Lightimes Online News and Resources for the LED and Solid State Lighting Industry and its Supply Chain

December 4, 2008...Good news! We're a year into a recession, and I would suggest that it is a key contributor to a perfect storm that will take the LED and solid state lighting industries to the next level. Benefits from a recession? Absolutely. Several of them, and one need only look at what happened as a result of the 2000 "tech bubble" burst, which we'll cover in a minute. But first, some detail on that good news.

According to the USA's National Bureau of Economic Research (NBER), the current economic slowdown began in the US in December of 2007 (ref. Market Watch article). According to the report, the NBER "does not judge a recession as two consecutive quarterly declines in gross domestic product; rather, it examines quarterly data along with four key monthly economic indicators: employment, incomes, industrial output and sales. Employment and incomes peaked in December, industrial output peaked in January, and sales peaked in June, the NBER committee said." Keep in mind that this would be for US economic numbers. If you're outside the US, "your actual results may vary" as they say in the weight loss and hair growth industries. Given today's worldwide economic interdependence, it's a fair bet that most other countries or regions followed the same timing trend, plus or minus a month or two.

The article went on to share that, "The expansion from November 2001 to December 2007 lasted 73 months. The previous expansion lasted 120 months. The average expansion since the end of World War II has lasted 57 months. The typical postwar recession has lasted 10 months." Business cycles are a natural part of a mostly-free market. Invention allows innovation. A new round of efficiency is created, and invariably, there is a period of substantial profit-gathering by the innovators. As more profit is gathered, new entries bring their ideas into the "economic arena" to catch a share of the riches. Remember that there can be multiple innovations going on at once, and they won't all be coincidental in their timing, but may be a cause and effect relationship nonetheless. Taking a snippet of the late 1990s tech bubble story, we had the opto-communications revolution, followed closely by the telecom and internet explosions. As more companies enter the arena with good ideas of their own, the original innovators can find themselves having budgeted their world around high profits which the new, lean, hungry market entrants quickly devour. Depending upon how quickly those original innovators adapt, they will either starve and die, or re-invent themselves to succeed at a more historically normal profit level. Either way, that excess profit pool will quickly get eaten, and some set of the companies, new and old, will wither and die.

In 2000, one result was a massive re-capitalization of the opto and communications industries. My local landline provider, SBC, tells me that fiber runs to the neighborhood node, and that I can watch a zillion channels as well as record 4 at once, for the low-low price of just $29/month. (Don't want them, but it is impressive). Similarly, when the old router needed replacement, we installed a 300 Mbit wireless version, with gigabit Ethernet, for the house, for less than $200. That happened in part because the new opto-comm innovators burst into a fat market in 1999-2000, gobbled up excess profits, and lots of companies tanked. For survival, a number of companies re-organized and wrote down assets, while others were bought at bargain basement prices, and for those that disappeared, their IP and equipment were auctioned off to the survivors. Nearly overnight, the industry had recapitalized it's production capacity and key fixed costs, notably capital equipment, were 10% of what they were a year before.

So what's on the horizon for LEDs and solid state lighting? Like waves on the ocean, sometimes trends overlap to make a bigger wave or trigger other waves. Obviously, the current cycles, most visibly led by "innovation" and commensurate large profits in the financial sectors, have triggered a ripple effect. Tight credit or delayed fundraising will put the equipment and IP of a number of industry companies "in play". They may need to sell themselves to someone for a bargain price, or may become attractive because their stock price got caught on the wrong stock market wave and headed to a low valuation in spite of their fundamentals. Creative deals will come into a play, such as Rubicon's recent $2M investment in one of their key silicon-on-sapphire customers... a cheap investment as part of a deal that assured them the majority of the company's wafer orders (not all companies are public, so few of us get to see the details on the majority of these kinds of thing). IP for sale... get your IP while it's hot... oh, you need equipment?... we've got that too, and at bargain basement prices! This won't be of the magnitude we saw in the opto-comm crash, but it will be significant.

In addition, some big companies have begun making the moves to join the LED fray. TSMC, with its reported investment in Bridgelux earlier this year, likely isn't just curious about the coming opportunity as LEDs take over the world. Similarly, it appears that one or more large display manufacturers are evaluating in-house LED manufacturing capabilities in the near future (but why build the production capability if you can by it at a great price... Epistar's model seems to have worked out well in the 'great Taiwan LED chip consolidation' of 2004-2005). Applied Materials has been taking measured steps to involve itself in the LED and related materials production arena. That suggests the classic 'increased volume, decreased price' dynamic, often not at the cost of profits when it's driven by efficiency increases rather than 'willingness to lose money faster than the other guy' as we saw in the LED keypad price plummet.

Component #3 of the equation is the introduction of useful standards for LED lighting. Based on the continuing CALiPER testing by the US Department of Energy, it's going to be a fairly narrow group of LED luminaire manufacturers that will be initially capable of earning the Energy Star mark. That will be an important factor, assuming EPA's dumbed-down "RLF" version continues to be seen for what it is... a bad idea that would devalue the Energy Star. Similarly, some rapid adjustments are needed to the DOE's new labeling initiative and "SSL Quality Partner" program that was just announced in order to prevent damage to the DOE's previously good work. Buyers will begin to demand "the mark" and companies that only have part of the equation right will watch their market opportunities get handed to the ones that have the whole design and manufacturing part done. Their pieces of the IP landscape, and some other expertise, will be available to the right bidder. Some big lighting players will see the technology as "ready now" and actually adapt to the value-and thought-shift that SSL represents.

So, you have a combination of financial and spec-driven industry attrition, which will result in some buying and recapitalization opportunities. Add to that the near-term entry of larger players, both from the semiconductor as well as lighting arenas, and you have the makings of a substantially re-made industry, ready, willing and most of all, able to compete with the incumbent technologies. Believe it or not, the downturn is the start of something good.

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