Significant overcapacity and low LED substrate prices will affect the profitability and viability of many sapphire players in 2013 and beyond, but emerging applications could transform the industry.

The sapphire material shortage experienced from 2010 to early 2011 created a window of opportunity for new entrants. In the last two years, more than 80 companies announced their intention to enter the industry, bringing the potential number of players to 130+ – with more than 50 of these potential new entrants located in China. Coupled with slow demand from LED makers in 2012, this has created a very challenging environment with cores and wafers often selling at prices at or below manufacturing cost. Revenues increased 15% in 2011 but are expected to drop 9% in 2012 due to lower Average Selling Prices, despite volume increase and a favorable product mix with the percentage of PSS wafersincreasing dramatically. These difficult market conditions will trigger an industry rationalization through consolidation and attrition that should take place in 2013 and 2014; activities that the Yole Finance business unit is monitoring closely. In the long-term, as the environment remains extremely competitive, we expect the industry to evolve toward a more vertically integrated model in order to limit margin stacking. A handful of tier-1 worldwide leaders should emerge from this rationalization, along with smaller tier-2 regional players.

LED-on-Si: a looming threat for sapphire makers

All major LED makers are currently exploring opportunities for transitioning from a sapphire-based technology platform to a silicon-based one (“LED-on-Si”); this interest is driven by a potential cost savings of up to 60% at the die level. But while significant progress has been made, the technology still faces hurdles, and it remains to be seen whether the leading proponents of LED-on-Si, like Bridgelux/Toshiba and Lattice Power, will be able to tackle all of the remaining challenges and transition to mass manufacturing in a cost-effective manner. For most other LED companies, LED-on-Si is often an important development axis, but not a necessary milestone on their manufacturing roadmap. The jury is still out, but in the meantime, investments in the large-diameter sapphire platform are often postponed pending the outcome of LED-on-Si.

SoS to provide welcome upsides, but could cell phone windows be the next killer application?

The Silicon on Sapphire (SoS) application could represent a nice upside for the happy few that enter the supply chain. Demand more than doubled in 2012 and could do the same in 2013. Leading SoS company Peregrine has developed a compelling Antenna Switch technology that has already achieved vast success in smart phones. The company benefits from strong macro trends in the cell phone market and is developing new components that could further increase not only SoS content per phone, but also wafer demand. Opportunities for these new components (Power Amplifiers and tunable capacitors), as well as for competing technologies developed by companies like Paratek (now part of cell phone maker RIM), may bring new volume applications to sapphire wafer manufacturers.

The significant capability and capacity build-up and dramatic cost reduction achieved by the sapphire industry in the last three years could open the door for a whole new range of applications. Amongst these, the use of sapphire for small display covers has the potential to be a game-changer and raise the sapphire industry to a completely new level. Despite significant hurdles in terms of cost and manufacturing technologies, all major cell phone OEMs are currently investigating this option. While mass adoption remains uncertain, it is not completely unrealistic — and due to the current dire situation of their LED-related business, most sapphire makers are eager to help it materialize.