Light emitting diodes (LEDs) are one of the bright spots in the semiconductor industry. Demand for LEDs continues to grow as they are used more in cell phones, automobiles, traffic signals and outdoor signs.

The high brightness LED market grew about 50% in 2002 to $1.8 billion. In 2003, strong demand will push the LED market to $2.5 billion and by 2007 the market will reach $4.7 billion. The good news for buyers is that despite growing demand, prices for LEDs will continue to fall. Buyers can expect a 10-15% drop in LEDs made with aluminum indium gallium phosphide (AlInGaP) and a 15-20% drop in tags for LEDs that use indium gallium nitride (InGan). InGaN produces blue and green LEDs while AlInGap produces red, orange and yellow LEDs.

Bob Steele, director, optoelectronic practice with optoelectronics market researcher Strategies Unlimited, says the mobile phone market is driving LED sales.

"Mobile phone shipments were flat last year, but the penetration of LEDs into phones grew significantly," says Steele. He says more cell phones are equipped with color liquid crystal displays (LCDs) which use LEDs for display backlighting and keypads.

"The Korean phone makers—Samsung and LG—and Kyocera in Japan, started putting blue LEDs into keypad backlights," says Steele. "That was a shot in the arm for LED manufacturers. Mobile phones account for about 40% of the total high brightness LED market and we see that continuing this year," says Steele.

Mike Dunn, vice president, optoelectronics for LED chip maker Cree Electronics, says demand for blue and green LEDs over the last 12-18 months was due primarily to the cell phone industry.

"Cell phones are the largest and fastest growing segment driving our business," says Dunn. "The trend in cell phones is to full color displays, which require a white LED to backlight the display," says Dunn. The only LED solution today to create white is a blue LED combined with phosphor that converts blue to white."

While white is new in cell phones, use of other color LEDs is not. "For several years cell phones have been backlit with some form of LEDs," says Steele. "Four years ago a monochromatic display was backlit by very inexpensive yellow green LEDs. That was the lowest cost LED available."

When cell phone displays became more sophisticated and started using full-color LCDs, a white backlight was needed.

Dunn estimates up to 20% of all cell phones use color displays, but in two years that will increase to 100%.

"With LED content in phones ramping up and the mobile phone market growing again, the LED market will get a boost," says Steele.

However, it's not just cell phones that are driving LED demand. Automakers are using more LEDs. In fact, some suppliers say LEDs will replace incandescent lights completely in cars in seven or eight years.

More LEDs are being designed into cars for both interior and exterior applications. LEDs were first used in automobiles in the late 1980s for rear high center mount lights.

In the late 1990s, Volkswagen, Mercedes and Audi started using LEDs in instrument panels to light the speedometer, odometer and other gauge displays.

In a few years, automakers will use LEDs for turn signals and front headlights.

"It will come on slowly, and eventually LEDs will take over," says Steele.

What has held back LEDs from being used in cars is the cost. There is still a price difference, but the gap has been narrowed.

Jovani Torres, Americas regional product marketing manager for Agilent's optoelectronics division, says an LED may cost three or four times more than an incandescent bulb.

"The price of an LED for a window switch would run 3 to 5 cents and an incandescent bulb would be a penny and a half," he says. With an instrument cluster the price per LED would be similar to a window switch, but more LEDs would have to be used.

But Torres says the total cost of using LEDs is less. There are assembly savings and reductions in warranty costs because LEDs last much longer than incandescent bulbs. LEDs last the lifetime of the vehicle, whole incandescents burn out. "When that happens you have to tear into the dashboard to repair a 10-cent bulb," says Steele.

"LEDs are all surface mounted so they can be reflow-soldered," says Steele. "Incandescents have to be individually soldered because they are through-hole mounts."

Dunn says that LEDs give automakers design options.

"The trend in instrument clusters is to go to thinner clusters in order to free up space for wiring harnesses," says Dunn. Incandescents have physical limitations as to how thin an instrument cluster can be built because a heat envelope is required. "Incandescents burn hot and create heat and more space is needed," he says. With LEDs, clusters can be made thin, space can be saved and cost reduced.

