Did Apple just kill the microLED industry?

Back in September 2023, analysts concluded the executive summary of Yole Group’s MicroLED 2023 report by saying that Apple’s smartwatch project was the incubator, not only for the company but for the entire industry, and that failure would be a devastating, if not fatal blow to the industry. Another key message that Yole Group’s display team conveyed to the microLED industry Association and at various events was that as microLEDs kept being delayed while OLED continued improving on all fronts (cost, performance, capacity), microLED’s value proposition was shrinking. Through 2023 discussion at Yole Group, to prepare this report, analysts sensed a palpable sense of urgency among industry players to accelerate microLED commercialization before OLED became too entrenched in the key applications it was targeting.

After spending more than $3 billion to develop the technology, Apple pulls the plug on microLED.

It was business as usual Monday at Apple’s microLED team. Meetings with suppliers, placing orders for consumables, running tests and experiments in the labs and pilot lines, checking on progress at Osram’s new 200 mm microLED fab, etc. But then the axe fell… On Tuesday, hundreds of people, Yole Group believes essentially the entire microLED team of more than 350 people, were laid off. Osram, who had just completed a more than $1 billion fab in Malaysia (known as “Kulim 2”) to meet Apple’s needs for the project, received the news from Apple that the project was canceled.

Analysts believe that Osram was on track with process development and qualifications, but Apple was still struggling with downstream manufacturing: mass transfer, an essential process to achieve cost-effective manufacturing, was still not ready. Yields were not satisfactory in the pilot lines, and other technical issues cast dark shadows over the project. Back in April 2022, when Osram initially announced plans for the Kulim 2 fab, the plan was to ramp up in late 2023. Since then, Yole Group has seen the schedule slip toward 2024, then 2025, with the first year of full revenue not until 2026.

But more than anything, OLED’s progress was making microLED’s value proposition less clear viz-a-viz OLED. In the year it introduced the Smartwatch Ultra, Apple was paying $50 for the entire display module. This is now down to less than $40. Yole Group’s cost models indicate that in the first year, the cost of Apple’s microLED display would have been $85. Could the performance and functionalities of this display be differentiating enough for the consumer to justify the premium? Apparently, Apple decided that with OLED’s improvement, this was no longer the case, even if analysts saw an (uncertain) path to reduce the cost to $35 after a few years.

For Apple, the smartwatch was just a stepping stone. The real endgame was the smartphone. For the iPhone 14 Pro Max, the company was paying $105 for the display, showing that it was willing to pay more than four times the price of an entry-level, flexible OLED display for its flagship model! Yet, even after harvesting 2 to 3 years of yield improvements and cost reduction since the smartwatch’s release, with Apple’s complex architecture combining TFT with microdrivers, the best number analysts could come up with was $115. Even in the long term, and with all the stars aligned, Yole Group’s cost models were struggling to hit the $100 mark. Analysts therefore believe that it had become clear to Apple that, in light of recent OLED improvements, a microLED smartphone no longer made sense and that without a smartphone to justify the massive investment in R&D and supply chain ramp-up, the smartwatch no longer made sense either.

ams-OSRAM is much more than just microLED.

Ams-OSRAM has multiple profitable product lines. It also has more than EUR 1 billion in hand on the balance sheet and access to 100’s of millions of revolving credit lines. So unliked GTAT, which had to file for bankruptcy just hours after Apple pulled the plug on a sapphire display cover for which the sapphire maker had also built a billion-dollar fab, Yole Group expects ams-OSRAM to stay in business.

The company’s immediate reaction to Apple’s project cancellation was to announce a noncash impairment of EUR 600 to 900 million. OSRAM has the Kulim 2 microLED fab on the books at EUR 1.3 billion (including the cost of capitalized R&D and a pilot line in Regensburg). The capex for the fab alone is about EUR 1 billion so far, with another EUR150 million of obligations toward equipment already ordered. OSRAM will obviously try to negotiate this number down with suppliers, but depreciation on the building was to start soon, and the hit is still hard.

In the short term, while the impact on the equity ratio is negative, the company should see a positive impact on cash flow in 2024 as capex for the new fab is eliminated. There might be some revenue from equipment sales, and OSRAM could receive some cancellation fees from Apple or a mix and match of cancellation fees and increased order commitments for other products. The company will also strive to reduce costs associated with the fab, which already employs a few hundred people. Running costs will decrease, but to preserve value for potential buyers, the fab will still undergo routine maintenance and can’t go dark.  Of course, the company will be eager to sell it and see off its books. It’s worth remembering that back in October 2023, ams OSRAM signed a $420 million sale-and-lease-back agreement with a pool of three Malaysian pension funds. OSRAM was retaining ownership of the equipment, selling the building, and leasing it back from the investors, with an option to buy it back in ten years.

