January 3, 2006...This week's guest writer for the McDonald Report is Scott McMahan. Scott serves as our hard working news editor for both CompoundSemi News and LIGHTimes. In this guest editorial, he outlines some of the important news of the past year and takes a look at how the past year stood up to industry expectations. He then gives us an overview of predictions our industry experts made about the future.

Let's take a look back at the past year of news about the Solid State Lighting (SSL) and compound semiconductor (CS) industries... In this editorial I have listed what I think are some of the important events and key trends of the past year. I briefly compare the year to industry projections, and I outline what our industry experts predicted about the future... This year we have seen prices of LEDs drop significantly, especially white LEDs. At the same time, many new LED makers have entered the market. LED backlight modules for LCD screens have seen significant increases in sales. However lighting for cell phone keypads has seen a growth slow down. Mobile appliance applications began to saturate the market. Strategies Unlimited’s researcher, Robert S. Steele (Bob) commented that "the HB [high brightness] LED market is entering a period of slower growth than it has experienced historically. For the next five years, growth rates may be expected to be in the range of 10-15% per year, rather than the 40-50% that the industry has come to expect."

Way back in 2001, Strategies Unlimited (SU) predicted the HB-LED market would reach 3.4 billion in 2005. The market exceeded expectations. The HB-LED market actually reached 3.7 billion in 2004 according to SU’s numbers. Taiwan-based LED makers saw considerable consolidation among companies due to increasing competition and lowering prices. Bob Steele said that, “in spite of some industry consolidation, we can expect to see new HB LED suppliers continue to enter the market, with either new packaging concepts or new device structures based on innovative technologies such as photonic crystals. Although it is more than 10 years old, the HB LED industry is far from mature, and new companies with new ideas will continue to help propel the industry to new frontiers in both technology and applications.” (Ref: coverage). He indicated that although the growth has slowed considerably, the market for high brightness LEDs for handsets is set to double by 2009 over 2004 revenues. (Ref: coverage). Another research firm, iSupply, came out with their own predictions, not about the HB-LED market, but about the LED market for general lighting. They predicted that by 2010 the LED market for general lighting will reach $874 million or about 6 times the level for 2005 which they estimated to be $144 million. (Ref: coverage).

A number of companies started selling and making phosphor-based white LEDs. Some of them licensed the technology, and others claimed to have developed their own. This led to many patent lawsuits. YEBY Associates analyst and major contributor to Strategies Unlimited's SSL industry studies, Robert Walker, (who is now CEO of eLite Optoelectronics) stated, "With Osram having licensed players in Japan, Taiwan and Korea, and Intematix out with a business model focused on licensing new, superior phosphors to key players in Asia, this could turn into something very exciting." (Ref: coverage).

The worldwide device market for gallium nitride (GaN) components reached $3.2 billion in 2004. GaN technology continues to be one of the biggest success stories in compound semiconductors, according to Strategies Unlimited. A few GaN foundries in the USA were awarded lucrative defense contracts for research into production ramp up. According to SU the GaN production market will reach $7.6 billion by 2009. SU reported that 232 companies were participating in GaN production as of early 2005. This represents an increase of 26% over the 2003 number. (Ref: coverage).

The optical component industry was troubled in 2005 with supply exceeding demand. Lee Johnson, a market expert formerly with TriQuint and Emcore, reported on the combined Optical Fiber Communication Conference and Exposition (OFC) and National Fiber Optic Engineers Conference (NFOEC) in Anaheim, California USA. He concluded that, “while there are new revenue growth opportunities for FTTX and 10Gb/s transceivers, there are also too many suppliers for the crowded optical component market.” (Ref: coverage).

Strategy Analytics predicted that gallium arsenide (GaAs) will drive the CATV revolution. Asif Anwar, director of GaAs service at Strategy Analytics said, “Increases in IP traffic will lead to expansions at 2.5 and 10Gps, used in network cores, with 10Gbps forecast to account for 57% of the market in 2009. GaAs will continue to command the 10Gbps market for the next five years.” Cell phone-based WiFi access met with increasing demand for the year. SA predicted that the continuing reduction in Wi-Fi radio chip prices and increasing integration, and adoption of front-end PA modules, will help drive Wi-Fi into an ever-increasing number of platforms. SA stated that the majority of WiFi chips were for notebooks, but by 2009 Wi-Fi enabled cell phones will dominate. Despite this, the SA report makes sobering reading for vendors. "Broadcom, Atheros and Intel presently control over half of the Wi-Fi chip market," stated Chris Taylor, director, Strategy Analytics' RF & wireless component service. He added, "The number of vendors has fallen dramatically over the past two years, but we count at least 58 players still in this market, which is still far too many. We only expect around 20 to survive the next five years." (Ref: coverage).

While more backlighting of LCD screens is being done with LEDs, it will be some time before LEDs dominate the LCD backlight market, iSupply said. Cold cathode fluorescent lamp (CCFL) backlighting will remain less expensive than LED-based backlighting for at least the next two years, iSupply stated. They added that many LCD makers have chosen to speed up capacity expansion for CCFL production for this reason. They also pointed out that because LCD TV makers are especially vulnerable to supply disruptions, many LCD makers produce some components in house. These most commonly include: color filters, polarizers, and CCFLs. So an attempt to in promote LED backlight use would in many cases have to overcome cost advantages of in-house production of certain parts. (Ref: coverage).

The next generation DVD format war heated up in 2005. Both sides could ultimately benefit CS companies who produce blue lasers required in each format. DVD format talks were attempted, but they failed to bring the sides together. (Ref: coverage). Microsoft and Intel joined HD-DVD proponents. (Ref: coverage). Pioneer Electronics introduced among the first PC-based Blu-ray format disk drives with 25Gbyte capacity. The company plans to ship the product in the first quarter of 2006. (Ref: coverage).

Silicon Carbide made some significant waves in the mainstream media with a report in Forbes magazine in a February article entitled, “A Power Portfolio.” They outlined why a number of companies in compound semiconductors, such as Cree, IXYS, and Fairchild Semiconductors would be good long-term stock picks. The reasoning they gave was that with high oil prices, hybrid autos will continue to increase in sales. A number of key components go into making a hybrid automobiles that require compound semiconductors such as silicon carbide (SiC). The main ones are used in power conversion at various points, to get the current from the alternator to get the right kind clean current needed for radio, headlights, signals, air conditioning, etc…. According to Forbes, the hybrid market will help the companies that make such components prosper. (Ref: coverage).

It may take years to see how good the predictions actually were, but overall the future of compound semiconductor materials and devices, and especially those used for solid state lighting applications, looks bright.

By News Editor, Scott McMahan who can be contacted directly in Austin, Texas at tel: +1-512-219-0158 or by emailing: scottmc@compoundsemi.com