The Chinese Government invests in LED Chips poorly causing Over Expansion, Price Deflation and Factory Closures

Posted by PITHOCRATES - May 27th, 2012

Week in Review

China’s formula for success is to partner government with business.  Like they did in Japan during the Eighties.  Before Japan’s Lost Decade.  And their deflationary spiral.  China is using the same formula.  Having government invest in corporations to expand production to dominate the market.  And, of course, create some bubbles along the way (see Analysis: Falling prices to kill off half of Chinese LED chipmakers by Leonora Walet and Twinnie Siu posted 5/27/2012 on Reuters).

In China, surplus capacity and sliding prices are sounding the death knell for half of the companies making light emitting diode (LED) chips used in Samsung television panels and Sharp computer monitors, with only the large, state-backed players likely to pull through.

Sluggish global sales of TVs and computers may further cut LED chip prices by 20 percent this year, and consolidation or closure are the only options for China’s smaller LED players, analysts say.

By contrast, Sanan Optoelectronics Co Ltd, China’s top LED chipmaker with a market value of $2.8 billion, and Elec-Tech International Co Ltd will be among a handful of large companies that will survive as they continue to receive subsidies and incentives from the government, according to analysts…

For the majority of LED firms, the government is slowly rolling back incentives, including tax breaks, free land and more than $1.6 billion in cash to buy LED chip-making equipment, that had helped sustain the industry for more than three years.

Proview International, whose Shenzhen-based unit is battling Apple Inc over the iPad trademark in China, is grappling with slumping LED prices and fierce competition that have dragged down earnings for other LED companies including Hangzhou Silan Microelectronics Co and Foshan Nationstar Optoelectronics…

Many LED companies are operating their factories at 50 percent capacity in China, with up to half of the 700 or so chip-making machines purchased with government money during the boom years in 2009 and 2010 left idle, industry watchers say.

In the past year, overcapacity has shut hundreds of small Chinese makers of LED lighting, according to analysts.

“China’s financial policy is not giving enough support to mid-tier and smaller enterprises,” said Bao En Zhong, executive vice chairman of the semiconductor lighting association in Shenzhen, one of China’s largest production bases for LED lighting. “We may see more factory closures…”

So the secret to success in China is government incentives, tax breaks, free land and lots and lots of cash.  If you can get this from the government you, too, can flood the market with product.  Sending your prices into a tailspin.  Then all you have to do is be one of the lucky few the government bails out so you can flood the market with more of your product.  Sending your prices into a tailspin.  Again.

People say this type of dumping of low-priced products onto the market hurts consumers.  I never understood that.  Here the Chinese helped to bring the cost of televisions down by making the chips that make them work so dirt cheap that they shuttered hundreds of Chinese manufacturers.  And chip prices may fall by another 20%.  I just don’t see how the consumer loses here.  It looks like the losers are the hundreds of shuttered businesses.  And the Chinese government who invested so much into those businesses.

This is state-capitalism.  Where businesses make bad decisions because of the free government handouts.  If it weren’t for those free government handouts these businesses wouldn’t have produced so many chips that they put themselves out of business.  You add up all of this bad government investment throughout China and it says only one thing.  A day of reckoning is coming.  If the Chinese don’t believe it they can ask the Japanese.

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