White Paper: Is There a Market for Novel Encapsulation Technologies?Published March 2013
The Encapsulation ParadoxIn the past few years, novel encapsulation technologies have become a hot topic in the thin-film,...
Glass endures: At first blush, the total addressable market (TAM) for encapsulants looks quiterespectable. Our projections...
Exhibit 3. Growth in the Market for Encapsulation in OLED and PV Applications in 2013 - 2019          Market Value of "Nov...
But turn this tale of woe around and an investment story emerges. The encapsulation firms can’tget profitable because they...
simply has the resources to withstand some very lean years and believes in advancedencapsulation enough not to mind.At the...
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Is There a Market for Novel Encapsulation Technologies?

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In the past few years, novel encapsulation technologies have become a hot topic in the thin-film, printed and electronics communities. Many of the latest materials platforms for displays, lighting and solar panels appear to require higher performance encapsulation technologies. And in response to this apparent need, new alternatives have appeared in the marketplace; notably multilayer barrier films and conformally deposited coatings.

While all this sounds like the makings of a good business case, recent history seems to be saying otherwise. Encapsulation plays such as Symmorphix and (quite recently) Cambridge Nanotech have gone out of business while Vitex was swallowed up by Samsung. And other startups are confessing that they are no longer sure how they are ever going to make big money out of their clever encapsulation ideas. So the industry finds itself facing a paradox. Some of the most exciting new thin film-printed-organic technologies need new kinds of encapsulation. Yet there is good empirical evidence that firms cannot make money providing these novel species of encapsulation.

This white paper addresses what is missing from the picture and details the strategic options facing the business.

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Is There a Market for Novel Encapsulation Technologies?

