Small Pixel Markets is rapid recovery-The industry needs enhance Profitability

The recovery of market demand in the domestic small-pitch LED display market has accelerated since the second quarter, aligning with the frequent "price increases" implemented by industry terminal companies. The convergence of recovery benefits and profit-driven pressures constitutes the primary trend shaping industry dynamics in the second and third quarters.

01. The demand in the industry is showing a general improvement.
Statistics from the "Mainland China LED Small Pitch Monthly Winning Projects Database" show that from January to June 2023, the number of publicly successful LED small spacing projects was 8,039, a year-on-year increase of 57.0%. Among them, 2,300 projects won bids in June, a year-on-year increase of 80%. Different from the sharp rebound in projects, Luotu Technology data shows that in the first half of 2023, sales of small-pitch LED displays in mainland China reached 7.33 billion, a slight increase of 0.1% year-on-year; the shipment area reached 498,000 square meters, a sharp increase of 20.2% year-on-year. 

According to the data from the two-phase analysis, two key conclusions can be drawn: firstly, there is a notable acceleration in demand recovery and the overall situation remains stable; secondly, the average industry price has reached historically low levels, which has had an impact on both industry sales growth and particularly on profits. Additionally, it is worth noting that these low prices may also serve as one of the factors stimulating demand expansion.

Compared to 2022, the current state of the LED direct display industry is much more favorable. While price cuts may be expected in 2022, there will likely be no corresponding increase in demand, resulting in a decline in both volume and price. However, industry insiders have noted that the LED direct display market has emerged from its previous slump. Emerging applications in Europe and the United States continue to grow while traditional applications are experiencing increased demand in non-European and American developed markets such as Asia, Africa, Latin America, and other Third World regions. As an innovative display technology sector, small-pitch LED displays and related industries may be among the first to recover from this round of global economic downturn.

02. The homogenization between second-tier brands and first-tier brands has intensified.
 The year 2021 will witness the proliferation of P0.9 technology among second-tier brands, while in 2023, the popularization of P0.7 technology is expected to extend to these brands as well. It is anticipated that within a span of two years, an increasing number of second-tier brands will achieve technical proficiency in producing products at the P0.5 level. The law of industry development dictates that "higher specification technology" invariably permeates throughout.

However, in terms of technology diffusion, small-pitch LEDs are approaching a pivotal moment - a turning point in their application scenarios. Historically, when the P1.6 product was initially introduced, its primary market consisted of high-end control rooms and command and dispatch centers. Currently, the market for P0.9 and p0.7 products remains the same within this context. Nevertheless, the demand for reduced pixel pitch in these scenarios will not continue to decline indefinitely. The equilibrium between the trend towards smaller spacing and actual demand as well as product procurement costs will inevitably be reached sooner or later.

From a market perspective, it is highly probable that small-pitch LED display products with a pixel pitch of P0.5 and below need to redefine their "core application scenarios". Currently, this scenario is widely recognized as the 100-200-inch all-in-one market.

Recently, Zheng Haiyan, the chief analyst of RUNTO's PID supply chain business group, highlighted in the report "Development Status and Future Trend Forecast of Commercial Display Market" that as micro-pitch technology advances and packaging techniques evolve, small-pitch LED displays with P<1.0 will account for 13% of products. The shipment volume of LED all-in-one machines is projected to reach only 2,300 units in the first half of 2023. Luotu Technology believes that mass production of all-in-one machines can only be achieved when their price drops to 70,000 to 80,000 yuan; however, this is still significantly higher than the current lowest price range for such products which stands at 20,000 to 300,000 yuan.

Therefore, there exists a possibility that second-tier manufacturers have narrowed the gap with first-tier manufacturers in terms of product technology advancement space, encompassing mature scenarios and commercial needs. This phenomenon is not only evident in micro-pitch products below 1.0 pitch but also extends to P1.0 to P2.0 products and even high-end packaging products incorporating COB technology. The emergence of second-line screens represents a significant trend.

A more abundant product supply is positive news for the demand side, but it also contributes to the acceleration of involution on the supply side. A significant portion of pressure on the current small-pitch LED industry to increase profits and raise average market prices stems from second-tier brands. The "technical gap" between first-tier brands has narrowed, leading to intensified competition in terms of homogeneity.

