The LED industry in China and Taiwan has gone from cooperation to competitive, said Epistar Chairman B.J. Lee. Even though China is still a major threat, Taiwan manufacturers cannot always choose to escape, or Taiwan will have no market strategies left. It is important to see where one’s opportunities are and think about whether Taiwan’s LED industry has any chances of winning. If there are opportunities then it is important to establish an environment beneficial to the industry’s development.
Below are extracts from an interview between Lee and CY Huang, Chairman of Taiwan Mergers and Acquisition and Private Equity Council:
Q: Everyone says Taiwan’s industry is very dull, should the industry try to transition to the next stage?
Lee: Similar to manufacturers forever pursuit of lowering costs, there are always ongoing industry transitions. An example of transition is when technology advances from low-end to high-end technologies.
Additionally, there are many very dramatic transitions from downstream to upstream and even into another industry, or from OEM to brands. I think every industry will make different choices overtime. Yet, often brands are the only thing people talk about. Would not this cause us to lose fundamental competitiveness? There are a few major European and U.S. brands, but what about Taiwan?
I think it is important to think about Taiwan’s industry structure, so the industry will still have advantages in the next 10 years, and fully develop and open up these platforms and industry environment.
Q: Has Epistar’s acquisitions over recent years achieved your goals?
Lee: There has been success in Epistar’s acquisitions, but there are also many places that still require further improvements.
United Epitaxy was acquired by Epistar in 2005, since its patents could compensate Epistar’s shortcomings. This merger was perfect, and resulted in very fast acquisition and generated results quickly.
The second acquisition was in 2007, when we acquired two UMC subsidies South Epitaxy and Highlink Technology. At the time we were vying Highlink Technology’s market share in China. At the time Chinese market revenue only had a 10 percent revenue share out of Epistar’s total revenue, while South Epitaxy revenue from China was about 70 percent. Epistar annual revenue from China is about NT$ 5 billion to NT $6 billion, much higher than the NT$ 2 billion before the merge, which indicates steady growth over the last few years.
In 2010, Epistar acquired Huga Optotech. At the time Epistar had already positioned itself in the mid and high priced market, and we wanted to use Huga Optotech in the mid to low priced markets.
Yet, the stock right structure was wrong, Epistar only had 50 percent stock shares, many important strategies could only be discussed at the board, and the company could not interfere with operations. Therefore, Epistar decided to acquire Huga Optotech by purchasing 100 percent of company shares and delisting it from the bourse. However, by then Chinese manufacturers already took the lead in the local low price market.
After Huga Optotech became a 100% wholly owned subsidiary, operations started to gain trajectory. The company has become profitable in the first half of 2014. This acquisition case explains why most horizontal acquisitions in other regions requires 100% stock purchases or absolute leadership to avoid potential profit conflicts with smaller shareholders, and make operation strategies more effective.
Q: What is your assessment of the benefits from Epistar’s acquisition of FOREPI?
Lee: Epistar can receive three major benefits from absorbing FOREPI. First, the company can quickly acquire human capital and production capacity. Secondly, the company’s R&D staff and engineers can exchange technology and experiences, thus shortening the time it requires to develop R&D products, raise yield rates and lower costs. The third is the two companies can establish strategic supplier relationship after FOREPI is delisted from the Taiwan bourse. This helps cut many management costs. It is estimated FOREPI’s gross margin can rebound to above 10 percent, and management costs will be lowered from 20 percent to 15 percent, and even below single digits.
Overall, this merge can integrate resources, expand operation scale, lower costs and raise operation efficiency, and greatly boost global competitiveness.
Q: What is the relationship between Taiwan and Chinese LED industry? Is it competitive or complimentary? As China restructures the LED upstream, midstream and downstream manufacturers, where should Taiwanese LED industry go? Where is the niche market?
Lee: The industry often says wryly, we just lose money on whatever sector China wants to get involved in and places focus on. But we can’t just run because China is doing this, or Taiwan will have no market strategies left. I think it’s important to think about what opportunities are out there, and consider what kind of position we want, and if there is any place for us in the global competition.