Besides lower total cost, automakers are using LEDs for signature styling. For instance, BMW uses orange interior lighting, while VW uses blue and Mercedes uses white. LEDs can be used to give a car a distinctive look.

Dunn says all interior and exterior lighting in vehicles will be LEDs by 2007.

However, headlights may be the last lighting application of a car to transition to LEDs.

With headlights, LEDs are more expensive than incandescents because headlights require high powered LEDs. Those lights have recently been developed, but are expensive. Some estimates have them as much as 100 times higher in price.

But LED manufacturers have recently demonstrated high power LEDs and some prototype cars at international car shows have been shone with LED headlights. It will probably be three or four years before cars equipped with LED headlights are sold.

The issues concerning LED lighting in cars are similar to the issues of LEDs in traffic lights, says Torres of Agilent.

Agilent is the world's largest supplier of LEDs for traffic lights.

About five years ago, an LED traffic light bulb cost about $120, compared to just $3 for incandescent.

"We had to do a lot of convincing of cities and departments of transportations that once you put the LED signal up you can forget about it. It lasts 100,000 hours which is 11 years. With an incandescent bulb you have to change it every year," says Torres. In addition, LED traffic signals use 50-75% less power so there are energy savings as well.

"The cost of an LED traffic light has dropped to about $50. The payback period use to be 2.5 years, but now it is about 1 year," says Torres.

Besides traffic lights, cars and phones, LEDs will be used more in planes, homes and businesses.

LEDs will replace incandescents in reading lights on airplanes. LEDs will also be used for general lighting in businesses and in homes because they use only about 50% of the energy that incandescents use. However, they currently cost 30-50 times more than incandescents although the gap will narrow.

However, the cost of LEDs used in businesses and in homes may never equal the price of incandescent or fluorescent lighting. But the cost will come down and the question is: What is the price point which results in businesses and consumers switching to LED lighting?

The challenge for LED manufacturers is to reduce cost and produce the same warm yellowish light as incandescents. LEDs tend to have a colder, blue light than incandescents.

"The lighting community feels incandescent is perfect light," says Fran Dourus, Americas marketing manager for Lumileds, which makes LED chips. "The look and color is what everyone strives to achieve."

She says Lumileds 3,200 Kelvin high powered LEDs produce a similar yellow light to incandescents.

"The LEDs allow lighting designers and users to mix LED solutions in the same environment as incandescent and other light source solutions without color variation," says Dourus.

The benefits of LEDs in business and homes are similar to the benefits in automobiles. LEDs last longer, require less energy and allow designers to be innovative.

The challenge is to reduce the cost of LEDs. Suppliers are looking to reduce cost by making the LED more efficient.

"We want to improve efficiency so we can get more light out of the same size physical package," says Dourus. "If an LED produces 24 lumens of light per watt and you increase it to 50, 100 or 150 lumens per watt, it means fewer LEDs are needed to accomplish the task," she says. "So instead of five LEDs to get to 100 lumen performance, you can do 100 lumen performance with one LED. Obviously your cost just dropped by a factor of five."

One way Lumileds and other LED manufacturers are looking to improve efficiency is by improving phosphor deposition on the indium gallium nitride die of the LED.

Manufacturing efficiencies will result in price erosion for LEDs as will the increased production of LEDs in low-cost countries such as Taiwan and China.

Prices for AlInGaP LEDs— red, orange and yellow—have come down considerably because more Taiwanese and Chinese companies are making the devices.

"Taiwanese manufacturers have bought the most LED reactors in the last two or three years and many of them have been AlInGaP," says Torres of Agilent.

"Three or four years ago an AlInGap chip was 22 cents. Now it is 13, 14 or 15 cents," he says. AlInGap used to be a premium product and now it is a commodity." Buyers can expect a 15-20% reduction in AlInGap chips over the next year

InGaN devices, blue, green and white LEDs, will be reduced 10-15%. Depending on color and brightness, InGaN chips are priced in the 20-80 cent range.