Automotive & Assembly EXTRANET

Chain Lightning: Charting the Evolving

Automotive LED Value Chain
Coming shifts in the automotive LED value chain promise structural
industry changes that players should position themselves for now.
By Yoshie Fujii, Willem Strijbosch, Oliver Vogler, Florian Wunderlich, and Dominik
Wee

Automakers worldwide have seen the light and it's shining on light-emitting diode
(LED) technology. Of the total market for automotive lighting USD 19 billion at
the fixture level today LED products already make up about USD 4 billion of the
total. Furthermore, the automotive LED market continues to develop rapidly on a
content-per-car basis despite the economic downturn, with vehicle interior
applications leading the way. For example, LEDs are already found in about 70
percent of interior indicator lights and 25 percent of instrument display backlights
(Exhibit 1). Currently, the largest exterior applications are center high-mounted
stop lamps (CHMSLs) at 20 percent penetration, and brake and tail lights at
about 10 percent each. The automotive LED supplier landscape remains highly
fragmented at the module level and dealing with modules will likely have
significant impact on the value chain.
Four Key LED Trends
Four major trends are shaping the LED market, with the first three affecting
overall market development and the final one focused on the lighting value chain
and automotive aftermarket.
Trend #1: Per-vehicle lighting value will increase due to the continued need
for vehicle design differentiation and introduction of new applications.
Some LED applications provide car designers with unmatched flexibility in
creating new exterior and interior lighting styling treatment, thus commanding
significant price premiums. One notable comparison of innovative LED
headlamps and high-intensity-discharge (HID) Xenon lighting revealed that the
LED solution was more than twice as expensive as Xenon. New LED applications
include enhanced night vision and head-up displays, and new features are also
being introduced, such as active light bending for front lights that allow drivers to
"see" around corners or "communicating" brake lights that can pulse-out
messages.

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Exhibit 1:
Interior automotive light segments currently see high LED
penetration levels
Total market at
LED market at

Interior

Exterior

Application

Examples

fixture level
USD billion, 2009

Description

fixture level
USD billion, 2009

LED penetration3
Percent, 2009

Headlamp

A lamp to illuminate the road ahead

(low beam, high beam, fog lamps)

DRL1

On the front of car, switched on automatically when vehicle is moving forward

Side lights

Markers on the vehicle side, also known

as position or parking lights

Turning
Lights

Signal lights mounted near the left and

right front and rear corners of a vehicle

CHMSL2

A central brake lamp, mounted higher than

the car's left and right brake lamps

Tail Light

Rear position lamps, typically combined

with break lights

Break light

Brake lamps, typically combined with tail

lights

Backlighting

Backlighting of LCD displays and simpler

backlighting, e.g. to illuminate cluster dials

0.8

0.3

32

Illumination

Light a physical space, e.g., main cabin,

glove compartment or trunk

0.7

0.1

17

Indication

6.9

Other indication lights in car body

2 Center high-mounted stop lamp

1.5

2.2

1.1

2.5

<1

0.1

<1

12

0.6

0.6

40

15

1.1

1.4

0.8

0.3
Total

1 Daylight running lamp

1.9

<1

15

0.2
19

75
4

3 Penetration based on number of cars

SOURCE: Automotive Lighting, IMS 2009, SupplierBusiness, press search, McKinsey LED market model

Trend #2: LED adoption rates will vary significantly depending upon
application. LED market penetration will be uneven through 2015, with new
applications (e.g., headlamps and daytime running lamps) growing rapidly from
very small bases, while CHMSL and indicator light growth will slow as LEDs
become the dominant solution in these applications (Exhibit 2).
Growth will come from increased LED lighting content in cars, which will
overwhelm expected decreases in average selling prices (ASPs). For example,
the global automotive lighting market in 2007 was just over USD 20 billion and is
expected to grow at 3.5 percent annually to USD 27.1 billion by 2015. Most of
this growth will come from the higher value of LED content in cars, which will be
nearly twice the size of predicted declines in LED ASPs (Exhibit 3).

