LED Inventory Builds Amid Slowdown in LCD TVs, Cree Says

Slower-than-expected sales of LED-backlit LCD TVs and notebook PCs produced an oversupply of LED chips for those products that won’t clear until early 2011, Cree Chief Financial Officer John Kurtzwell said Tuesday at the Citigroup Technology Conference in New York.

The buildup of LED inventory began in Q2 as lead times for the chips shrank from 12-16 weeks to eight to 10 weeks, Kurtzwell said. The oversupply is tied to slowing sales of notebook PCs and LCD TVs that are expected to ease as the installed base of LED backlit devices grows, Kurtzwell said. LED backlit TVs will account for 20-30 percent of global LCD TV sales this year, growing to 40-50 percent in 2011, Kurtzwell said. Once the installed base crosses 50 percent, the inventory will be less of an issue, as manufacturers’ stocks of CCFL backlights diminish, he said. “Many manufacturers have CCFL orders to balance and get out of before they start switching over to LEDs,” Kurtzwell said.

LCD TV and notebook PC manufacturers are working off LED inventory, Kurtzwell said. LEDs for LCD TVs account for less than 10 percent of Cree’s annual revenue, but they give the company the insight into emerging trends in the industry, Kurtzwell said. Cree developed and then scrapped a line of Colorwave red, green and blue LEDs for PCs and TVs in 2008 (CED Feb 21/08 p10).

"The lead times extended because of demand from TV market, but demand hasn’t been as great as many people expected and right now suppliers are consuming their existing inventory” of LEDs Kurtzwell said: “It will be a little rough” until the Chinese New Year in early February 2011 in dealing with the LED oversupply. “We thought there would be a digestion period” of LED orders after the Chinese New Year, but it “came five months early,” Kurtzwell said.

With a small portion of its business tied to notebook PCs and LCD TVs, Cree is focusing on LED lighting components and chips. The LED chips business, which includes those for TVs and notebooks PCs, typically generates $200 million in annual revenue for Cree. Sales of LED components and modules are expected to grow rapidly as commercial and industrial businesses convert to LED lighting. LEDs have only 2-3 percent penetration of the commercial lighting market, Kurtzwell said. Cree produces LEDs delivering up to 135 lumens per watt, with lower power consumption than incandescent bulbs or fluorescent lighting, Kurtzwell said. Cree is developing LEDs capable of 200 lumens per watt and will have them commercially available in “a few years,” Kurtzwell said.

LEDs are more expensive than conventional lighting, but the prices are expected to fall 20 percent annually the next several years, Kurtzwell said. Cost reductions for LEDs will be driven by a shift to larger wafers from which they're carved, industry officials have said. Cree expects to have a pilot R&D line producing six-inch silicon carbide wafers at its Durham, N.C. plant by year-end and will be in volume production in fiscal 2012, company officials have said. Cree currently makes LEDs using four-inch wafers.

Cree also is doubling capacity for components and testing for its XLamp LEDs for commercial lighting. It has started production at a new 564,900-square-foot factory in Huizhou, China, that has 356,600 square feet for production. That’s more than triple the production space available at another Huizhou facility, which Cree inherited in buying Cotco in 2008. Cree is increasing capital spending in fiscal 2011 to $300 million from $240 million the previous year to fund expansion, company officials have said.

Cree also has struck an agreement with Home Depot to carry its CR6 downlights that fit into a six-inch recessed lighting can on ceilings. The Home Depot private label EcoSmart downlights, sold online for $49.95, have a 35,000-hour lifetime and use 10.5 watts to put out as much light as a 65-watt incandescent light bulb, company officials have said. EcoSmart products will be available in Home Depot stores in October, although the number of outlets hasn’t been decided, Kurtzwell said. Cree also is said to be supplying components to General Electric, which plans to introduce a general purpose bulb later this year. And Cree has a distribution agreement in China for LED modules with China Electric. Cree posted about $500,000 in sales in China in fiscal 2010, the company said.

Cree’s Q4 net income increased 18 percent from the previous quarter to $52.8 million as revenue grew 79 percent from a year earlier to $251 million. LED product revenue rose 13 percent from Q1 to $240.1 million, while those from power and RF chips jumped 10 percent to $24.5 million. Gross margin increased to 49.5 percent.