Novel-Nano Encapsulation Technologies: A Good Business?

Q: Is there a market for novel encapsulation technologies?

The Encapsulation Paradox

In 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, 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.

This sounds like the makings of a good business case. Unfortunately, recent history seems to be saying otherwise. The start-up firms that have believed in this business case have not been a happy 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 no longer 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-organic technologies apparently need new kinds of encapsulation. Yet there is good empirical evidence that firms cannot make money providing these novel species of encapsulation. What is missing from this picture?

“Too Late,” The Market Cried

NanoMarkets’ analysis suggests that a big part of the problem here is the big contrast between the 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 the OLED and thin-film photovoltaics sectors and the results are rather illustrative in this regard.

Glass endures:

At first blush, the total addressable market (TAM) for encapsulants looks quite respectable. Our projections indicate that materials for encapsulation of OLEDs and TFPV can reach about $770 million by 2015 and about $2 billion by 2019. These amounts should be more than enough to put a smile on the face of any advanced materials entrepreneur. However, there is a world of difference between the theoretically addressable market for a new material and the market that is actually serviceable.

The NanoMarkets view is that rigid glass is going to be very difficult to dislodge in the encapsulation marketplace and will be used wherever it can be used. Because of this NanoMarkets estimates the market share for non-glass encapsulation can grow from about 11 percent today, to only about 21 percent and 27 percent in 2015 and 2019, respectively.

So one question that has to be asked here is: Have the providers of the latest and greatest encapsulation materials confused the whole market for encapsulation with the part of the market they can actually reach? Could it be that their business models are based on a false idea of what the revenue potential of this market actually is?

For if one takes glass technologies out of the equation, then the markets for encapsulation suddenly look a lot less attractive. Without glass, the 2013 market value of novel encapsulation materials multilayer barrier films and conformally deposited coatings is under $2 million in OLEDs and just over $50 million in PV applications. And these market values are only expected to grow to about $135 million and $410 million, respectively, by 2019. These are not revenue numbers that can expect to entice investment into this sector.

This analysis takes on an even more cautionary tinge, if one takes into consideration the fact that NanoMarkets doesn’t even expect to achieve this combined figure of around $445 million, unless the firms in this space can concurrently improve performance (especially in the OLED sector) and reduce costs, which will be very difficult.

In other words, what we are looking at here is a market where 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 the near- 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 the long-term revenue projections and certainly not the technology risk, but the fact that it is going to take 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 is going to have to wait quite a few years before they will see any real return and they will have to make their investment decisions based on discounting future cash flows with high numbers for inflation, political risk, etc., etc.

In fact, NanoMarkets is already hearing from the encapsulation start-ups that this issue is becoming one that is of serious concern. What these firms are actually saying is that they can’t charge 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 build large-scale manufacturing plants for their new materials, thereby reducing the cost through economies of scale.

But turn this tale of woe around and an investment story emerges. The encapsulation firms can’t get profitable because they can’t find investors who can relieve them of the necessity of having to charge a price for their materials that reimburses them for CapEx and R&D in a short period of time. Such investors would also let them build capacity and tap into economies of scale in advance of volume demand.

A full-scale manufacturing plant for advanced encapsulation systems, would surely cost tens of millions of dollars and take many years to recover. Scaling up is a shaky value proposition, and few investors are willing to take the risk!

What is to be Done? Four Strategies

None of this is encouraging. And it cannot help but leave encapsulation companies wondering whether 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 that there will be more market exits and bankruptcies by small firms in the encapsulation business during the 2013 and 2014. Few encapsulation firms are likely to choose this option willingly, and for obvious reasons.

Alternative products:

Moving into other markets. This is not an uncommon strategy for struggling start-ups in the advanced materials sector. The point here is that most such firms begin with a core materials technology and then try to find an application that will fit the technology. 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 was acquired 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 in the packaging of other electronics products or in food packaging, both of those markets are crowded 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 the equipment/process side of the business. Equipment expertise is more widely needed, and there may be any number of markets that the firm could target. For example, Beneq already works in various end-markets; high performance encapsulation of OLEDs and PV is only one of the many applications in which its ALD processes could be used. While shifting into new markets may not be an easy strategy for struggling encapsulation firms, it does hold out the prospects of a fresh start and big profits. . . someday.

Strategic investments:

It may be possible for some encapsulation firms to attract strategic investments from large materials or electronics firms who are in need of a good new encapsulation technology for their products. Here the economics surrounding the investment is quite different to other kinds of investment. In this case, the investor may be basing its calculations of return on enhanced cash flows from its core products; displays and solar panels. Or the investor may be a large materials company that simply has the resources to withstand some very lean years and believes in advanced encapsulation enough not to mind.

At the margin, a strategic investment morphs into a large firm buying a small firm for its technology and some smaller encapsulation firms may thus see the strategic investment option more in terms of hanging on long enough to get acquired. This may make a lot of sense for some of 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 become more and more unfavorable to the smaller company. In the end, strategic investment can look quite close to liquidation.

Give up on big revenues:

Finally, an encapsulation start-up may opt to become a small R&D company, obtain some development contracts and survive. This is a classic small businessscenario. It is not compatible with a “flashy” VC business with big IPO plans, but it may be better than nothing. And there is always the hope that such firms may grow big some day. By way of an example, there were many very small telecom component firms that grew into substantial businesses 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 understand why many firms in this space may want to follow their bliss. But the reality is that some of these small firms show little likelihood of finding it based on existing strategies and goals.

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