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Exhibit 2:
In 2015, CHMSL and DRL will have the highest penetration,
while headlamp will only achieve about 6%
LED automotive lighting penetration rates1
Percent
2007

80

60

Indication

70

75

CHMSL2

20

64

56

Tail light

12

50

Brake light
Backlighting

12
25

50
48

Illumination

12

42

38

DRL3

40

Side light

20

Turning light

Headlamp
0
2007

08

09

10

11

12

13

14

2015

19

<<1

CHMSL2 and DRL

with highest
exterior
penetration
increase
(regulation driven)

Headlamp only
with ~6% in 2015

Interior lighting
with penetration
rates from ~40%
up to ~75%

2015

1 Luminaire level, including after-market; global penetration rates 2 Center high-mounted stop lamp 3 Daylight running lamp
SOURCE: McKinsey LED market model

Exhibit 3:
Growth waterfall shows that biggest proportion comes from LED
penetration even net of LED ASP decrease
x Correspond
CAGR

Automotive lighting market (incl. traditional and LED)

USD billions
1.4
5.0

9.7

20.6

0.6

27.1

2.7

Total market Increase

2007
of yearly
cars sold

1.5

Higher
Decrease of Decrease of Growth in
lighting value traditional
LED ASP
aftermarket
in cars from ASP
LED penetration
4.5

-0.6

-2.2

0.3

Total market
2015

3.5

SOURCE: McKinsey

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Today, many drivers and OEMs prefer LED lighting solutions for a number of
reasons:

Design and performance: LEDs provide design flexibility, better

packaging, and better dimming and turn-on speed performance.

Energy and CO2 savings: LEDs offer better power efficiency and
significantly longer life cycles. They have also proven extremely durable
in automotive use because of their innate shock resistance.

Cost: Cost remains a hurdle in some areas, such as headlamp

applications, but continued cost decreases and proven superior quality
and durability have made LEDs the new industry standard in terms of
end-customer value.

Regulation: LED lighting demand has benefited from government

regulations that specify requirements for headlamps and other
applications. Governments are also enacting new vehicle lighting
mandates, such as the European Union's requirement for daytime running
lights (DRLs) beginning in 2011.

Overall penetration will increase as LEDs reach cost parity with conventional
solutions, such as halogen lighting. Beyond regulatory mandates, LED lights will
continue to enter the market incrementally as each new generation of cars takes
increasing advantage of their performance and stylistic differentiation potential.
3) Cost-based LED substitution for halogen and HID Xenon headlamps will
not occur until the end of the decade. Currently, comparable LEDs cost about
100 percent more than halogen headlamps and 150 percent more than HID
Xenon solutions (i.e., achieving comparable performance to HID Xenon
headlamps requires a much more expensive LED solution than for lowerperformance halogen technology). Based upon a model developed by McKinsey
& Company, LEDs of comparable performance will ultimately achieve cost parity
with both halogen and HID Xenon technologies, but not until the 2020 timeframe.
Until then, the vehicles that feature LED headlamps are trading off the often
significantly higher costs against the ability to offer the innovative styling and
design solutions that customers demand.
4) The aftermarket for LEDs will lag behind the overall automotive lighting
market. Aftermarket demand for automotive LED lighting will grow more slowly
than the overall vehicle lighting market. This is due to the technology's greater
durability compared to that of traditional lamps, which will offset higher average
selling prices. Burned out bulbs and damage from accidents are the two main

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sources of traditional aftermarket lighting demand. The significantly greater