With Apple’s project off the table, microLED demand is not expected to take off anytime soon and certainly not at the scale required to fill this fab sufficiently to absorb its fixed cost. The traditional LED industry doesn’t need extra capacity either at the moment, and, most likely, won’t benefit much from this 200 mm fab, which is way over-engineered for regular LED applications. Interest might come from other compound semiconductor industries, such as power GaN, RF GaN, or even SiC, as the manufacturing requirements align well with the fabs’ capabilities. The fab could also go as a shell to an entirely different industry.

So, what about microLED, specifically at OSRAM? Through its own internal efforts, which pre-dated its partnership with Apple and the experience learned while building the fab and ramping up, Yole Group believes that the company has acquired world-class expertise in designing and manufacturing microLED chips, especially for the very small size, less than 10 µm, that will ultimately be required if one ever wants to make microLED a success in high-volume consumer products. In an interesting twist, OSRAM might also be freed from some or all the restrictions and contingencies imposed by Apple regarding its freedom to serve competitors and adjacent applications. That is, of course, most likely still short of any proprietary technologies and designs developed by Apple and transferred for the project. Analysts at Yole Group, are in the process of reviewing the microLED intellectual property landscape for the upcoming MicroLED IP report (More information) and can already say that Osram has a solid portfolio of its own. The company had already started promoting foundry services to microLED companies and was preparing to release standard microLED die products. It might now have free reign to accelerate this effort. Once again, Kulim 2 won’t be needed for that, and for the time being, demand could be served from the existing 150 mm Regensburg and Kulim 1 fabs or, most likely, from the Regensburg 200 mm microLED pilot line which has capabilities more suited to the unique demand of microLED manufacturing. More details in the report, MicroLED 2023 are available.

Microleds are not dead.

It could be argued that when it acquired Luxvue in 2014, Apple single-handedly created the microLED display industry. No competitor or display maker wanted to be left behind and within months, Yole Group saw patent activity from all corners of the world start to grow at an exponential rate. There’s no denying, therefore, that Apple’s decision is a devastating blow to the industry, although it is likely that the company will keep a skeleton crew to continue researching microLED. Although analysts have no certainties at this stage, they believe that the team working on an AR-related microLED project remains unscathed.

To strive and survive, microLEDs will have to prove their worth. As mentioned at the beginning of the article, there are applications and use cases where microLED could remain strongly differentiating against OLED, delivering unique performance and functionality. These are the ones the industry now has to focus on. Reports indicate that AUO left CES 2023 vindicated after its impressive automotive display demos generated a lot of interest and traction. Yole Group believes that if AR finally finds a compelling use case and takes off, microLEDs are well positioned to dominate this market, although there’s still some work to do to achieve high efficiency and full color. There’s still hope for other applications also. Apple’s departure leaves a lot of room for other players to take their chance at the smartwatch, which is still seen as the low-hanging fruit when it comes to consumer applications. At the microLED event Yole Group organized at SPIE Photonic West a few weeks ago, Intel confirmed its strong interest in microLED technologies, and just this week, Lenovo demonstrated a laptop with a 17-inch transparent microLED display which wowed showgoers at MWC.

In the short term, of course, microLED teams will have to work harder to justify their projects and get budgets from large corporations. It will be hard for microLED startups to raise money this year. VCs and institutional investors will legitimately wonder if they should invest in a technology that Apple decided to kill after spending $3 billion over more than 10 years to develop. Yet, Yole Group still expects some deals related to AR applications that analysts know are close to being announced to be concluded. And there might still be a lot of values and hidden gems worth investing in, but the due diligence will likely be thorough. They are also not going to see microLED startups with unproven technologies get snapped up by tech giants at billion-dollar valuations as Google did in 2022.

The center of gravity is moving toward Taiwan and automotive applications.

Samsung and Apple were the two champions carrying microLED on their shoulders. It’s not clear how Samsung’s microLED TV project is faring. Executives repeatedly said that “microLED is the future” for their top lines of TVs, but Yole Group is still waiting on significant moves in terms of introducing new sizes and reducing prices since the first 89” microLED TV became available a year ago for more than a hundred thousand dollars.

