With demand exceeding supply, overseas businesses are setting up factories and boosting capacity in China, lured by subsidies and preferential policies.
Touted as the world's factory, China is now strengthening its position as a major global manufacturer of LEDs.
In recent months, several leading international suppliers have invested in the construction of factories in the Pearl, Yangtze and Minjiang River Delta regions, Bohai Bay Rim Economic Region, and even in some parts of Middle Western China.
"China will become important to the global LED industry this year," said Zheng Haowen, director of the National High-Tech Enterprise Development LED Professional Committee, addressing a seminar at Global Sources' systems design and component sourcing event, IIC-China.
"The total foreign investment for the sector is projected to exceed 60 billion yuan ($8.
8 billion), a phenomenal increase from about 10 billion yuan ($1.
5 billion) in 2009.
" To encourage international businesses to set up production facilities in China, local governments have set up policies for subsidizing the cost of construction.
The district of Nanhai in Foshan, Guangdong province, for instance has a 1 billion to 2 billion yuan ($146 million to $293 million) financial assistance fund.
This was set up in October 2009 to support the development of the semiconductor lighting industry in the area.
One result of this endeavor is that US-based SemiLEDs poured $350 million into a new production facility in the district.
The factory, Xurui Optoelectronics, will incorporate SemiLEDs' patented vertical LED on metal technology in manufacturing wafers and higher-powered chips.
Full-scale operations for the initial stage are projected to start in October 2010, with monthly capacity at 20 million 1x1mm LED chips.
But once all three stages of the project are completed in 2013, output per month is expected to reach 380 million units.
Yangzhou in Jiangsu province has a similar policy.
The city government is setting aside 2.
4 billion to 2.
5 billion yuan ($351 million to $366 million) for subsidizing MOCVD machine procurement.
The fund will be available by October 2011.
Through this policy, Yangzhou will shoulder 10 million yuan ($1.
5 million) for each unit purchase.
Depending on the specifications of the equipment, an MOCVD machine can cost about 30 million yuan ($4.
4 million).
Taiwan-based Formosa Epitaxy has been quick to take advantage of this measure.
The company has partnered with Unity and AmTRAN, and South Korea's LG to establish a $150 million LED epitaxy manufacturing facility in the mainland China city.
Jiangsu Canyang Corp.
is expected to have a monthly output reaching 1 billion LED chips once it becomes fully operational in May.
The chips will be used largely as backlights for LCD panels.
Other local governments are implementing similar strategies as well.
After the National Development and Reform Commission announced the latest industrial guidelines in October 2009, various city officials have increased their efforts to support growth in the LED sector.
Shenzhen in Guangdong province will be setting aside 100 million yuan ($14.
6 million) each year from 2009 to 2011 to help spur the industry's development in the city.
Shanghai's Putuo district, meanwhile, doled out 393 million yuan ($57.
5 million) to the high-tech industry special fund for 2010.
Cree in the US and OSRAM from Germany are building LED production facilities in Huizhou and Foshan, both in Guangdong.
Epistar is taking the same route as well.
The Taiwan-based chipmaker is cooperating with LED packaging house Lite-On and a mainland-based home appliances supplier to set up a $120 million factory in Changzhou, Jiangsu.
It also formed a joint-venture company with UMC and invested in a $16 million LED factory in Shandong province.
Impending shortage With global demand for LEDs outpacing yield, manufacturers are looking to expand production capacity to curtail a looming deficit in supply.
The growing popularity of LED-backlit LCD TVs is expected to exacerbate this situation further.
Each LCD panel for such units generally requires between 300 and 500 LEDs with a uniform level of brightness.
Laptops need only about 50.
Because of this probability, several TV manufacturers in China have decided to form partnerships with LED chip suppliers similar to the deal LG and Formosa Epitaxy made.
Doing so not only ensures stable supply for their LED-backlit LCD TVs, it also helps in building a stable ground for the development of the energy-saving semiconductor lighting industry in the country.
Moreover, a group of core patents for LEDs is set to expire beginning this year, opening up the technology to a larger pool of manufacturers.
This is another incentive for businesses to invest in upstream LED chipset production.
Presently, the core patents are held by Nichia and Toyoda Gosei in Japan, Cree, Philips in the Netherlands, and Osram.
China's semiconductor lighting industry has a 3,000-strong supplier base.
Roughly 70 percent, however, are involved in downstream processing such as packaging or applications.
This is because significant investment is required to engage in upstream operations such as chip and wafer manufacturing.
In fact, 65 percent of the 70 billion yuan ($10.
2 billion) 2008 revenue in the industry came from LED application products.
Only 3 percent were from chips and wafers.