durability of LEDs will effectively stunt replacement demand going forward,
leaving collision repair as the main demand driver.
The Impact on LED Industry Structure
Given the four LED trends mentioned, managers can anticipate changes in
industry dynamics that will likely lead to a number of structural changes in the
supply industry. First, the upstream portion of the automotive LED value chain
will become commoditized due to scale and learning curve effects as volume
rise, but the degree to which this occurs will depend upon the strategies of the
"Big 5" LED producers. While scale will drive down costs, it won't become a
"biggest-takes-all" business, since the advantages of scale in the LED industry
are not as pronounced as those in the semiconductor sector due to lower fixed
costs. If the Big 5 continue to own intellectual property (IP) rights despite high IP
litigation costs, they will prevent competition and the current oligopoly market
structure will remain. If, on the other hand, they expand cross-licensing, the
market will become fragmented in the short term, but scale effects will drive
consolidation in the long term.
Second, room still exists for chipmakers and packagers interested in supplying
premium LED chips for automotive lighting applications. As observed in the
semiconductor industry, these automotive-focused fabricators typically offer the
higher quality demanded in safety-related and recall-prone automotive lighting
systems by adding extra process steps and more inspections, and by scheduling
additional maintenance compared to non-automotive "fab" plants. The trade-off is
higher cost, which automakers are compelled to pay.
Third, the lighting industry profit pool will migrate from chip making/packaging to
modules and fixtures (Exhibit 4). By 2020, chip production will become
increasingly commoditized and thus, less profitable. Also, new entrants from Asia
will speed the commoditization shift. The inclusion of "smart lighting" functionality
on the LED module will boost its value, as will improved heat management
substrates. Also, tier-one supplier branding efforts and improved thermal
management solutions should keep margins attractive and thus, increase their
LED market share.

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Exhibit 4:
Value-add shift from upstream to downstream
expected

Total profit pool ( billions)

Higher/lower expected
share of profits

Profit pool development for automotive LED lighting

Percent
Epi/chip

Package

Module

Tier-1 mfg.1

Total
100

LED
lighting
today

28

46

19

0.2
100

LED
Lighting
"2020"

5-10

Rationale
for LED
development until
"2020"

Commoditization of
chip production
expected
semicon-like
increase of
competition with
only a few
profitable players in
the end
New entrants (like
TSMC or
Samsung) will
"professionalize"
epi process

~5

Despite commoditization in industry,

packaging can
keep profit share
due increase of
white light / highbrightness
applications (e.g.,
headlamps)
New entrants from
Asia for low-end
business (e.g.,
interior) expected

~60

~30

Additional functionalities (e.g., "smart

lights") to be included
on LED module
Improved heat
management on
substrate level
improves margins

~0.7

Designing
("branding") of
fixtures, combined
with improved size
and heat management solutions keep
margins attractive
and increase LED
market share
"R&D ownership" for
overall system
improves margins

1 Luminaire level
Source: Company Web sites, IMS, Amadeus, team analysis

And, because tier-one suppliers will likely take on a leading role, LED module
specialists will probably disappear. Lighting-focused tier-one companies have
specific product design and quality-related strengths that pure module players
and integrated LED manufacturers lack. LED technology allows for more design
differentiation, upon which tier-one suppliers can capitalize by having in-house
module capability. Furthermore, tier-one suppliers can source quality LED chips
at lower cost by leveraging their inherently larger volumes compared to the
typically more fragmented module players. The alternative direct cooperation
between LED manufacturers and automakers seems unlikely without also
tying-in tier-one suppliers, which typically supply large portions of interior or
exterior systems.
Finally, the tier-one supplier market will become more consolidated, especially
when it comes to mature geographies and established technologies. Scale will
become an increasingly important avenue for driving down cost and only a few
tier-one players will be able to secure heavy demand. Furthermore, the growing
consolidation among OEMs will increase price pressure on tier-one suppliers.
This same type of consolidation occurred when the automotive airbag industry
reached the commoditization phase, resulting in three global players now
controlling the airbag industry.

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These shifts mean that the automotive LED industry will change from its current
value chain from chipmaker to module specialist to tier-one supplier to a
situation in which integrated tier-one suppliers with in-house module-making
abilities take over the module role, while auto-focused chipmakers provide LED
chips of the required quality. Alternatively, for largely commoditized products
(e.g., interior lamps), a large-scale lighting specialist with chip-making capabilities
could produce standardized, cost-competitive modules while the tier-one supplier
focuses on cost reduction.
Strategies for Integrated LED Manufacturers and Tier-One Players
To position themselves to take advantage of impending LED value chain shifts,
integrated LED manufacturers, tier-one suppliers, and OEMs have a number of
choices to make.
LED manufacturers should develop new applications by integrating their products
with electronic components such as sensors, while maintaining close
communication with OEMs and end customers. They can also pursue a stretch
goal to reduce chip and module costs twice as quickly as currently predicted,
striving to, for example, reach cost parity with halogen technology by 2014 rather
than 2020 (Exhibit 5). Or, they can aggressively lobby for regulations mandating
LED use in specific applications (e.g., DRLs, CHMSLs, or brake lights) based
upon their increased safety (i.e., reliability) or superior CO2 abatement properties.
LED makers could also pursue a value chain play, working directly with OEMs
instead of through tier-one suppliers. This strategy can be risky, however, since
LED suppliers must guard against earning tier-one margin levels, which can be
half the size of their current ones.

