China's LED industry is expected to face tough eliminations in 2012 as the price of LED products dropped drastically in 2011. The China government is determined to help domestic LED firms weather the storm by increasing cooperation among local, and with international, firms. Taiwan-based LED firms fear government involvement will delay the necessary business cycles for the LED industry. In addition, if international firms team up with China's domestic firms, market opportunities for Taiwan-based peers will shrink significantly.

According to industry sources, there are currently less than 20 LED firms in China that have economies of scale and more than 20 units of MOCVD equipment. Many China-based LED firms were said to close operations in second half of 2011 as prices were dropping fast and banks tightened control over financial capital. The wave of elimination is expected to continue throughout 2012. The market expects by second-half 2012, there will only be 3-4 competitive LED firms in China.

Industry observers pointed out that even though the China government claims that 68% of LED chips in China are self-made, most are low- and medium-power products. China is currently at the beginning phase of domestically producing high-power LEDs. Due to lack of advanced technology, China has been eager to recruit Taiwan-based LED firms to China over the past 2-3 years. In recent times, Taiwan-based firms have been replaced by international LED firms due to the 12th Five-Year Plan. Hoping to be internationally recognized, the China government has been encouraging domestic firms to work with Europe-, US-, and South Korea-based firms.

With superior technology, Taiwan-based firms have been taking up market share for high-end LED products. However, Taiwan-based LED firms noted, the intervention by the China government through policies will increase the technologies possessed by domestic firms in a short period of time. Once this happens, Taiwan-based LED firms will face tough challenges.