The center of gravity of the microLED industry is moving to Taiwan. Willingly or not, AUO and its strong domestic ecosystem with PlayNitride and Ennostar are now wearing the industry leader and champions’ hat. Innolux also accelerated its microLED effort through 2023 and had strong ambitions for 2024. Taiwan lost the LCD war to China, which now dominates in all major applications and is gaining a share in the remaining profitable niches in which Taiwan had found refuge. The need from electronic giants to decouple a supply chain that had become too reliant on China is, however, helping. For 2024, both Samsung and LG have increased their orders from Taiwan.  The island also missed the OLED opportunity, letting Korean players dominate while China is investing massively to catch up. Taiwan panel makers are, therefore, at a crossroads and must conjure up a differentiating technology for high-margin displays. MicroLED is the best candidate, allowing Taiwan to leverage already existing strong domestic ecosystems for displays, LEDs, semiconductors, and equipment. MicroLED capex is also less extensive than OLED and can be distributed among multiple players, from LED to display makers. In the 1990s and 2000s, Taiwan’s LED and display industries were plagued by horizontal competition until consolidation occurred in both sectors. For microLED, the island’s key players seem to be working better together to set up a robust vertical ecosystem from the start, one capable of competing internationally against China and Korea.

PlayNitride has been at the core of the island’s microLED chip and transfer technologies. It is currently in the process of transferring its chip technology to LED makers’ holding Ennostar, and its Chip-on-Carrier (CoC) technology to AUO. The former has delayed its phase II microLED fab ramp at least 2-3 years or until demand really takes off, but PlayNitride is currently operating at full capacity. AUO has started pilot production of its own microLED smartwatch panels for Tag Heuer. Here again, the project is delayed, but Yole Group is still hoping for a commercial (although expensive) product, possibly for spring 2025, one year ahead of when Apple’s watch would have landed. The driver for microLED is now automotive applications. With its now leading microLED technology and after the acquisition of German tier-1 automotive supplier BHTC, AUO is uniquely positioned to make automotive microLED happen.

AUO’s microLED ecosystem

It would, of course, be foolish to discount China. The number of microLED patents filed over the last three years by companies such as BOE, TCL-CSOT, and Vistar is absolutely staggering (More details in the coming MicroLED 2024 Intellectual Property Landscape report). China shares a common ground with Taiwan in the sense that microLED would level the playing field compared to OLED, where it is playing catch up with Korea. BOE recently spent $300M to acquire LED makers HC-Semitek, with all the proceeds of the transaction going toward building a 150 mm microLED fab. Vistar, an offshoot of OLED maker Visionox, has started on the construction of a $413M TFT microLED fab, with the first $150M phase scheduled to ramp at the end of 2024. Although the schedule is a bit aggressive, in Yole Group’s opinion, it shows the determination of Chinese players.

There’s still a lot to process, but no, the microLED industry is not yet dead. It received a devastating blow, but it’s too early to say it was fatal. The end of Apple’s efforts might p open the door to other players. AUO has a lot on its shoulders and will have to decide over the next few weeks if it wants to stop, scale down, or maybe accelerate its microLED efforts and, along with its partners PlayNitride and Ennostar, take up the responsibility of becoming microLED’s new champion. Enough traction and early success in automotive and specialty displays could enable the emergence of a supply chain to start serving low-volume, high-end consumer applications initially (watches, TVs…) before accelerating once costs come down. There will be a lot of bumps on the road, but rather that than Apple’s path, which required going from zero to millions of displays in a short amount of time, a smoother ramp might be easier to negotiate for the industry. As analysts said in Yole Group’s MicroLED report, the microLED race has turned from a sprint to a marathon. And, for what it’s worth, there are now likely hundreds of top microLED experts available in Silicon Valley.

Zine Bouhamri, PhD is Activity Manager, Imaging & Display at Yole Group. He is managing the expansion of the technical expertise and the market know-how of the company.

In addition, he actively assists and supports the development of dedicated imaging and display collection of market & technology products, as well as custom consulting projects.

Prior to Yole Group, Zine oversaw numerous R&D programs at Aledia. During more than three years, he developed strong technical expertise as well as a detailed understanding of the display industry.

Zine Bouhamri holds an Electronics Engineering Degree from the National Polytechnic Institute of Grenoble (FR), one from the Politecnico di Torino (IT), and a PhD in RF & Optoelectronics from Grenoble University (FR).

As Principal Analyst, Display at Yole Group, Eric Virey, PhD is a daily contributor to the development of LED, OLED, and display activities.

He has authored a large collection of market and technology products as well as multiple custom consulting projects on subjects including business strategy, identification of investments or acquisition targets, due diligence in buying and selling, market and technology analyses, cost modelling and technology scouting.

Thanks to his deep knowledge of the LED/OLED and display industries, Eric has spoken at more than 30 industry conferences worldwide over the last five years. He has been interviewed and quoted by leading media all over the world.

Previously, Eric has held various R&D, engineering, manufacturing and business development positions with the Fortune 500 Company Saint-Gobain, based in France and the United States.

Eric Virey holds a PhD in Optoelectronics from the National Polytechnic Institute of Grenoble.

Source: www.yolegroup.com