It's back to the future for Royal Philips Electronics (PHG), Europe's largest electronics company, which started out in 1891 making carbon-filament lamps. Long seen as a steady but unexciting part of the company's vast product portfolio, Philips' $9 billion lighting division is suddenly on a tear, thanks to a burst of well-timed acquisitions, rapid technology shifts, and growing interest in saving energy.
The surprising fact is lighting accounts for about one-fifth of all electricity use—in part because traditional incandescent bulbs waste most of their energy in heat. New solid-state alternatives made from light-emitting diodes (LEDs) burn cooler and can produce the same amount of illumination using, on average, 40% less electricity. With the global push to go green, that's a compelling savings—and it's driving surging demand for next-generation bulbs and fixtures.
To seize the opportunity, Philips has stepped outside its vaunted research labs and gone on a buying binge. This year alone, it has spent $4.3 billion to snap up five companies in the lighting sector, including the Nov. 26 purchase of Louisville's Genlyte (GLYT), the No. 2 U.S. maker of lighting fixtures, or "luminaires." The acquisitions have catapulted Philips past General Electric (GE) as the largest lighting supplier in the U.S. "Until recently, lighting was considered a little bit dull, but now it is growing fast," says Rene van Schooten, chief executive of Philips' luminaires business group.
Will Longer-Lasting Bulbs Lose Money?
As if to demarcate its new status as king of the hill, Philips this year will provide the lights for the annual New Year's Eve Times Square Ball in New York. Instead of 600 incandescent and halogen bulbs, the ball will be fitted out with more than 9,500 LEDs that burn twice as brightly and can create a palette of 16 million colors. Best of all, depending on their color, they'll be up to 98% more energy efficient than the bulbs they replace. Philips also supplied the 50 giant LED snowflakes decorating the front of the flagship Saks Fifth Avenue (SKS) store in New York. The 40,000-plus LEDs used in the display consume only as much energy as three toaster ovens, Philips says.
To be sure, the transition from traditional to solid-state lights carries big business risks. For one thing, the bulbs last far longer, which wipes out the replacement market: A typical LED will work for more than 11 years if burned 12 hours per day. To make up for the lost lightbulb annuity, Philips has gradually maneuvered or bought its way into every corner of the lighting market, from fixtures to professional services. The thinking: To take full advantage of solid-state lighting, customers also must install new fixtures and control systems. Between retrofits and new construction, Philips figures it has decades of sales ahead supplying the build-out of next-generation lighting infrastructure.
"Philips is the only player that covers the whole value chain in solid-state lighting," says investment bank UBS (UBS) in a recent report. It has transformed its lighting business "into a powerhouse." UBS predicts that Philips' lighting unit will grow 6.5% next year—the fastest rate of any division—and earn pretax margins of 12.2%. Only the company's booming domestic appliances group, which sells coffee makers, shavers, and electric toothbrushes, earns higher returns, but its revenue growth is expected to slow next year to less than 6%, UBS says.
That makes lighting a surprising star after years of being overshadowed by consumer electronics, domestic appliances, and medical systems. Philips has spent billions beefing up its health-care group, which now accounts for 27% of revenues, but UBS forecasts flat sales growth next year.
And consumer electronics—plagued by savage Asian price competition—will continue to be "lackluster," says UBS, with no growth next year.
Lighting, on the other hand, enjoys renewed attention because of environmental concerns. Green awareness is spurring the transition away from traditional bulbs, which not only contribute heavily to carbon emissions—thanks to their electricity consumption—but also add significantly to air conditioning bills in summer months. Philips reckons that Europe could meet its 2010 Kyoto carbon dioxide targets in one fell swoop if all traditional lighting were switched to energy-efficient alternatives. The energy saved would equate to 50 million barrels of oil per year.
The promise of such large energy savings is starting to resonate with Philips' customers. In the first half of this year, sales of energy-efficient lighting products grew at twice the rate of the lighting division as a whole, and for the first time accounted for almost 50% of its sales. Genlyte, which reported 2006 net sales of $1.6 billion, should help accelerate growth even further. Its products are promoted through architects, engineers, contractors, and building owners, giving Philips new access to professional customers in the U.S.
A Bright Outlook for Philips
Though LED-based lighting systems cost more than their conventional counterparts, Philips says the energy savings mean they pay for themselves in two to three years. Plus, LEDs can do wondrous things that incandescent bulbs can't, such as change color or be implanted into walls and furniture.
All told, Philips' new lighting push is helping it move ahead of GE and the Osram lighting unit of Siemens (SI). It's the latest step in a reorganization announced in September that will streamline the company into just three major units (BusinessWeek.com, 9/10/07). Philips says the reorganization should help boost margins and double earnings per share by 2010. If the lighting business turns out to be as fast-growing as Philips hopes, going back to its roots may prove to be a very bright idea.