OLED/UDC Proprietary Chemical and IP Industry Strategy Review

Last updated on Fri 03/03/2023 - 10:24

 Below is a strategy review of the OLED IP/Chemical industry, and how it relates to UDC's business potential. I wrote this for my current MBA course.

Hopefully people can find it interesting/useful.

5 Forces Review

 

 

Adapted from Porter’s 5 Forces (1) 

 

 

 

 

 

Introduction:

It is important to outline the Organic Light Emitting Diode (OLED) chemical and IP industry before diving into the competing organizations and their respective strategies. This network of suppliers serve consumer electronic firms with the latest display technology for smartphones, tablets, and televisions. For example, the majority of the Samsung Galaxy™ products have OLED displays instead of LCD, and new wearable devices such as the Apple Watch™ use OLEDs unique characteristics to drive value.

The technology itself is a thin layering of carbon compounds which create a plastic film that emits light when electric current is applied. The active structure itself is on the order of nanometres, as such OLED technology enables substantially thinner devices than LCD. Moreover, the technology has additional advantages over LCD displays. OLEDs use less energy than comparable LCDs as the technology is directly emissive. This technical feature also enables better colour contrast. Additionally, OLED displays have quicker response times which make them ideal for multimedia applications such as movies and games. 

This is driving exciting market adoption and growth. The following graph from analyst firm DisplaySearch indicates OLED material sales alone are expected to reach approximately $3.5 billion by 2017. 

 Forecast

Forecast of OLED Material Revenue by Application - NPD DisplaySearch (2)

This ramp up the market adoption S-curve will allow technology supply firms, such as Sumitomo and Universal Display Corporation, to reap large profits in multiple ways. For example, they can research and develop unique chemicals that are used in the end devices – tapping into the revenue depicted in the previous graph. These novel organic compounds can drastically outperform competitors and extract large rents from the end customer. Additionally, research companies can patent new device formats, characteristics, and architectures. These can then be licensed out at a generous profit. 

The Buyers of IP:

LG and Samsung are the two members of the OLED display manufacturing duopoly, and the largest customers of OLED technology firms. Combined the two companies have over 2,312,644.8 m^2 of annual production capability, with millions more square meters of capacity in the planning(3). The centralization of buyer power is particularly strong as both firms operate in the same national and cultural theatre. No business deal or proposition can be conducted without passing through Seoul, South Korea. As such, there is a unique opportunity for collusion, as was reported in 2012 when the two companies faced a penalty of $39m from the FTC for price fixing(4). 

One of the few apparent challenges to this centralization of manufacturing power in the OLED industry is Apple. The firm’s new smartwatch uses OLED as the display, which has driven rumours of the technology giant potentially adopting the same screen technology in the iPhone. This has ramifications for the duopoly, as the firm has heavily subsidized its manufacturing partners in the past in order to maintain a diverse ecosystem of suppliers – most recently Japan Display announced a new $1.4 billion factory that is widely speculated to be exclusively producing screens for Apple(5). Their status, as well as a handful of other powerful firms like Xiaomi, have the power to push the display manufacturing industry into a more dis-integrated layout.

The Input Suppliers:

Much of the technology used in the commercial chemical and IP OLED industry has only recently been adopted from pre-market sources like academic institutions. Princeton University, the University of Michigan, National Taiwan University, etc… all control critical patents in this space. Moreover, cutting edge research is still largely produced through these institutions. This is compounded by the fact that patents are not the only scarce resource – the researchers themselves are particularly rare. These few institutions are the only source for new talent in this developing market. As such, commercial entities looking to profit from this industry must maintain a strong relationship with academia. This often takes the form of generous grant funding, or by providing universities exclusive access to the commercial entities expensive research facilities. 

Chemical components represents the other major input for this industry. Merck, Pittsburgh Plate and Glass, Moser Baer, and other large chemical manufacturers all provide the building blocks of aromatic rings, functional groups, etc… that are necessary inputs for OLED materials. Fortunately, there is a wide array of raw organic material suppliers. Unfortunately, nearly all these suppliers have their own R&D departments and a strong desire to move up the value chain. 

