Historically, it has been very difficult to play trends in the LED industry as many participants are systems integrators such as Siemens (which owns Osram) or General Electric, while others such as the Japanese LED supplier Nichia are privately owned. "Investors have typically looked to Cree [a leading US chip manufacturer] in order to play this space, but of course Cree is quite far down the supply chain," says Dorsheimer.
At the moment, the LED industry has a scarcity value in the financial markets. "People recognize this as a large market with very few pure-plays; the investment community would like to see additional public companies throughout the supply chain," says Dorsheimer. "Companies that can exhibit a solid business plan to benefit from this large market opportunity will certainly be welcomed in the public market."
The Asian influence
One section of the Bright Ideas event discussed the influence of Asian LED manufacturers and the trend towards commoditization of LEDs in the handset market. "Commoditization has not happened to date, but our panel discussion revealed an interesting discrepancy in prices between Asian suppliers and major manufacturers such as Nichia, Toyoda Gosei, Cree, and Osram," says Dorsheimer.
For blue 460 nm LED chips used in the keypad market to provide blue or white backlighting, with power in the sub-10 mW range, prices from Asian suppliers have dropped below 2 cents per chip. For the major suppliers, prices are still up in the 5-cent range.
How can the higher prices be sustained? "Reliability is still higher from the major manufacturers, and another major factor is IP," says Dorsheimer. Essentially, the strong intellectual property position of the major suppliers gives their customers the assurance that nothing is going to come along and disrupt their supply chain.
However, the lines are becoming more blurred, for example as the ODM model for handset manufacturing continues to gain traction; if ODMs source components locally, then LEDs containing "non-friendly IP" may end up in major-brand handsets in the US and European markets.
"IP issues are like a runaway freight train - a few lawsuits in the beginning can put up barriers and hold it back, but as it starts to gain momentum it's difficult to stop," says Dorsheimer. As technology becomes widely used, legally or not, it gradually becomes incorporated into products piece by piece until it becomes very difficult to have a successful lawsuit. The global nature of the LED marketplace is the main cause of concern. "Nichia has been very successful in Japan, there's also been success in the US, but it becomes much more difficult to maintain barriers on a global basis," Dorsheimer explains.
Financial interest
The investment community is very interested to understand the dynamics of the LED supply chain as well as the demand from the various end markets. "People realize that in 10 years, solid-state lighting will probably represent a very large market," says Dorsheimer. "But, between now and then, there's going to be multiple cycles as new markets adopt the technology, and then commoditize the technology on the downside. Understanding the peaks and valleys and their timing is the critical issue in making a good investment."
If LED markets such as handsets move towards commoditization, then companies such as Cree and its competitors need to stay ahead of the curve and look to emerging markets such as automotive headlights, which may not materialize until 2007 and beyond. The key issue is to understand the timing of the adoption of new products.
Next year, says Dorsheimer, the real driver will be the handset and PDA market, with some applications in specialty lighting, as described at the Bright Ideas event by Color Kinetics, TIR Systems and OptiLED. Daktronics, a publicly-traded supplier of LED displays, is benefiting from expanding market opportunities in billboards and interactive media.
Dorsheimer adds that the better than expected popularity of the inaugural Bright Ideas event means that a follow-up will be organized in 2005.
