Chris Bryant writes a good article in the Financial Times about how LED lighting is making important inroads but also creating major changes in the industry.
Industrial giants caught in LED headlights
Shoppers at the Carrefour hypermarket in Lille no longer have to ask for help to find items on special offer — instead they can navigate to them using their smartphone.
Philips, the Dutch technology conglomerate, has installed 800 light-emitting diode fixtures at the 7,800 square metre store that can send a location signal to a customer’s phone using light invisible to the human eye.
“With the right sensors installed, an LED light-fitting could become the best GPS ever by directing customers or visitors to where they want to go” says Gaia Nocchi, director at Frost & Sullivan, the research and consulting firm.
Lighting is starting to become part of the “internet of things” — where different devices are all connected on telecoms networks — but for incumbent manufacturers this rapid technological shift is causing huge upheaval.
Industrial giants Philips, Siemens and General Electric for decades enjoyed an oligopoly in the hitherto slow-moving lighting market, which James Stettler, an analyst at Barclays, compares with a “licence to print money”, partly because people have to regularly replace their bulbs.
Now LEDs are fast displacing traditional light sources such as incandescent, halogen and fluorescent bulbs, catalysed partly by double-digit annual price declines in components.
Government regulations also have supported the growth of LEDs because of their energy efficiency. They produce light using semiconductors — whereas traditional light bulbs rely on filaments — and therefore consume less electricity.
LEDs also last much longer than old-style bulbs and are far more sophisticated. For example, the new 68-storey International Youth Culture Centre in Nanjing, China, has 700,000 LED lights capable of illuminating the building façade in different colours at night.
Frost & Sullivan estimates the global LED lighting market grew 35 per cent to $32.3bn last year, and it is forecast to more than double to $70bn by 2019. LED as a proportion of the total lighting market is set to near 50 per cent by the end of 2015 and reach 84 per cent by 2020.
The incumbents saw the tech revolution coming and are now among the biggest players, but the rapid growth in LEDs has attracted new low-cost competitors, particularly from Asia.
The incumbents are responding to these challenges in different ways, but broadly speaking they are restructuring legacy, high-volume lighting units and regearing their business models towards “smart” and “connected lighting”.
“In 10 years there might not be a single light bulb left. If your core competence isn’t needed any more, then you need to adapt — the challenge is to move from being a general lighting company to a solution provider,” says Ms Nocchi.
Philips announced in September that it would split in two by creating a standalone lighting company that could respond more quickly to the “fundamental changes taking place in the lighting industry”. Philips will focus on its core healthcare and consumer lifestyle business.
It plans to float the lighting solutions business — the world’s largest maker of conventional and LED bulbs — during the first half of 2016 but has not ruled out other options, including a sale. In 2014 lighting solutions generated €7bn in sales, compared with €14.4bn at health and consumer tech.
Siemens, the German engineering group, spun off its Osram lighting unit in 2013. In April Osram said it would carve out its light-bulb unit, which makes traditional and LED bulbs, into a separate entity by 2016.
Options for this entity, which generates more than €2bn in annual revenues, include a spin-off, sale or partnership. Since 2012 Osram has announced some 16,500 job cuts. Its total headcount was 41,400 at the end of 2011.
Although lighting is GE’s oldest business — the company was founded by Thomas Edison — analysts have long seen it as a candidate for disposal. GE declined to comment.
Lighting accounted for about $2.5 billion in sales last year, and Jeff Immelt, chief executive, confirmed this month that GE was on track to book about $1bn in LED revenue in 2015.
“There is lot of investor uncertainty about how the lighting industry is developing — there will be winners and losers, and investors are not sure who is going to be which,” says Peter Reilly, an analyst at Jefferies.
Companies that have focused on the LED market are not finding the going easy either.
Samsung Electronics in October announced the South Korean group would cease selling LED bulbs overseas.
Meanwhile, Cree, a US LED lighting and component company, is cutting manufacturing capacity due to falling prices and lower than expected sales. Cree’s stock has fallen almost 50 per cent over the past year.
Osram believes its future lies in LED components and speciality lighting, notably for the car industry, where it considers the barriers to entry to be high.
In March Philips agreed to sell a majority stake in its LED component and car lighting business to GO Scale Capital, an investment fund run by China-based private equity group GSR Ventures and Oak Investment Partners.
Asked why Philips was exiting a business that will be the core of the new Osram, Olaf Berlien, Osram chief executive, says this is normal as “each company sets a strategy according to its strengths”.
Philips has won plaudits for its innovations in connected-lighting, including its HUE system, which allows customers to customise their homes with colour-changing LEDs linked via WiFi and controlled via a mobile app. HUE can also be integrated with video game play, so that when enemies attack the living room lights blink red.
Thanks to LED’s superior performance and controllability, opportunities are also opening in areas such as street lighting.
“Lighting is becoming a high-tech infrastructure business,” GE told investors in February. For example, it is trialling intelligent street lights in San Diego that are able to identify vacant parking spaces.
Although sales of traditional light bulbs are in structural decline, the market remains profitable because there is so little competition. The incumbents therefore talk about a “long” or “golden tail”.
“From an investor perspective, this is a cash cow and a solid one, despite the top line decline,” says Frans van Houten, Philips chief executive.