LEDs: Opportunity Could Be Bright
Light-emitting diodes, or LEDs, have been around for decades. Today, LEDs have become quite a bit more interesting, and represent an interesting growth industry with a range of important, new and emerging applications.
Written by: Dennis Wassung, Jr., CFA,
Associate Portfolio Manager
INTRODUCTION
Light-emitting diodes, or LEDs, have been around for decades. In its simplest form, you can think of that little red light that illuminates when you press a button on your TV remote control. Today, LEDs have become quite a bit more interesting, and represent an interesting growth industry with a range of important, new and emerging applications. Specifically, “high brightness” LEDs, or HB-LEDs, are being implemented into everything from your cell phone, to your car’s dashboard lights and headlights, to interior lighting in buildings, to the street lights in your town, to your new widescreen TV and laptop computer. Most importantly, and one of the biggest questions, is the notion that you might soon replace your traditional light bulb with an LED-based light. The impressive set of applications and a rapid adoption rate have resulted in an interesting growth and investment opportunity.
INDUSTRY GROWTH OPPORTUNITY
LEDs are an efficient, energy-saving illumination technology when compared to traditional lighting sources, although the cost of LED- based products has been prohibitive for some time. The economics of manufacturing LEDs are improving and LED technology is getting better and more efficient, and the resulting reduced costs and higher performance is leading to increased use.
LEDs are finding themselves in a growing list of consumer electronics products today, as well as in a range of other applications. LEDs have been used in mobile phones for years and this application represented a large portion of the LED market through 2009 (see chart on next page). LEDs are used for backlighting of the phone’s screen, and in some cases, as backlighting for the keypad. Given the size of these devices, only a few LEDs are typically required in each device. Over the last year or so, the market dynamics began to change.
As the market forecast chart illustrates, the LED market is estimated at roughly $8 billion in 2010, ramping to about $20 billion in 2014, representing more than a 30% annual growth rate from 2009 to 2014, according to Strategies Unlimited forecasts. As discussed, the key market drivers today are the mobile phone market and the led (liquid crystal display) market, while the growth is expected to come from further expansion and penetration of LEDs in the led display market and the emergence of the general lighting market in the LED space. The general lighting market — more specifically the timing of market adoption — is a big question, and specifically whether the market will ramp soon or several years from now.
LEDs are now commonplace in notebook computers and led televisions for backlighting of the screen (now oftentimes called LED TVs”), and the desktop led monitor segment is another opportunity in its early stages. The penetration rate for LEDs in notebooks and led TVs has been rapid — laptops have migrated to nearly 100% LEDb acklit displays and the LED TV market is quickly moving down the same path. These applications can drive sizable LED market growth given the size of these devices (large TVs require significantly more LEDs), and are likely to remain a key aspect of the LED market in coming years.
Another key driver for future growth in the LED industry is the “general lighting” market. As shown in the slide below, there are numerous lighting applications — each with a potential LED opportunity. The broader lighting industry will not entirely switch to LEDs, nor will any transition likely occur rapidly. However, major lighting suppliers are evaluating and developing LED-based products for a range of applications. As these products are brought to market (some are here today), the impact on the LED industry could be meaningful. Price is one of the key factors in consumer adoption of LED-based lighting. LED-based lighting has been significantly more expensive than the traditional incandescent light bulb — although the energy efficiency and life of the product will often offset the higher price over time. As prices come down, the door could open for a much broader adoption by consumers. In the interim, architectural and commercial/industrial applications are the primary early adopters, as these projects can look at the longer-term cost savings of implementing LEDs.
WHO ARE THE PLAYERS?
LED manufacturers are located in several Asian countries (Taiwan, China, Korea, and Japan), plus a smattering of players in North America and Europe. The chart on the following page shows the universe of manufacturers today, although it is worth noting that emerging players are entering the market, including new Chinese manufacturers that are aggressively ramping their production capabilities.
MANUFACTURING CAPACITY GROWTH
As the demand for LEDs has grown significantly over the last two years, new manufacturing capacity has been in high demand as well. As a result, suppliers of the key equipment used to produce LEDs have experienced a sharp increase in business.
Industry participants have estimated the market for metal organic chemical vapor deposition, or MOCVD” systems — the key equipment required in producing LEDs — in the 700 to 800 units range for 2010. In sizing the market opportunity for these tools, Veeco Instruments (a leading LED equipment supplier) estimates that 1,450 units would be required to support 100% penetration of LEDs for backlighting of TVs and notebook computers. Roughly half of that number (-.725 tools) will be installed by the end of 2010, meaning the equipment installed base will likely have to double from today to meet demand.
As general lighting applications ramp into volume production, the number of LED manufacturing tools required will increase again — some estimate by a factor of 5x to lOx the current tool market. Obviously, this is a very wide range, but it is clear that the general lighting market represents a sizable opportunity for competitors throughout the LED food chain.
CONCLUSION: WHERE ARE THE OPPORTUNITIES?
The LED industry appears as though it may be in the early stages of a longer-term secular growth cycle. As a result, the opportunity could be substantial for many players throughout the industry’s supply chain. From an investment perspective, there are several areas that represent potential investment opportunities:
- LED manufacturers — as the industry grows and evolves, the manufacturing landscape is changing
- Lighting suppliers — companies producing LED-based lighting products
- LED manufacturing equipment suppliers — while likely to be cyclical, manufacturing capacity expansion will continue
- LED material suppliers — companies supplying the base materials used in manufacturing LEDs
As the LED industry evolves into one of growing importance across a range of high-growth, high-volume applications, we look for investment opportunities across what could be an exciting landscape for years to come.
Any advice or suggestions are provided for informational purposes only and is not a solicitation to purchase any investments or services described herein. Please consult your advisor to determine if an investment strategy is appropriate for you. Past performance of either the domestic or international markets or any specific investments is not predictive of future results nor will diversification alone protect front loss.
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