Chinese LED Chip Makers Drastically Modify Expansion Plan Due to Weak End-Market Demand

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According to a survey conducted by LEDinside, a research division of TrendForce, because of the subsidy policies enacted by local governments in 2010, Chinese LED chip makers planned to expand their capacity and increase the amount of MOCVD equipment to target at the prospects of the LED lighting market in 2011. However, affected by the uncertain end-market demand of the LED industry in 2011, the inventory levels of LED products continue to rise. Therefore, LED manufacturers have put their purchases of MOCVD equipment on hold.

In addition, in response to inflation, the Chinese government continues to raise the required bank reserve ratio and tighten the monetary policy, which make it difficult for local governments to carry out the subsidy policies. On account of several factors, Chinese chip makers remain conservative about their expansion plan. LEDinside predicts that the new installment of MOCVD equipment in 2011 will total 711 units with 380 units of them in the Chinese market.

Inflation Pressure Forces China to Tighten Currency Supply

Since the beginning of 2011, the consumer price index in China has been continuing to set record highs: the inflation rate in May reached 5.5%. As of June 20th, The People’s Bank of China has raised its required reserve ratio for six times. Starting from July 7th, the base rate has been raised to 6.56%, which is the third time raise in 2011. The loan increment in May plummeted from RMB$ 740 billion to RMB$ 552 billion with a 25% drop compared to that in April (with a 13.7% drop compared to the same time last year.) Such a setback indicates not only the severe finance circumstances of local business firms and the continuously increasing labor cost, but also the challenges facing the LED industry in terms of managing operating cost.

Tightening Monetary Policy Puts Expansion Plans of LED Manufacturers on Hold

Moreover, Yangzhou government’s announcement of ending the subsidy policy for MOCVD purchases in 2H11 has created market fear that other local governments would also terminate their subsidy policies. As a result, Chinese and Taiwanese LED chip makers have been purchasing MOCVD equipment since 1H11 in hope of taking advantage of the subsidies before the deadline.

However, the tightening monetary policy makes it difficult for Chinese LED manufacturers to benefit from the subsidy policy, which in turn impedes their expansion plans. In addition, the weak end-market demand and the drastic drop of chip price have lowered the capacity utilizations of several LED chip makers to 50%. Due to the market downturn, manufacturing equipment is being used for conducting researches, and LED chip makers have decided to delay their expansion plans.

Perspectives from LEDinside

According to the research by LEDinside, first tier Chinese LED chip makers have begun the construction of their new sales centers on sites that were originally designated for production expansions. In addition, they have asked the MOCVD equipment makers to delay the delivery of their orders, which adds uncertainty to the chip supply in China in 2H11.

On the other hand, as for the second tier Chinese LED chip makers, they may have to terminate their expansion plans and even face the possibility of going out of business due to the lack of professional experts and MOCVD equipment. LEDinside believes that with the end-market demand remaining weak, only manufacturers which possess advanced technology and cost competitiveness can manage through the turbulent times in 2H11.