Threat of New Entrants:

Merck already has established itself as a powerful supplier in the OLED materials space. In a recent interview Dr. Udo Heider, Merck’s OLED unit VP, projected that they “will be among the top players in OLED materials” within five years(6). Pittsburgh Plate and Glass, Moser Baer, or other input suppliers could adopt a similar strategy of trying to compete against their customers. This behaviour has a well-documented history in high technology, where there is a strong motivation to extract information out of business partners. Firms like Samsung, Microsoft, etc… have been able to co-opt ideas and intellectual properties from their customers, and use that information to generate wealth for themselves. Complex legal frameworks and the strategic separation of tasks can help mitigate the chances of a supplier transforming into a competitor. However, short of full vertical integration, there are few options that will ensure a company’s technology won’t be imitated by other pieces of the value chain.

Additionally, universities, through the formation of spin off companies can act as both a supplier and a competitor. Vladimir Bulović, a professor at MIT, helped develop the patents that launched one of the more established OLED IP firms, Universal Display. Since then he and his students have started new firms such as QD Vision and Kateeva which act as direct and indirect competitors to the industry incumbents(7). 

Substitute Products:

Liquid Crystal Displays (LCD) remains the dominant player in the display industry. As such, any continued LCD product development could siphon customers and revenue away from OLED technology suppliers such as Sumitomo chemical and Universal Display. The effect is particularly strong in established industries like television. However, the rate of LCD improvement may not be the most important factor for OLEDs ability to supplant it as the dominant technology. 

As indicated by Bower and Christensen, disruptive technologies do not need to surpass the incumbent technologies performance on every metric. Instead, they need to surpass the performance demanded by the established market. Or, the disruptive technologies needs to find an initial market for which it is strategically critical. The graphs below describe this:

 Catching the wave

Adopted from Disruptive Technologies: Catching the Wave (8)

The graph on the left demonstrates OLED’s difficulty to meet the performance needs of the TV market, where as the graph on the right demonstrates OLEDs ability to exceed the wearables market performance needs in the same amount of time. These trends give insight as to how the OLED industry as whole could prevent LCD from being a desired substitute. Wearable products should be used as a beachhead from which OLED technology could leapfrog LCD.

The Existing Competitors:

With the industry laid out it is easier to begin researching and analysing the strategies of the competing organizations, and assess their relative strategic prospects over the next five years. The Porter’s 5 Forces analysis helps categorize the players, and demonstrates the different motivations of firms that act as customer/competitor, supplier/competitor, etc… For example, the R&D arms of big manufacturing firms like LG or Samsung will have drastically different opportunities than industrial chemical and material firms like Sumitomo. This will be different still than a pure R&D firm like Universal Display Corporation. 

LG and Samsung produce their own host materials, substrates, and dopants to support their core manufacturing processes. The principle motive is to enable the delivery of upstream products in a timely, and cost effective manner. As such their strategic prospects are mixed in regards to the IP subset of the OLED industry. With funding streams coming from substantially larger markets, principally TVs and smartphones, both firms can easily cross-subsidize the development of proprietary chemicals and patents. This would seemingly give them a massive advantage against smaller firms like Universal Display. 

However, the need to consistently one up each other in a race for flat panel display market control distracts and disables their ability to dominate the R&D side of the technology. First, as large firms they are both beholden to the previous market technology – LCD. This caused them to be late movers on OLED, which allowed other firms to control many of the critical patents and resources in the nascent market. Secondly, their direct competition with each other makes LG and Samsung open to any resource that could give them an immediate advantage. This enables any third party firm with differentiating technology to enter the supply chain.

In the future I see their strategic prospects being analogous to Charles Fine’s Double Helix – which is reproduced below(9). There will be continuous pressure to oscillate between integration and fragmentation for LG as they acquire or capture some suppliers, while outsourcing to and enabling others. Samsung, however will be under heavy pressure to disintegrate the OLED technology value chain as they struggle to compete against niche competitors in their core market of smartphones. The rise of Xiaomi and the resurgence of Apple will force Samsung to source competitive advantage more heavily from outside the company, while increasing the firm’s reliance on contract manufacturing as a source of revenue. This is reflected in its recent conference call, where Samsung iterated the comparative strength of their semiconductor and electronics component businesses(10).

 Double

Charles Fine’s Double Helix (9)

An example of a supplier/competitor to the OLED IP business is Sumitomo Chemical, a multibillion dollar chemical company whose slogan is “Be the Best, Be the One” (11). This has driven them to acquire and integrate several specialty firms to drive earnings and growth from operational synergies between different chemical products. This “pressure to integrate” ultimately led them to acquire the UK company Cambridge Display Technology, a firm that directly competes with Universal Display Corporation. They champion a technology called polymer – OLED, which uses long chain compounds that are inkjet printed on to substrates. This difference enables potentially cheaper large scale manufacturing compared to small molecule OLED, the dominant technology in the OLED industry. However, there are numerous drawbacks such as reduced device lifetime, resolution, and power efficiency. As such, analysts largely believe that “small molecule OLED has a substantial lead, and is likely to maintain that, leaving behind polymer OLED as the emissive dye of choice” (12).