03. Reinforcing the implementation of Mini/micro LED technology, with a focus on cost reduction.
To enhance market competitiveness and profitability, apart from expanding sales volume, a more effective approach is to reduce one's own costs. This is also the strategy adopted by the small-pitch LED industry in recent years.

The recent announcement by Nationstar Optoelectronics regarding the launch of their new GT series 1010 product, accompanied by a significant price reduction of 30% compared to the original NH-1010, is expected to have a substantial impact on the industry's average pricing. Analysts predict that this innovative product has the potential to decrease the cost of P1.2 product modules by approximately 4,000 yuan per square meter.

The year 2023 is commonly referred to as the inaugural year for MIP packaging, exemplifying one of its application features - the ability to extend mini/micro LED technology products to larger sizes ranging from P1.0 to P3.0 or even beyond. This advancement will facilitate cost savings on epitaxial wafer ends for currently economical small-pitch LED direct display products with slightly wider spacing by further reducing the size of the LED crystal.

At the same time, in addition to advancements in packaging technologies, the traditional COB product market can also achieve cost reduction through mini/micro LED technology. For instance, Zhaochi Co., Ltd. has reported that by downsizing the MiniLED chips currently being shipped in large quantities, they have successfully reduced chip costs, significantly improved production efficiency, and enhanced profitability of their chip products. It is worth mentioning that Zhaochi has transitioned from using 4*8mil chips to 3*7mil or 3*6mil chips while maintaining a COB yield level equivalent to that of 4*8mil.

The LED direct display industry is witnessing a major industry trend towards cost reduction and efficiency improvement, driven by scale cost advantage, technology cost advantage, and the advantage of compressing the length of the industrial chain. Industry experts believe that as spacing continues to shrink in the future, there will be a decline in the necessity of product performance in existing mature scenarios. Therefore, strengthening cost competitiveness through industrial chain integration and technological progress has become crucial for increasing profits in this industry.

04. The industry is still pursuing growth driven by cost optimization.
According to data from Luotu Technology, in the first half of 2023, the shipment area of small-pitch LED displays in mainland China is still mainly concentrated in P2.5-1.7 pitch products, accounting for 74.1% of the market. That is, relatively cheap products have a larger market share.

However, based on the changes observed in the shipment area structure during the first half of the year, there has been a significant growth in the P1.6-1.1 spacing segment, with an increase of 5.6 percentage points compared to the same period last year, reaching a substantial share of 24.7%. Moreover, from a sales perspective, this particular market range accounts for an impressive proportion of 49.3%. This remarkable surge can be attributed to the rapid decline in prices within this specific range since 2022.

Similarly, the market share of COB small-pitch LED products increased by 3.3 percentage points year-on-year in the first half of the year, reaching a proportion of 9.7%, representing a growth rate exceeding 50%. This can be attributed to the significant cost reduction in COB products.

The market share of LED direct display is predominantly influenced by low cost and price, as well as rapid cost and price decline, indicating that the industry is still in a cost-driven stage of development. Furthermore, industry experts predict that with the increasing popularity of P0.7 products, the significance of "technical driving force" characterized by improved core spacing indicators will gradually diminish, further emphasizing the industry's high sensitivity to cost drivers. In the future, technologies focused on reducing costs will be more favored in the large-screen LED direct display market compared to those aimed at improving resolution.

The potential for increased industry integration in terms of horizontal scale and vertical industrial chain as a result of cost-driven factors should be subject to long-term observation. Conversely, a more cautious approach may be necessary when it comes to the development of "high-cost" technologies such as TFT AM active drives. The market introduction period for high-performance and costly technologies might also be prolonged.

To conclude, the small-pitch LED industry has emerged from the "trough cycle" in Q2 2023, particularly during H2 of the year. The market recovery is gradually taking shape. However, achieving a delicate balance between scale, cost, and profitability remains challenging for the industry. This explains why some manufacturers proactively reduced prices despite most others raising them in Q2 and Q3. The ability to navigate short-term recovery while maintaining profitability and scaling will test the wisdom and comprehensive competitiveness of industry players.

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