Discussing the dilemma and future of LED companies

Looking back at the development trajectory of the light-emitting diode (LED) industry is like staring at the industry life cycle curve in a textbook.

Once upon a time, it was hailed as the "green light source of the 21st century". It carried the mission of energy conservation and had great potential to contribute to environmental protection. It also had broad market prospects, attracting the influx of countless capital and companies around the world.

However, past glory has not created sustainable prosperity. Today, the entire industry is generally trapped in the predicament of low profits and excessive competition, and is recognized as an involution industry. A large number of companies are struggling to survive on meager profit margins, and the market presents typical "Red Ocean" characteristics, which is in huge contrast with the initial optimistic imagination and expectations.

Upon in-depth analysis, you will find that the current crisis in the LED industry is not simply a market trough, but a structural crisis caused by the superposition of multiple factors such as industrial structure, policy, technology and demand.

This crisis has eroded the industry’s ability to create value, making it difficult for traditional cost competition and scale expansion strategies to To continue.

Although LED is also a subcategory of semiconductors, LED has not been able to rise again after adjustment like typical semiconductor industries such as integrated circuits. Instead, it has been dormant for many years. Why did the LED industry reach this point? In this article, we first analyze the underlying causes behind the crisis in the LED industry, and then draw on the successful cases of the world's leading companies to systematically evaluate four feasible strategic response paths.

Finally, the article will look to the future. In the semiconductor megatrend driven by artificial intelligence (AI), it is recommended that LED companies focus on some emerging areas with high growth potential, hoping to provide a clear and operable framework for corporate decision-makers in troubled times to achieve strategic breakthroughs and create greater value again.

Chapter 1:
The root cause of the collapse of profitability in the LED industry

At first, everyone thought this was an ordinary winter. However, the recovery of the LED industry has repeatedly missed its promise, and this winter is far longer than imagined.

Today’s Industrial difficulties can no longer be attributed to a single external shock or short-term market fluctuations. This is a typical case of value erosion caused by the internal structural flaws of the industry itself.

In this section, we systematically diagnose the four major causes of this crisis through industrial structure analysis, life cycle theory, policy impact assessment, and analysis of the nature of LED demand.

1.1 Market fragmentation is a structural contradiction caused by excessive competition

One of the core indicators to measure the industrial competition pattern and profit potential is market concentration. A highly concentrated market usually means that a few leading companies have strong pricing power and stable profit margins.

On the contrary, a fragmented market will inevitably lead to fierce price competition and continued erosion of profitability. The LED industry, especially the lighting packaging link, is a typical portrayal of the latter.

Through the Herfindahl-Hirschman Index, HHI) quantitative analysis, we can clearly see the fundamental flaws in the LED industry structure. Compared with some high-barrier sub-sectors in the semiconductor industry, there is an order of magnitude difference in the HHI index of the LED packaging industry.

As shown in the figure, the HHI of the AI ​​GPU market is as high as about 8,700, showing an absolute monopoly; the DRAM market is about 3,400, which is a typical oligopoly. Nvidia and Hynix, which have made a lot of money in recent years, are not only riding the trend of the AI ​​industry, but also beneficiaries of this highly concentrated market structure.

However, the HHI of the LED packaging industry is far below 1,000, and the HHI of the general lighting LED field in 2024 is as low as 342. This is an extremely fragmented market structure.

This fundamental difference in structure is the core reason why the profitability of the LED industry is far lower than that of other semiconductor fields.

Further use of Porter's five forces model to conduct a comprehensive analysis of the LED device industry can reveal its harsh competitive environment more clearly:

Threat of new entrants: High. Due to technology diffusion, sufficient talent supply and lower patent barriers, the industry's entry threshold continues to decline. Once industry profitability improves, new competitors will join.

Rivalry among existing competitors: Extremely high. There are a large number of LED companies and serious product homogeneity, resulting in competitive behavior that is highly focused on price wars. This is a core destructive effect on profitability.

Bargaining power of suppliers: weak. The procurement of key equipment (such as MOCVD) is convenient, and the supply of upstream chips is dispersed and sufficient. The profitability of this industry itself is somewhat neutral. On the one hand, it is not easy to be manipulated by key upstream suppliers, but it will also lead to further loss of upstream resource scarcity.

Bargaining power of buyers: Average. Downstream applications are fragmented, but customers are extremely price-sensitive due to small product differentiation.

Threat of substitutes: Low. In the short term, there is no lighting technology that can fully surpass LED in cost and performance.

The conclusion is obvious : In a market with low entry barriers, numerous internal competitors, and highly homogeneous products, companies have almost no pricing power.

The only means of competition seem to be cost control and price reduction, which has plunged the entire industry into a vicious cycle of "involutional innovation" - the performance parameters that companies strive to improve actually lead to a decline in the value of overall demand because they stimulate more intense price wars.