As this form of OLED technology has largely been marginalized by the industry I see Sumitomo having few strategic prospects over the next five years. They can endeavour to acquire, build, or co-opt a value chain to support niche markets that make use of the polymer version of OLED technology. 

Universal Display Corporation is an example of a pure specialty chemical and IP firm.  It exclusively specializes in OLED technology. It developed phosphorescent emitters, which increased OLED power efficiency by 300% and made the technology a credible threat to LCD’s industry dominance. Starting as a Princeton University spin-off in 1994, the company has grown revenue from $15.8m in 2009 to $191m in 2014. Over that time it has strategically pivoted from a contract research firm to a seller of wholly owned intellectual property through licensing and material sales. This is evident in their income statement (13), which can be seen below.

 

FinanceOver the past five years technology development revenue has shrunk, while material sales have increased at an average of 97% and royalty revenue has increased at a rate of 99%. Simultaneously, they have created wholly owned subsidiaries in South Korea and Japan to facilitate operations in those regions. The successful transition from a contract researcher to a licensor represents a movement up the value chain. Their strategic prospects over the coming years are strong, where there is further opportunity to grow their value add and industry influence. This will be analysed and discussed more thoroughly in the following section.

Part 2:

As a first mover in the OLED industry Universal Display Corporation (UDC) has generated a lot of momentum. In addition to developing many of the foundational patents, UDC has used their financial success to acquire patents from other firms, including the acquisition of Fujifilm’s $105m portfolio and exclusive rights to Motorola’s patents (14). This provides a strong platform for competing against other firms on a resources basis. 

What gives a company a competitive advantage is the “strategically valuable resources, which enable [the firm] to perform activities better or more cheaply than rivals”(15). In UDC’s case a strategy centred on the acquisition of unique researchers, patents, and smaller businesses can create a bundle of non-imitable complementary assets that will help them vault into a full IP solutions and licensing company. This transition has been performed by other technology companies before, including IBM and Qualcomm.

 Venn Diagram

Adopted from “Competing on Resources” (15)

As indicated in the Porter’s 5 Forces analysis, academia has a powerful role in influencing the industry. Particularly, academic institutions are the most cost effective place to find talent which specializes in OLED technology. UDC should leverage its strong cash position of $288.5m (13) to create a large and well marketed fund to sponsor certain University studies and particular PhD students. More specifically, this should be agnostic of the University or College itself. This would give the firm early access to the latest research, and signal the market of skilled doctoral scientists that UDC is actively searching for new talent. This will be particularly important in non-western geographies as much of the industry is centred in Asia. Tapping in to graduates from Seoul National University or Kyushu University in Japan will create value for the firm while depriving its competitors. 

Simultaneously, UDC should continue its strategy of acquiring chemical, process, equipment, and electric control patents. GE, Xerox, and IBM all have stranded patents that would complement the existing portfolio. Particularly, GE and Xerox have underutilized the technologies they have developed as they lack the business infrastructure to license or make sellable products from them. Kodak’s OLED cross-license agreement with LG demonstrates the opportunity that can be created from new patent access. Using Kodak’s white – RGB (Red, Green, and Blue) pixel structure allowed LG to manufacture large area displays with substantially higher yields and lower manufacturing costs than Samsung. Ultimately, this led Samsung to exit the OLED television display market. Per LG’s Global Communication Director the acquisition of Kodak’s OLED patents will be “an advantage that we'll probably feel for ten years”. These patents are the scarce, appropriable, and highly demanded resources that can fundamentally alter a firm’s competitive prospects (16).

Patents and people, however, do not encompass all the valuable IP from which UDC, or other firms, can derive value. Trade secrets, institutional knowledge, and environment dependent skillsets do not get transferred in cross-license agreements nor through patent sales. For example, smaller firms such as Silicon Valley’s Kateeva or Rochester’s OLED Works offer expertise in equipment design that are likely not fully documented. Anecdotally, this “tribal” knowledge can often make or break a research group’s ability to deliver results. When I worked on OLED lighting at Kodak, our group stopped being able to produce the highest efficiency devices when a junior researcher left the firm. This person didn’t control any key patents, nor did they have any unique device designs. They were, however, the only person that could operate the spin coater just right to produce pristine films for light extraction. Her ability to make such films was really only valuable in that specific environment. Corporate acquisitions would transfer this sort of miscellaneous intellectual property. As such UDC should make equity investments in smaller firms to accent other aspects of their technology portfolio.

