Background: Cree has announced that the company will restructure its LED business in order to reduce overhead and to improve the business’s cost structure in the future. According to Cree’s announcement, the restructuring savings will amount to $85M including $47mn in capacity and overhead cost reductions, $27mn in channel revenue reserves, and $11mn in inventory reserves. The company also gave a below-than-expected guidance of revenue and operating margins in FY4Q15 (CY2Q15).
Implications: Cree has invested in Lextar in order to outsource mid-power LED packages and lighting products, which was discussed in my earlier blog (http://www.strategies-u.com/articles/2014/09/cree-invests-in-lextar.html).
Now Cree is consolidating its LED manufacturers and is building up reserves in anticipation of severe pricing competition. The company management has seen dramatic pricing pressure increase, which has led to massive ASP decreases. This is in-line with I saw during my visit to the Guangzhou International Lighting Exhibition in June (http://goo.gl/IiYpfk). Chinese LED players are having severe price competition, especially mid-to-low end LEDs and from LED packages to lighting products. As a result, not only Cree but also other major LED makers will be under pricing pressure in Asia and going forward. We forecast that international brands will start a price war in 2H15 or even in 2016.
On the other hand, we believe Lextar will continue to receive more orders from Cree, given that Cree will be reducing its manufacturing capacity. Although price trend will go down more than expected for Lextar, we believe the company can leverage its scalability and lower costs.
Opportunities: For the past 2 years, the LED industry has been going through consolidations, vertical integrations and bankruptcies and I think Cree’s restructuring announcement is the signal of the end of the company’s down cycle. I believe factory consolidation, headcount reduction and Power/RF spin-offs will create a cost synergy for Cree as a long term strategy as the LED industry will continue to see more consolidations in 2015.
A number of Chinese LED players are also targeting Cree and other major brands for their technology/channels/patents. We know these Chinese players have very deep pockets and if Cree’s restructuring doesn’t go as planned, I would not be surprised if Cree is acquired by one of them.
No matter what happens, consumers will continue to see decreasing LED and LED product prices in the near future.