Nine Great Innovations, Opportunities and Challenges for 2012 - Slide 10

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Driven by an increasingly apparent supply-demand imbalance, GP Bullhound predicts that the rate of price decreases in the LED market will accelerate in 2012, reaching a level where mass adoption could finally take off. The music in the LED industry suddenly stopped in 3Q11 as LED manufacturers collectively realized they had spent too much money on adding capacity. The combined orders for Aixtron and Veeco, the two dominant players in the MOCVD space (a critical machine for manufacturing LEDs) saw their combined orders fall nearly 70 percent QoQ in 3Q11 compared to an increase of nearly 20 percent in 2Q11.

Chinese LED manufacturers, which constitute the largest share of the market for MOCVD machines at the moment, slammed the brakes on investments due to global macro concerns and the realization that the government subsidy-induced spending binge could lead to significant over-capacity in the industry. Indeed, Veeco estimates that factory utilization in November 2011 was as low as 60 percent in Asia and do not expect a meaningful uptick in orders over the next few quarters.

The equipment manufacturers’ loss, however, may be the consumers’ gain. LED light bulbs currently have too high a price point for consumers to switch to the more expensive (though much longer-lasting) LEDs. But prices are racing down at a very high rate, and GP Bullhound believes could even accelerate given the current supply chain dynamics. Veeco estimates that the cost per watt for a high power LED is tracking down 50 percent year-over-year. Aixtron estimates that the tipping point for consumer mass-market adoption for an LED light bulb is $15-20. This compares to the average cost of an LED light bulb in 2H11 of around $25. At a price point of $15-20, a LED bulb would be about 10x as expensive as an incandescent light bulb and 3-4x a CFL bulb. Furthermore, GP Bullhound predicts that the over-supply issue will persist throughout much of 2012, as LED manufacturers are incentivized to have high factory utilization rates in order to cover their substantial fixed costs. They expect to see a very large amount of LED light bulb alternatives hit the shelves with price points below the breaking points, allowing for a real mass-market consumer adoption.

Companies to Watch: Access Lighting, Alpine Systems, Halco

As technology analysts and advisors, GP Bullhound expects a volatile 2012 with pockets of great innovation, opportunity and new successes, but also continued challenges as commoditization will wreak havoc to some industries, and hype will remain in others creating near-term opportunity and in some cases long-term issues.

We are entering the new year under rather unusual circumstances. The macroeconomic outlook remains cloudier than ever due to unprecedented uncertainty around a number of major global economic and political situations including the fate of the Euro and the European economies, the status of the U.S. recovery and the role of the U.S. dollar, nervousness in recently outperforming emerging markets, like Brazil, and the global impact of a slowdown in China just to mention a few.

Some things do remain the same however such as the continued global Internet trend, the rapid mobilization of users and applications and the inevitable trend of increased online social interaction.

In 2012, GP Bullhound expects Internet to continue its inevitable shift from being an information and content channel to a trusted platform for socializing, sharing, communicating and most importantly for 2012, consuming. Furthermore, they expect a lot of opportunity to come out of the rapid adoption of mobile online activities, particularly in emerging markets. They also expect to see some much needed innovation in the enterprise software arena, which is now well behind the consumer technology curve.

The macroeconomic outlook however remains cloudier with unprecedented levels of uncertainty on a global scale. In an ever-more connected and competitive global technology world, there will be little room to hide without differentiated products or services. The value of IP will continue to rise, while commoditization will punish the me-too players. As a consequence, they are seeing investors and acquirers becoming increasingly willing to travel far to find best-of-breed companies, supporting an anticipated rise in cross-border acquisitions and investment activities. All in all, they look forward to an interesting 2012.

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