As LED patents run out, supply chain value will shift downstream

Barclays Capital finds that light-emitting diode (LED) manufacturing and materials patents will soon run out, potentially draining value from material/chip/package suppliers and turning LEDs into commodities. These financial and market dynamics take-aways were gleaned from the Intertech Pira Phosphor Summit, a conference on phosphors being used in the LED industry.

For Barclay's update on phosphor technologies, gleaned from the conference, read Phosphor trends for LED manufacturing

LED-related patents are buoying the top LED makers selling to lighting companies; however, core LED patents will expire in the next 4-5 years, leading to more intensified competition. Top LED makers -- Cree, Nichia, OSRAM, and Lumileds -- are the go-to sources for global lighting manufacturers -- GE, Philips, OSRAM -- thanks to strong patent protection. Barclays notes that cross-licensing arrangements between these LED makers make it difficult to gauge precisely when this patent position begins to erode.

Some Korean and Taiwanese LED makers -- Epistar, Seoul Semi, Samsung, LG Innotek, and Forepi -- have secured licensing agreements or partnerships with the top LED makers, gaining access to Acuity Brands, Zumtobel, Hubbell, Cooper and other top luminaire manufacturers in developed regions. But even as LED manufacturers in Korea, Taiwan, and even China ramp capacity and gradually improve their LED chip/component quality, global lighting conglomerates continue to purchase LEDs only from the top LED manufacturers.

The continual evolution in the LED structure makes it difficult to isolate which core patents remain a true barrier for new entrants (chip color, phosphor composition, chip structure, color mixing), Barclays notes. LED makers continue to develop novel ways to improve luminous efficacy (lm/W), CRI (color quality), thermal management, lifetime, and cost.

Although it is difficult to compare the various new product claims among the top LED makers (claims about theoretical luminous efficacy levels are often not apples to apples due to different specs around drive current and voltage, color temperature, LM70 lifetimes), what was clear from the various presentations and comments at the conference was that the top 4 LED makers maintain a noticeable quality leadership relative to Tier 2 and 3 players.

The majority of profits in the LED lighting sector will go to the lighting system manufacturers in the future, given an LED oversupply on the market and LED patents running out. Once core IP is no longer patent-protected, the materials, chip, and package suppliers will watch value fade from their offerings. Lighting companies can still differentiate products through design and distribution, while procuring commodity-like LED components. LED maker Cree’s push downstream "may be a prudent step," Barclays reports, given this trend.

Lighting suppliers and chip makers (Cree, Lumileds, and OSRAM made statements on recent earnings calls) confirm that IP does not make them immune to pricing pressure, with competition among the Tier 1 LED makers fighting for spots with lighting companies.