One of the involution innovation methods that the LED industry is good at is to improve performance and keep the price constant. However, when performance improvement can no longer stimulate new demand, the better the performance, the smaller the quantity consumers need, causing the demand curve D1 to shift to the left to D2. However, once the production capacity is formed, it is difficult to exit or switch to other uses, so the supply curve is approximately a straight line, and the result is an inevitable decline in price (from P1 to P2). But when the price cannot cover the variable costs, the company faces a survival crisis, and it is too late to pass on the cost pressure through price increases.

This dilemma is the direct reason why Chinese LED companies generally have low profitability, thin net profit margins and even losses.

1.2 The double-sided edge of policy: the "ratchet effect" of industrial subsidies and equipment localization

The LED industry's dilemma is not entirely caused by the market itself, but is deeply affected by industrial policies. Especially in China, in order to create an “optical valley” and support strategic emerging industries, local governments have Since 2009, various industrial subsidy policies have been introduced. These policies, especially the purchase subsidies of up to 10 million yuan per unit for core production equipment MOCVD, have spawned a huge industrial cluster in the short term, but their long-term consequences are unexpected.

The existence of these industrial subsidies has distorted normal investment return expectations and triggered an irrational "gold rush." ​​Coupled with various games between enterprises, local governments, and enterprises and governments for subsidies, the final result is that everyone is involved in many homogeneous projects, resulting in production capacity expansion that far exceeds the market's digestion capacity.

What is even more fatal is that another trend driven by policies, the localization of key equipment and materials, has also unexpectedly produced an irreversible "ratchet effect." From the perspective of resource-based enterprise competitiveness, when key equipment (such as MOCVD) and auxiliary materials (such as phosphors, encapsulants) that once served as technical bottlenecks and constituted high barriers to entry were overcome and gradually became popular, they changed from scarce strategic resources to ordinary commodities available to everyone. This is true It has finally broken the original supply bottleneck of the industry, permanently lowered the entry barriers of the industry, accelerated the maturity of the industry, and will never go back, like a wheel (ratchet) that can only rotate in one direction.

This process actually implies a clear chain of cause and effect: large-scale government subsidies stimulated irrational investment and led to serious overcapacity. At the same time, the encouragement of localization has accelerated the diffusion of core technologies, sharply lowering the technological and capital barriers to entry into the industry. The combination of overcapacity and lower entry barriers has led to the influx of a large number of new competitors into the market, causing the industrial structure to rapidly become fragmented.

The fragmented market structure (i.e. extremely low HHI index) directly leads to the simplification of corporate competitive behavior - only brutal price wars, which is the extreme involution that everyone usually feels. In the end, these policies, which may have been based on good intentions, indirectly caused structural damage to industrial barriers, leading to a permanent decline in the profitability of the entire industry.

Furthermore, due to the existence of subsidies, companies can no longer easily exit when they find that their operations are in involution. The subsidies themselves imply the social obligations of the companies receiving subsidies to stimulate employment and contribute tax revenue. This creates huge exit barriers for the industry, thereby prolonging the painful cycle of industrial adjustment and causing the entire industry to fall into a quagmire of low profits and high risks.

Originally, even though LED was a fragmented and low-margin industry, it could at least maintain stable low profits commensurate with the investment risk. However, due to the increase in exit barriers, the nature of the industry has changed to low profits and high risks. In the past few years, the LED chip industry has fallen into such an embarrassing dilemma.

In Mike Porter’s view, the best situation is one with high entry barriers and low exit barriers. When both entry and exit barriers are relatively low, it is already a not optimistic situation (the LED industry under normal circumstances); an industry with low entry barriers and high exit barriers (LED after receiving subsidies) is undoubtedly the worst situation.

1.3 No choice but to let the flowers fall away: mature life cycle and diminishing marginal utility

Any industry has its life cycle. According to TrendForce analysis, the general lighting market is in a critical stage of transition from the backend of the growth stage to the mature stage. Data show that the main driver of market growth has shifted from new demand (Primary Replacement & New Install) to existing replacement demand (Secondary Replacement), and the overall market size growth has slowed down significantly. This means that the explosive growth period of the market has ended, and the industry has entered a stage of capacity clearing and inventory competition.

At the same time, LED technology itself is also facing the challenge of "diminishing marginal utility". The first is the diminishing marginal effect of performance. In the field of lighting, LED technology has reached a level that satisfies the vast majority of consumers in terms of light efficiency (lumens/watt), lifespan, and reliability. Although technology is still improving, these incremental improvements have very limited improvement in user experience. For example, increasing the light efficiency of a light bulb from 150lm/W to 160lm/W is almost imperceptible to ordinary home users, making it difficult to stimulate new purchase or replacement intentions. There is also an upper limit on the number of lights used. Assuming that the reasonable demand for a room is 5 lights, placing 5 more lights will not only cause a waste of energy, but also cause negative effects such as glare and light pollution.

