity.

Citing HC SemiTek (300323.CH), Sanan (600703.CH), Aucksun (002245.CH) and Changelight (300102.CH) as the basis for such capacity increases, and projects ranging from specific product line expansions to greenfield fabs, the expansion will be rather rapid.  While in the past, Chinese LED producers expanded capacity so quickly that oversupply became a significant issue, we see Chinese LED supply in a slightly different situation.  After a number of years in the aforementioned oversupply situation, the Chinese LED producer market has shrunk; not necessarily in overall capacity, but in the number of actual players. 

Through M&A and outright company failures, we believe the Chinese LED industry has become narrower, with the 2015 price wars taking their toll on smaller producers that had been only marginally profitable at that time, and this more concentrated industry should be better able to manage expansion without falling back into an oversupply situation.  That said, Chinese component producers are extremely competitive, and have not been willing to put the industry’s health on par with profitability, but the smaller base, the past struggles for profitability, and (so far) the lack of Chinese government subsidies, gives us hope that Chinese supply will stay close to demand during the 2017 year.  “Hope springs eternal”[i].



[i] Alexander Pope - 1734

Now that Apple (AAPL) has been rumored to have negotiated two contracts with Samsung Display (pvt) for 160m OLED displays, the rumor mill continues to expand, now including rumored talks with Beijing based BOE (200725.CH) for OLED displays, or at least is evaluating BOE’s OLED displays.  BOE has a number of OLED production and R&D projects in development, with a Gen 5.5 LTPS OLED line in Ordos, and Gen 6 line in Mianyang, and a Gen 6 line in Chengdu, along with a pilot line in Hefei. 

We believe the capacity at the Ordos project is small, although we expect a substantial increase during the 3rd quarter of this year and the Chengdu OLED fab is also expected to begin production this year, at least at the phase 1 level, but the Mianyang lines are a bit further out, likely close to 3Q 2019, and will be focused on flexible OLED production.  Details of our production expectations for BOE and other OLED producers is available upon request.

We note that just because the fab has started up new capacity does not mean it is able to produce in high volume, as new lines, especially at producers with only modest experience in OLED production, can take considerable time to achieve reasonable yield levels, and we know that BOE has had issues with deposition yields in the past.  That said, BOE has been relentless in its development of LCD technology over the last few years, and while we expect their OLED production to remain somewhat limited this year, they have the potential to become a substantial supplier in the 2018/2019 timeframe.

Not that we doubt that Apple is testing BOE’s OLED product, but we would expect Apple to evaluate any available OLED product, or at least from any producer that can provide at least moderate levels of OLED production in the near future.  We have seen one actual production level OLED product from BOE so far, a 5” 1280 x 720 panel that we believe is being used by a Chinese smartphone brand, but consider that a ‘starter’ product, as it is a relatively low resolution display.  However, we would expect Apple to more seriously evaluate BOE and other Chinese LCD products for non-OLED Apple products, particularly should Apple see a need for a lower price tier product for the iPad.  While we would not expect Apple to make a major shift away from current suppliers in the near future, we could see Chinese suppliers being adopted as a 2nd or 3rd source supplier, to make sure they can meet specs and volumes as Chinese suppliers gain legitimacy.  A deal, even a small one, with Apple would be a significant psychological win for any of the Chinese suppliers.

Munich-based OSRAM (OSR.GR) has indicated that anticipated strength in its IR component business has led them to increase the staffing at their optical plant in Regensberg, Germany by 50%, through the hiring of ~1,000 new employees in R&D and production.  The company is expected to be supplying Samsung Electronics (005930.KS) with IR components for the upcoming Galaxy S8 flagship smartphone, which will include iris scanning ID capabilities, and setting the pace for increased demand. 

There have been a number of smartphones that have included iris-scanning identification in recent months, with the ill-fated Note 7 among the most visible, but the Microsoft (MSFT) Lumia 950, the HP (HPE) Elite x3, and much of the India-based Lava (pvt) smartphone line all include iris scanning, which is expected to quickly gain popularity as the cost of components drops and the mechanics of how the user interfaces with the device become easier. 

