Analysts grill ams Osram’s outgoing bosses on the pricey factory expansion

When a $5 billion company commits nearly $1 billion to expand a strategic manufacturing site for a key technology that the outgoing CEO acknowledges still has some “technical challenges” as a deadline approaches, you would expect the financial analysts to ask some pressing questions.

That is exactly what happened last week during ams Osram’s fourth-quarter earnings web call. Analysts peppered boss Alexander Everke with inquiries about the state of play in Kulim, Malaysia. Some of theme wondered whether timelines were slipping on construction of a modern factory intended to churn out LEDs — and the all-important future product category of micro LEDs — from 8-inch wafers.

The 8-inch approach marks an advance from the 6-inch wafers that ams Osram has been using at the Kulim site, which opened in 2017. Larger wafers can be more economical because they yield more chips.

For some time, Everke has been lauding what he says is ams Osram’s leading position in the move to 8-inch fabrication. He has repeatedly proclaimed ams Osram as the leader in developing micro LEDs, a product that is much smaller than conventional LEDs and that some industry observers expect will become the predominant display technology for small devices, including smartwatches, phones, and “metaverse” gear for virtual and augmented reality, of which Everke is a big proponent. Micro LEDs could also work their way into larger displays.

On last week’s call, Everke was adamant that the €4.82 billion ($5.16 billion) Premstaetten, Austria–based company is still out in front both in 8-inch wafer utilization and micro LED development.

“The market feedback we receive clearly confirms that we hold a strategic leadership position in smaller-structure-size micro LED technology, and that we are the frontrunner for high-volume industrialization of this next-generation technology,” Everke stated in his opening remarks. “We continue to spend a significant amount of R&D expenses on this program to drive the ongoing process of industrialization further towards completion over time, and together with partners in the ecosystem.”

Analysts hung on every word of his Kulim update. It did not escape their attention that he described the ongoing research and development effort as “significant.” Or that he articulated certain technical hurdles that remain regarding micro LED product development and manufacturing.

“It will continue to be a major engineering focus for us to address the technical challenges that still exist,” Everke said. “So please keep in mind what we said all along regarding the complexities of the technology itself, and manufacturing it in high volume. This includes both our production of manufacturing, and the other steps in the manufacturing chain that need to be in place for the industrialization of the technology.”

On top of that, they wondered whether he signaled a delay when he said that “we currently expect to start recording relevant revenues from our micro LED technology in 2025.” A few months ago, the company had said that the factory would start up in 2024. It committed to the nearly $1 billion expansion last April, saying expansion would take between 18 and 24 months.

Cue the questions

The questions flowed, in the direction of both Everke and chief financial officer Ingo Bank, who, like Everke, will soon depart the company. Has the timeline slipped? Are there serious technical challenges? Will the micro LEDs be too expensive for anything other than niche high-end gear? How long will it take for them to be profitable? Is ams Osram really out in front, when competitors are making their own advances both in 8-inch production and in micro LEDs? And so on.

Everke and Bank insisted that nothing has changed and all is going to plan.

“We’ve always said in the past that we’re building a new 8-inch facility and readying for ramp-up in 2024,” CFO Bank responded to one analyst. “That goal has not changed. We’ve said that we expect to be in a position to have that ready, but we’ve never communicated a time expectation for ramp-up of micro LED technology.”

A possible interpretation: ams Osram has until now been intentionally fuzzy in communicating the micro LED portion of the 8-inch output versus the LED portion. It is now differentiating, essentially saying the micro LEDs will come online after the LEDs, at least with regard to generating significant revenue.

Bank and Everke allowed that startup costs, combined with teething pains and comparatively low initial yields, will stall profits.

“With any kind of technology, when you ramp in the first year, one should not expect that will generate a profitable contribution to your bottom line,” CFO Bank said. “That’s normal, you have the typical learnings that you have, you don’t have the most fantastic yields initially. That’s not going to be different here than it’s been also with other technologies…Year one is always a kind of a ramp year, and in year two you see very meaningful improvements.”

One analyst cited a report that, in the smartwatch market, micro LEDs will probably only be used for expensive products, relegating them to niche status.

CEO Everke refuted that. He compared the market adoption of micro LED displays to a previous transition from LCD screens to OLED screens.

“Every new technology, when you introduce it to the market, has higher cost levels than the to-be-replaced technology,” Everke said. “But it shows, and it’s also the plan, the more you go in high-volume production, which is on our side but also applies for the whole supply chain, the cost will come down to a level that a broad adoption is actually possible.”

Noting that the early days will be limited to the high end followed by a gradual migration into midrange and low-end products, he added, “The main driver for cost reduction is obviously yield improvement, high volume production, which will happen naturally.”

Technical challenges

Another analyst wanted more information on what the analyst perceived as the “new” technical challenges that Everke had mentioned in his opening remarks.

CFO Bank tried to assure the analyst that Everke was referring only to the normal arc of technical development and not to any recent snag. Bank said the only change is that ams Osram now has more clarity on when it will start receiving micro LED revenue.

“The only thing we did today is we added information available to us and based on an assessment we did that we expect now relevant revenues to be, for micro LED, in 2025,” Bank said. “We still expect our 8-inch LED manufacturing facility to be ready for ramp in 2024. Also if you go back, we said all along that, coming back to micro LED, it’s of course a highly differentiating technology, which will have technological challenges and process challenges. That’s what we always said.”

Both Bank and Everke repeated that timing also depends on developments throughout the value chain of micro LEDs.

“We’re working here in an ecosystem where it’s not just us, but also others, that need to make sure that it can be industrialized,” Bank noted. “That’s what we’ve also said.”

Related to the ecosystem, Everke insisted that “the customer engagement in this area is very deep, significant, and active.”

Ams Osram has previously revealed that one customer for product from the 8-inch plant has agreed to make a “substantial prepayment”. The prepayment is believed to be related to micro LEDs, but the company will not confirm that. Bank declined to say when the prepayment might be made.

Whatever the state of the prepayment, Everke reiterated what he considers to be the company’s leadership position in 8-inch fabrication and in micro LEDs.

“We are clearly far ahead of the competition in IP technology and obviously investment in the first 8-inch LED manufacturing capability,” he told one analyst. “I think it’s good news that more and more companies are getting interested in this technology. It shows that the market sees the market potential and the wide range of market applications, which is good news. Getting the feedback from various customers, suppliers, industry players, I clearly can state that we are clearly up front with our positioning as a company in micro LED technology.”

On April 1, it will become the job of incoming CEO Aldo Kamper to keep ams Osram on track with its micro LED and 8-inch wafer development. It’s probably no coincidence that, in replacing Everke as top boss, the company hired Kamper, who has past in-depth knowledge of the Kulim operations. Kamper was instrumental in its opening back in 2017, when he headed the semiconductor portion of Osram, a few years before ams acquired the company.

MARK HALPER is a contributing editor for LEDs Magazine, and an energy, technology, and business journalist ([email protected]).

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