These strategically valuable resources would expand the network from which Universal Display can draw for their theory of value creation. Akin to the Disney’s strategy of using “a valuable and unique core, and identified patterns of complementarity among them” (17) Universal Display can explore the addition of tangential assets that will reinforce each other, and funnel cash through the organization. 

 

Disney

 Disney

Walt Disney’s Original Defined Vision (17)

Universal Display Corporation

 

UDC

Proposed Vision for Universal Display Corporation

As shown in the previous model, I have highlighted the existing businesses in blue and listed the proposed businesses of “Specialty Equipment Design” and “Technology Consulting” in white. This framework emphasizes the value add which the resource procurement strategy had hinted at. In addition to expanding the existing businesses, UDC has an opportunity to create a network of reinforcing assets. For example, the purchase or capture of Kateeva would fill in UDC’s Specialty Equipment Design business. This unit could build the right equipment and machines which take advantage of unique material properties from UDC’s existing chemical sales business. Moreover, the right materials and manufacturing equipment could accentuate architectural designs from their treasure trove of patents. These architectures would then drive further material sales. This virtuous cycle would lock UDC’s customers into their intellectual property ecosystem, from which UDC could extract larger and larger funding for future R&D.

Additionally, I see the development of a technology consulting business as a key catalyst for this virtuous cycle. A consulting arm would allow them to directly funnel sales to their unique portfolio of assets. Like IBM does with their consulting services, customers could be channelled to solutions and services that use all of Universal Display’s technology. Here UDC would be taking advantage of the dis-integration of the consumer electronics market – particularly smart phones and wearables. The rise of niche competitors in that market has reduced the market power of UDC’s largest customer – Samsung. Simultaneously, it has created a host of competitors like Apple, Google, Xiaomi, and Lenovo that are willing to pay a premium for hardware advances. UDC could consult these firms directly, which would elevate their stature in the value chain. Moreover, UDC consulting could drive the firm closer to Qualcomm’s business model, where the IP is heavily segregated from the manufacturing. This would generate large profits for UDC, without expensive spending on CapEx.

Implementation should be funnelled through their Korean and Japanese offices. This would expand their regional footprint in Asia, where the vast majority of the manufacturing takes place. Local hires from mid-tier consulting firm’s like Deloitte could support UDC’s existing base of qualified technologists. In addition to interacting with established firms like Samsung, LG, or Japan Display, a consulting branch of UDC could consult low cost Chinese manufacturers such as Visionox, Tianma, or China Star Optoelectronics Technology who are trying to compete against more advanced firms. This strategy could help develop a network of captive manufactures, who further help dis-integrate the upstream industries. 

Tying it all together:

This paper has covered the OLED specialty chemical and IP industry using a Porter’s 5 Forces analysis, while using additional frameworks to study the development of the technology and the patterns of various member firms. Isolated relationships such as the fragmentation of downstream firms and trends such as the advancement of wearable devices have profound impacts for this industry. Corporate strategies can use these affects to advance their market standing and personal bank accounts.

 

Universal Display Corporation was focused on particularly. This firm that has a lot of potential, and can use the following recommendations to develop their business:

  • Use wearables as a beachhead against LCD
  • Buy/Co-opt assets to 
    • Solidify current businesses
    • Develop new complementary businesses to create a self-reinforcing network
    • Establish a consulting arm to elevate value add - Engage smartphone and wearable manufacturers as well as low end display makers to disintegrate/reduce market power of OLED producers 

Should this approach be adopted I would expect UDC in five years to look less like Dow or DuPont and look more like Qualcomm and IBM. Simultaneously, I would hope and expect a noticeable increase in the shares of stock I own.

 

Bibliography

 

 

    1. Porter, Michael. "The Five Competitive Forces That Shape Strategy." Harvard Business Review (2008): n. pag. Web. 31 Mar. 2015.
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    14. "Universal Display Purchases Fujifilm`s Worldwide OLED Patent Portfolio for $105 Million." Reuters. Thomson Reuters, 24 July 2012. Web. 31 Mar. 2015.
    15. Collis, David J., and Cynthia A. Montgomery. "Competing on Resources." Harvard Business Review (2008): n. pag. Web.
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