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Exhibit 5:
Significantly accelerating future cost reductions
implies decisive action along main cost drivers

-x%

Cost structure LED headlamp

ASP to OEM USD/car
Aggressive
cost-down

Base case

ASP 2009

Chip+
Package

Module

Fixture

ASP 2015

58

14

40

178

-8% p.a.

-16%

-5%

-5%

Cost driver
(% of total)

Proposed cost-down measures

(% annual reduction until 2015)

Capital (16%)

Labor (30%)

Materials (41%)
Others (13%)

Driver (56%)
Plastic bracket (38%)
Assembly (6%)

Drive development of low-cost

standardized driver electronics
(-20% p.a.)

Housing, cooling,
reflector (80%)
Assembly (5%)
Overhead and
profit (15%)

Standardize module and pursue

rigorous design-to-cost program
(-12% p.a.)

290

290

61 -17%

30

72

127

-14%

-10%

Avg. annual
reduction

-13% p.a.

Migrate to larger wafer-sizes,

improve yield and binning rate
(-20% p.a.)
Drive automization and consider
further relocate to low-cost
countries (-20% p.a.)
Use scale to renegotiate
materials costs (-15% p.a.)

At EUR ~125 parity to xenon:

reduction of -13% p.a. is realistic
target considering US DoE roadmap of -20% p.a. for general
lighting luminaires

1 Base case: ASP reductions of -16% p.a. for chip/package at constant margins and -5% p.a. for downstream production steps (source iSupply, IMS)
SOURCE: McKinsey

LED makers must also guard against the threat of backward integration by tierone suppliers and watch out for "attacks" from backlighting players with natural
cost advantages, which could precipitate price wars. In either case, it will be
critical to establish long-standing relationships with tier-one players and be
involved in product development early on.
Tier-one suppliers also have a number of options open to them; many similar to
those available to LED makers. Like LED players, tier-one suppliers can
aggressively go after LED chip and module costs, or attempt to shape regulation
to their advantage. They can develop new applications that integrate with other
electronics systems or enter adjacent segments, such as car customization,
public transportation, or street lighting. They can also expand their business to
provide standardized LED modules to pure tier-one suppliers or actually
backward integrate into modules.
At the same time, tier-ones must guard against being squeezed-out by the
forward-integration moves of LED manufacturers or becoming too dependent
upon a few chip suppliers with large market shares and significant amounts of
market power.

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Finally, OEMs should pursue a targeted LED option strategy, designing attractive
LED solutions for DRL, CHMSL, or interior applications, and driving the customer
adoption rates of existing high-margin options by offering them in attractive
bundles. They can also strive to offer break-through functionality in new vehicle
options by brainstorming with chipmakers or systems integrators on true
innovations. OEMs can further attempt to attract new chipmakers into the
automotive industry to increase price pressure.
Automakers can also mitigate a number of risks (e.g., new regulations that make
current vehicle options mandatory) and thus, squeeze margins or have dominant
upstream players take on attacker roles and forward-integrate, thus gaining
market power. Other risks involve dealing with price hikes caused by the
industry's cyclical nature and facing profit and/or market share losses caused by
OEMs' slow reaction and long development lead times.
***
Expected changes will present challenges and opportunities for players in the
automotive LED value chain. Some participants, such as module specialists, may
soon find themselves crowded out by tier-one players seeking to capture greater
value. At the same time, others will have to invest and forge cooperative
relationships in order to position themselves to claim a larger portion of this
migrating industry profit pool.

Copyright 2010 McKinsey & Company, Inc.

All rights reserved.

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