We would like to argue some of the points made by the new BloombergBusiness article entitled “Light Gives Us Life But Actually Is a Terrible Business” with the subtitle “Why the lighting industry is dying,” by Alex Webb and Elco Van Groningen.
In the article, authors Webb and Van Groningen argue: (1) competition is high; (2) profit margins are low; and (3) growth is slowing, and then note the lighting industry a terrible and dying business. Webb and Van Groningen note, “In the past decade, Philips’ operating profit margin for its lighting division has plummeted, from 10.5 percent in 2005 to 2.7 percent in 2014.” The article continues to mention that Philips, GE, and OSRAM, the three largest lighting companies, are either selling off or splitting their lighting business sector. My main issue with this article is that it focuses entirely on the larger businesses and their struggles, but does not account for emerging lighting leaders and the vast market growth of LEDs and new technologies.
Philips, OSRAM, and GE have been in the lighting game a lot longer than new LED-focused firms, such as Cree and LG. As such, the three lighting giants have sustained more traditional business models. Over the past few years, LED lighting has surged, leveraging businesses that focus exclusively on LEDs. Cree, for example, has done very well. In Q2, “Cree’s lighting business increased 3% sequentially and 33% year on year, as the double-digit growth in LED fixtures more than offset the lower LED bulb sales.” Webb and Van Groningen have it right on one point: “It all comes down to light-emitting diodes.”
Webb and Van Groningen discuss and present graphs of the large lighting brands—with a focus on Philips—and their recent profit losses. Focusing only on the losers, however, does not justify a statement that lighting is a terrible business. By excluding the winners—businesses that are active in the LED market—the authors do not bring to light the potential market growth. The LED market itself is “anticipated to grow 45% per year through 2020,” and with LED lights “anticipated to reach $63.1 billion by 2020” from its current valuation at $13.6 billion in 2014. By 2020, “LED lighting is expected to account for 80% of the entire lighting market.”
Webb and Van Groningen argue, “The 10-year lifespan of an LED has killed the classic light-bulb business, where manufacturers could depend on consumers buying replacements every three years.” Yet, as it stands, the LED global market is hardly saturated. According to the National Lighting Bureau, LED lighting will reach 36% market penetration by 2020, and 74% by 2030, just in the U.S. Given LED’s have an approximate lifespan of 10 years, lighting companies can retain competitive advantage through smart research and development and a focused global business model. Furthermore, the buck does not necessarily stop with LED lighting. New technologies continue to emerge, the most recent in the limelight is OLED lighting. Companies like LG are already looking into the OLED market. In just five years, the OLED market is expected to grow from a humble $82 million in 2015 to $4.7 billion in 2020.
One of the main drivers of revenue loss for lighting manufacturers has been LED components, especially semiconductors. Webb and Van Groningen aptly point out GE and Philips have seen reduced profit margins from OSRAM, which produces its own semiconductor chips. Even Cree’s LED component revenue has “declined 29% year over year and 13% sequentially on account of lower LED demand, primarily from China.” Webb and Van Groningen, however, do not make mention of companies like LG and Samsung, who produce their own semiconductor chips. Last year, LG acquired Silicon Works, Korea’s “largest fabless semiconductor company that designs display driver ICs,” which are used in LED drivers and other applications. To remain competitive in this extremely fast-paced and technologically advanced market, businesses need to stay abreast of all cutting-edge innovations and solutions, which often means vertically integrating into complimentary markets.
Are there current challenges? Yes. Webb and Van Groningen do mention serious problems within the lighting industry; however, by only focusing on the losers, they are overlooking the larger picture of the competitive marketplace. Philips and GE may be losing ground in the lighting marketplace, but Cree, LG, and others are slowly taking their place, and turning profits in the process. I do not see the lighting market crashing anytime soon.