NEW YORK (

TheStreet

) -- The High Brightness Light-Emitting Diode (HB LED) market is expected to soar as unit shipments more than double between 2009 and 2012.

We're witnessing a rapid increase in the market for HB LEDs used in various applications such as notebook backlights and automobile headlights, which is stimulating heavy capital investments by LED manufacturers.

While Japan is home to the word's largest HB LED manufacturer, as well as five of the world's top 10 HB LED suppliers,

Cree

(CREE) - Get Report

is one of the largest.

LEDs are creating a niche market for conventional suppliers of semiconductor processing tools and a lucrative market for Metal Organic Chemical Vapor Deposition (MOCVD) suppliers.

Veeco Instruments

(VECO) - Get Report

, a leading supplier of MOCVD tools, notes in an investor presentation that a consensus of forecasts from six sell-side analysts forecasts a doubling in MOCVD demand, from 208 tools in 2009 to 415 tools in 2011.

This consensus forecast of 415 MOCVD tools represents a market of greater than $1 billion based on an average selling price of $2.5 million for each MOCVD tool.

MOCVD represents 8% of the typical cost breakdown for a packaged LED. Other front-end tools represent more than 3% of the cost and equates to an additional $500 million market for lithography and metrology tools from companies such as

Ultratech

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(UTEK)

and

KLA-Tencor

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.

On the materials side, subtrates represent 6% of the LED cost equating to a $750 million market.

Rubicon Technology

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is a leading provider of develops high-quality sapphire substrates for the LED industry.

The biggest sector of the LED manufacturing process is what's referred to as the back end such as substrate removal, chip separation, and packaging, and represents 65% of the cost.

Our analysis indicates that in 2009, each MOCVD tool was capable of processing about 30 million LEDs. In 2011, based on the same throughput, there will be a cumulative supply deficit of 15.5 million LED units, unless MOCVD equipment suppliers increase throughput and yields to reduce cost of ownership.

The U.S. DOE's Solid State Lighting Manufacturing Roadmap targets a factor of two improvement in cost-of-ownership for manufacturing equipment every five years. If suppliers are successful, enhancements in processing time, uniformity, repeatability, temperature control, and flow geometries will mitigate the supply deficit.

Clearly it is not within the best interests of MOCVD tool suppliers to improve cost of ownership as it will reduce sales. But competition is the key enabler, which will force suppliers to enhance their tool capabilities.

The HB LEDs are currently a $5 billion niche market compared to the $250 million semiconductor market. The backlight sectors will exhibit the fastest growth in the HB LED market with an overall compound annual growth rate of more than 40%, led by the LCD TV sector exhibiting a CAGR of 300.3% between 2007 and 2012.

At the time of publication, Castellano did not own any stocks mentioned. Robert N. Castellano, Ph.D, is President of The Information Network, a leading consulting and market-research firm for the semiconductor, LCD, HDD and solar industries. Castellano is internationally recognized as one of the leading experts in these areas. He has nearly 25 years of expertise as an industry analyst. Castellano has provided insight on emerging technologies to many business and technical publications, including Business 2.0, BusinessWeek, The Economist, Forbes, Investor's Business Daily, Los Angeles Times Magazine, The New York Times, USA Today and The Wall Street Journal. He is a frequent speaker at conferences and corporate events. He has over 10 years' experience in the field of wafer fabrication at AT&T Bell Laboratories and Stanford University before founding The Information Network in 1985. He has been editor of the peer-reviewed Journal of Active and Passive Electronic Devices since 1985. He is author of the book "Technology Trends in VLSI Manufacturing," published by Gordon and Breach. His book "Solar Cell Processing" was published in 2009 by Old City Publishing. He received his Ph.D. in solid state chemistry from Oxford University.