The biggest criticism of the technology comes not from how it works, but it ‘convenience’ level, as some say holding the phone in front of you for a few seconds is far more complicated that touching a fingerprint sensor, and having to do this every time you turn on your phone will cause users to abandon the idea.  In actuality, users don’t turn their phones on and off on a regular basis.  The data suggests (yes there is data on how often users turn on/off their smartphones) that US smartphone users rarely turn off their smartphones (once/week is usually suggested by the manufacturer to reset applications and updates), so the idea that you would have to be holding up your phone to your eyes constantly seems to be a misconception, but we believe if users have the ability to protect the security of their smartphones, they will opt for what is most secure in most cases, especially as smartphone pay systems become increasingly popular.  Perhaps OSRAM is over-anticipating near-term demand, but while timing might be off, we believe the concept makes sense.

According to sales data analyzed from 9/2015 to 8/2016 Amazon (AMZN)’s private label brand has dominated sales of a number of products, moving Amazon from a retail channel to a competitor in particular markets.  The statistics are quite telling for such items, and we note here both speakers and batteries that are sold online.  At the top of the triangle, 89% of all speakers and 94% of all batteries sold online are sold through Amazon, with estimated market sizes of $1b and $113m (online), already an amazing capture rate, but digging deeper, in just 2 years, Amazon accounts for almost half of online speaker sales, and in the last year (8/15 – 8/16) grew 67% y/y.

In the online battery business,  as noted above, 94% of batteries sold online are sold through Amazon, already a staggering metric, but Amazon’s own brand accounts for almost 1/3 of all battery sales online and has grown 93% over the 8/15 – 8/16 year.  While price is certainly a factor, especially in the battery category, where brand loyalty is extremely low, Amazon has created a speaker product, the Echo, that has significant appeal to consumers, and while it doesn’t have the highest conversion rate[i], it does have the highest proportion of product views.

All in, Amazon has taken it incredible retail might and begun to use that strength to hawk its own products, and while competing with its customer base, is likely going to expand the number of categories in which it sells its own brands, despite the conflict.  While it is hard to imagine that this will not cause some consternation with its B2B customer base, Amazon’s reach is so great that in the long run, BTB customers will have to accept that Amazon itself could dominate their product category, potentially thinning the competition to those able to produce more competitively priced (batteries) or more innovative product (speakers).



[i] Product views over product purchases

In early January we noted that China-based Sanan Opto (600703.CH) informed customers that it would be raising prices on some of its low power LED chips as of January 10, which had followed price increases from other LED vendors late last year.  MLS (002745.CH), China’s largest LED packaging producers has indicated that it will also be raising prices on some items by 15% and it is expected that a number of other Chinese LED packagers will follow that trend as Chinese lighting producer Opple Lighting (603515.CH) has done with almost all of their LED lamp and luminaire products.

Prices for chip raw materials, particularly industrial metals, have been on the rise as the new US government administration is expected to increase spending on infrastructure along with the weakening Chinese currency, pushing LED producers and packagers to increase their prices to keep pace.  In contrast, year-end discounting had caused LED bulb prices to drop substantially at the end of 2016 (3% and 2.4% for 40W and 60W bulbs respectively), tightening margins for many producers that were already under margin pressure. 

While the price increases, which we expect were slightly ahead of cost increases could give some producers a short-term breather, we would expect 2017 to be another year of consolidation in the LED space, particularly in China, where the number of producers had mushroomed a few years back when the Chinese government was offering very generous subsidies for LED tool purchases to almost anyone who could put up a letter of credit.  That ended in late 2015, and Taiwan banks began tightening credit for LED manufacturers last May as profitability against Chinese LED pricing was reaching panic levels and banks were (rightly) concerning about loans to smaller LED production firms.  Now it seems to be a race to see how much of a price increase the market will bear, although with costs also rising, it would seem that margins will see only a small amount, if any relief going forward, squeezing more small players out of the market.