Consolidation of LED Industry Continues in China

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The scale of China’s LED package market is projected to expand 16% year on year to 61.4 billion RMB in 2015, according to the latest Chinese LED Industry Market Report by LEDinside, a division of TrendForce. The growth of Chinese LED package market on the whole has slowed. With China being the production center of the global LED industry, the weakening of global economy this year has led to a larger slide in the exports of the country’s LED products. The year-on-year increase of Chinese LED lighting product exports for this year’s first half is 21%, a steep decline compared with the 80% year-on-year growth for the first half of 2014.

LEDinside analyst Allen Yu said that below expected growth of the lighting market demand has caused the current overcapacity for the LED package industry. As competition intensifies, prices of LED products will keep falling and operation pressure will mount for small and medium-size industry participants. Therefore, industry consolidation will also continue. With huge war chests already in place, some major Chinese LED companies have begun acquiring smaller players to strengthen themselves and transform their business models. Presently, most Chinese LED companies are competing in the low-end market. For Chinese LED product exporters, they will need to acquire international companies with a good number of patents in order establish a firm presence overseas. In sum, mergers and acquisitions will be frequent in the Chinese LED industry.

This recent and relentless wave of acquisitions is the result of the gradual maturation of the Chinese LED industry, and the process began with LED package companies in 2014. By 2015, the deal-making was officially in full swing with Lumileds, Bridgelux and other international companies becoming targets.

Yu pointed out that the competition in the Chinese LED package market has always been fierce, especially in the lighting LED segment. Chinese industry participants furthermore have lower margins for their products, reflecting their relatively weak profitability. Acquisition is thus one of the various methods that these players can use to help change their business models or boost their competitiveness. The following are some common types of deal-making that have taken place so far:

1. Horizontal integration: An LED company can either acquire or merge with another company belonging to the same industry or the same level of supply chain as to rapidly expand, pool resources and complement each other’s technological strengths. Notable cases in the Chinese LED industry are Honglitronic’s acquisition of Smalite and Refond’s acquisition of LT Photoelectricity.

2. Vertical integration: This type of deal-making involves buying companies up or down the supply chain as to obtain raw materials at cheaper prices or secure sales channels for end products. Examples in the Chinese LED industry include Natinstar’s deal with Invenlux Technology (LED chip maker), Honglitrongic’s deal with Lianyou (lead frame supplier) and Mason Technologies’ takeover of Rishang (LED advertising signage specialist).

3. Cross-industry merger/acquisition: Cross-industry deals help companies to spread their risks. One prominent example is Honglitronic’s attempt to enter the Internet of Vehicles sector via investments in DINA and Wisdom GPS. At the same time, Honglitronic is also branching into the Internet of Finance sector with its investments in Wang Li Finance Corporation.

In addition to these types of deal-making, Chinese LED companies that have amassed significant funds are establishing their own investment firms to rationalize their resources with various financial instruments and improve their overall competitiveness. For their acquisition targets, the injection of additional fund will relieve them of their cash flow pressure as well as helping them increase their production capacities and scale of their business operations.