As shown in the figure above, as the number of light bulbs in the room increases, the luminous flux increases linearly and proportionally, but the effect on people is different. At first, as the number of light bulbs in the room increases, the room becomes brighter and people become more and more comfortable and happy. However, when it increases to a certain number (4-5) and continues to add more lights, people will not necessarily feel happier. Instead, they may cause discomfort due to glare. If it continues to increase, it may cause physiological damage due to glare and bring negative effects.

This phenomenon is in sharp contrast to the field of high-performance computing (GPU/CPU). In the field of computing, improvements in computing power (such as higher TOPS) can directly unlock new application scenarios (such as more complex AI models, higher-quality games), thereby creating new demands. Especially in scenarios such as AI training, under the parallel computing architecture, the computing speed of the system is highly dependent on the speed of each subsystem, and the demand side is willing to pay multiple additional costs for the improvement of marginal computing power.

However, in the field of general lighting, further improvement in luminous flux cannot bring about a qualitative change in user value.

The essential nature of this demand determines that the value conversion efficiency of technological innovation is extremely low. It cannot continue to create market growth space through technological iterations like other technological fields. It is also difficult to stimulate consumers to pay for these additional performance innovations after meeting their basic lighting needs.

1.4 The distant waters of the New World cannot quench the near thirst

Faced with the stagnation of the traditional lighting market, many companies have pinned their hopes on emerging applications such as Micro/Mini LED and automotive LED. However, according to TrendForce’s forecast data, although these new continents have promising prospects, they will be unable to make up for the huge gap caused by the decline of traditional markets in the short term.

Analyzing the output value share of each segment in 2025 and the compound growth rate (CAGR) in the next five years can reveal a grim reality:

Although general lighting LEDs and display backlight LEDs account for a huge proportion of output value, their growth is weak or even declining (CAGR is negative or low single digits); Micro/Mini Although LED self-illuminating displays and automotive LEDs have a high compound growth rate of 20%-60%, their output value in 2025 will be relatively small.

This reveals a fatal strategic dilemma: the "old world" of the LED industry is collapsing in terms of profits, but its size is still huge; while the promising "new world" is growing rapidly, but its scale is still unable to provide sufficient momentum for the huge industry as a whole. As a result, LED companies are trapped in a gap where the old business is unsustainable and the new business cannot quench the current thirst.

In addition, LED products generally have a long life, which is several times longer than traditional light sources such as energy-saving lamps, CCFL, and halogen lamps. This greatly suppresses the frequency of stock market updates in all application fields, further exacerbating the demand dilemma.

In summary, the crisis in the LED industry is systemic and structural. The fragmented market structure, policy-driven oversupply, the maturity of the industry life cycle and the diminishing marginal utility of technology have jointly blocked the profit space of mainstream markets such as general lighting.

The insufficient volume of emerging applications in the short term makes the transformation path full of uncertainty. In such a difficult environment, the survival and development of enterprises must transcend traditional operational thinking and seek fundamental strategic breakthroughs.

Next, let’s look at the cases of several companies to see how they responded to the dilemma.

Chapter 2:
Apocalypse of strategic transformation from industrial giants

In a low-profit environment caused by structural defects, the survival and revival of enterprises can no longer rely on environmental improvements or random opportunities. Instead, they must think carefully and make fundamental strategic decisions. select. This chapter will provide an in-depth analysis of four completely different strategic archetypes, and provide a strategic reference manual for LED companies in distress through the cases of Samsung, Micron, BOE and Baoming Technology.

2.1 Strategic Turn: Samsung’s Art of Resource Reallocation

Strategy Prototype: For large diversified companies, the most rational choice is to decisively withdraw resources from the Red Ocean market with low returns and fierce competition, and reallocate resources to emerging or adjacent fields with better industrial structures and higher growth potential. This is a capital allocation idea based on opportunity cost.

Samsung case analysis: Samsung Electronics is a textbook example of this strategy. Faced with the commoditization and profit erosion of the global LED market, Samsung has made the difficult but wise decision to gradually withdraw from the mainstream LED business. Its exit timetable is clear and resolute: it will stop the production of LED chips for lighting in the first half of 2026, and exit the TV LED backlight business in the second half of 2026. Moreover, it is expected that Samsung may completely complete its business by the end of 2030. Exiting other commercialized LED businesses.

This retreat was not a rout, but a carefully planned strategic shift. Samsung has focused its strong capital strength and top R&D resources on two new battlefields with high barriers and high growth potential: Micro LED and power