Investment continues to flow to new LED entrants (Client registration required). But more established firms are still struggling to find their footing amid a heavy market oversupply. We expect the oversupply to abate after 2011 (Client registration required), due partly from increased demand fueled by China’s recent policy announcements (Client registration required). But low margins and anemic growth still weigh on major industry players.

This was underscored by earnings releases last month from Semileds, Cree, Veeco, and Philips do not bode well for a recovery. Semileds reported second quarter earnings with a net loss of $7.1 million on revenue of $7.9 million, down from $10 million the same quarter a year ago. More concerning, however, was Semileds’ outlook for the third quarter, where it expects a higher net loss of $7.5 million on $7.9 million to $8.9 million in revenue. Cree’s Q3 results delivered a drop in profit by half to $9.5 million on revenue of $284.8 million compared to the same quarter a year ago, while Veeco’s LED and solar EBITA dropped four-fold to $17.5 million on revenue of $96.0 million compared to the same quarter a year ago. Philips, meanwhile, saw adjusted EBITA for its lighting division fall by nearly half to €110 million on revenue of €2 billion compared to the same quarter a year ago.

Amidst these developments, cost-cutting has come into fashion. Osram, for example, is reportedly planning its first LED manufacturing plant in China in an effort to reduce manufacturing expenses. This move is too little too late, however. Unless Osram is planning to introduce its GaN-on-Si technology (Client registration required) at the new plant, it is unlikely to find itself in a better position, given the oversupply situation and the scale of its competitors in China. Although Osram has fared better than its LED peer Philips Lumileds, it’s well-known that parent Siemens is anxious to shed the unit. Indeed, Siemens CFO Joe Kaeser speculated the IPO for its Osram unit – put on hold last year – could be resurrected this fall if the LED market strengthens.

At Philips, CEO Frans van Houten acknowledged the near term challenges presented by the LED transformation, including “higher investments in R&D and selling expenses, as well as competitor pricing pressure.” But he remained convinced of the Lighting Group’s “profitable future.” It’s hard to share Houten’s optimism, however, given that Philips Lumileds has dragged its feet on cost reduction just like Osram. What’s more, Philips has been less aggressive than peers downstream, where companies like GE and Cree are capitalizing on the shift in value. In the end, Philips Lumileds best path forward may be to follow that of Philips Semiconductors, which was spun out in 2006 to form now publicly traded NXP.

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