  1. 1. White Paper: Is There a Market for Novel Encapsulation Technologies?Published March 2013
  2. 2. The Encapsulation ParadoxIn the past few years, novel encapsulation technologies have become a hot topic in the thin-film,printed end electronics communities. Many of the latest materials platforms for displays, lightingand solar panels appear to require higher performance encapsulation technologies. And inresponse to this apparent need, new alternatives have appeared in the marketplace; notably Page | 1multilayer barrier films and conformally deposited coatings.This sounds like the makings of a good business case. Unfortunately, recent history seems to besaying otherwise. The start-up firms that have believed in this business case have not been ahappy crew. Symmorphix and (quite recently) Cambridge Nanotech have gone out of business.Vitex has been swallowed up by Samsung. And other startups are confessing that they are nolonger sure how they are ever going to make big money out of their clever encapsulation ideas.So here is the encapsulation paradox. Some of the most exciting new thin-printed-organictechnologies apparently need new kinds of encapsulation. Yet there is good empirical evidencethat firms cannot make money providing these novel species of encapsulation. What is missingfrom this picture?“Too Late,” The Market CriedNanoMarkets’ analysis suggests that a big part of the problem here is the big contrast betweenthe apparent size of the novel encapsulation market and the time that it will take to emerge.NanoMarkets has carried out detailed forecasts of the markets for encapsulation in both theOLED and thin-film photovoltaics sectors and the results (Exhibit 1) are rather illustrative in thisregard. Exhibit 1. Growth in the Market for Encapsulation in OLED and PV Applications in 2013 - 2019 Market Value of Encapsulation by Application 2013-2019 ($ Millions) Market Value of Encapsulation in OLEDs and PV by Technology 2013-2019 ($ Millions) 2500 2000 2500 2000 Conformal Coatings 1500 1500 1000 1000 Multilayer Barrier Films 500 500 0 0 Flexible Glass Rigid Glass Products Year Year © NanoMarkets 2013 OLEDs Thin-Film PV Applications
  3. 3. Glass endures: At first blush, the total addressable market (TAM) for encapsulants looks quiterespectable. Our projections indicate that materials for encapsulation of OLEDs and TFPV canreach about $770 million by 2015 and about $2 billion by 2019. These amounts should be morethan enough to put a smile on the face of any advanced materials entrepreneur. Page | 2However, there is a world of difference between the theoretically addressable market for a newmaterial and the market that is actually serviceable. The NanoMarkets view is that rigid glass isgoing to be very difficult to dislodge in the encapsulation marketplace and will be used wherever itcan be used. Because of this – and this is shown in Exhibit 2 – NanoMarkets estimates themarket share for non-glass encapsulation can grow from about 11 percent today, to only about 21percent and 27 percent in 2015 and 2019, respectively. Exhibit 2. Comparison of Projected Market Share of Encapsulation Technologies in OLED and PV Applications in 2015 and 2019 21.3% 26.9% Glass Encapsulation 78.7% 73.1% Novel Encapsulation 2015 2019 © NanoMarkets 2013So one question that has to be asked here is: Have the providers of the latest and greatestencapsulation materials confused the whole market for encapsulation with the part of the marketthey can actually reach? Could it be that their business models are based on a false idea of whatthe revenue potential of this market actually is?For if one takes glass technologies out of the equation, then the markets for encapsulationsuddenly look a lot less attractive. As shown in Exhibit 3, without glass, the 2013 market value ofnovel encapsulation materials – multilayer barrier films and conformally deposited coatings – isunder $2 million in OLEDs and just over $50 million in PV applications. And these market valuesare only expected to grow to about $135 million and $410 million, respectively, by 2019. Theseare not revenue numbers that can expect to entice investment into this sector.
  4. 4. Exhibit 3. Growth in the Market for Encapsulation in OLED and PV Applications in 2013 - 2019 Market Value of "Novel" Encapsulation by Market Value of Novel Encapsulation in OLEDS and Application 2013-2019 ($ Millions) PV by Technology 2013-2019 ($ Millions) 600 Page | 3 600 500 500 400 400 Conformal Coatings 300 300 200 200 Multilayer Barrier 100 100 Films 0 0 Year Year © NanoMarkets 2013 OLEDs Thin-Film PV ApplicationsThis analysis takes on an even more cautionary tinge, if one takes into consideration the fact thatNanoMarkets doesn’t even expect to achieve this combined figure of around $445 million, unlessthe firms in this space can concurrently improve performance (especially in the OLED sector) andreduce costs, which will be very difficult. In other words, what we are looking at here is a marketwhere market expectations are just not that great but the risks are fairly high.And glass systems are meeting encapsulation requirements now, will continue to do so for thenear- and mid-term, and glass companies will make continual improvements to their products,too!Time, time, time: But the truly damning aspect of NanoMarkets projections in this area is not thelong-term revenue projections and certainly not the technology risk, but the fact that it is going totake a long time to reach a market that any outside investor is going to treat seriously.In the current environment, any firm or individual putting money into the encapsulation business isgoing to have to wait quite a few years before they will see any real return and they will have tomake their investment decisions based on discounting future cash flows with high numbers forinflation, political risk, etc., etc.In fact, NanoMarkets is already hearing from the encapsulation start-ups that this issue isbecoming one that is of serious concern. What these firms are actually saying is that they can’tcharge prices high enough to stay profitable because end-user markets are too cost-sensitive,and thus the novel encapsulation technologies have been unable to gain a foothold in the market.They also say that they can’t yet generate cash flows large enough to grow organically and buildlarge-scale manufacturing plants for their new materials, thereby reducing the cost througheconomies of scale.
  5. 5. But turn this tale of woe around and an investment story emerges. The encapsulation firms can’tget profitable because they can’t find investors who can relieve them of the necessity of having tocharge a price for their materials that reimburses them for CapEx and R&D in a short period oftime. Such investors would also let them build capacity and tap into economies of scale inadvance of volume demand. Page | 4A full-scale manufacturing plant for advanced encapsulation systems, would surely cost tens ofmillions of dollars and take many years to recover. Scaling up is a shaky value proposition, andfew investors are willing to take the risk!What is to be Done? Four StrategiesNone of this is encouraging. And it cannot help but leave encapsulation companies wonderingwhether they should “die well or die badly.” Beyond hyperbole, there are, NanoMarkets believes,four options available to today’s generation of novel encapsulation companies.Get out now: Some firms may opt out of the business altogether. NanoMarkets believes thatthere will be more market exits and bankruptcies by small firms in the encapsulation businessduring the 2013 and 2014. Few encapsulation firms are likely to choose this option willingly, andfor obvious reasons.Alternative products: Moving into other markets. This is not an uncommon strategy forstruggling start-ups in the advanced materials sector. The point here is that most such firmsbegin with a core materials technology and then try to find an application that will fit thetechnology. We can think of one company, for example, that started in the lighting business,shifted to the drug delivery business, before settling on the solar panel business. Ultimately it wasacquired by a large chemical company!This is an approach that we think firms in the space that we are discussing should be considering.But we don’t think it will be that easy. While encapsulation technologies might find new homes inthe packaging of other electronics products or in food packaging, both of those markets arecrowded with much lower-cost competition. But there may always be niches worth exploring.A more viable option may be available to encapsulation firms whose expertise tends towards theequipment/process side of the business. Equipment expertise is more widely needed, and theremay be any number of markets that the firm could target. For example, Beneq already works invarious end-markets; high performance encapsulation of OLEDs and PV is only one of the manyapplications in which its ALD processes could be used.While shifting into new markets may not be an easy strategy for struggling encapsulation firms, itdoes hold out the prospects of a fresh start and big profits. . . someday.Strategic investments: It may be possible for some encapsulation firms to attract strategicinvestments from large materials or electronics firms who are in need of a good newencapsulation technology for their products. Here the economics surrounding the investment isquite different to other kinds of investment.In this case, the investor may be basing its calculations of return on enhanced cash flows from itscore products; displays and solar panels. Or the investor may be a large materials company that
  6. 6. simply has the resources to withstand some very lean years and believes in advancedencapsulation enough not to mind.At the margin, a strategic investment morphs into a large firm buying a small firm for itstechnology and some smaller encapsulation firms may thus see the strategic investment optionmore in terms of hanging on long enough to get acquired. This may make a lot of sense for some Page | 5of them; but, of course,it assumes that they don’t run out of cash while waiting for their savior.The problem with this approach is that as time drags on, the deals that can be struck becomemore and more unfavorable to the smaller company. In the end, strategic investment can lookquite close to liquidation.Give up on big revenues: Finally, an encapsulation start-up may opt to become a small R&Dcompany, obtain some development contracts and survive. This is a classic “small business”scenario. It is not compatible with a “flashy” VC business with big IPO plans, but it may be betterthan nothing. And there is always the hope that such firms may grow big some day. By way ofan example, there were many very small telecom component firms that grew into substantialbusinesses during the telecom boom of two decades ago.Frankly, none of the options that we have set out above are that attractive and we can understandwhy many firms in this space may want to follow their bliss. But the reality is that some of thesesmall firms show little likelihood of finding it based on existing strategies and goals.For additional details of NanoMarkets analysis of encapsulation markets, pleasevisit www.nanomarkets.net/advanced_materials

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