Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

For years making light bulbs was an oligopolistic business that generated lots of cash for Philips and Siemens. These days, neither company seems to want much to do with lighting.

Siemens partially exited the business in 2013 with the IPO of its Osram lighting unit, although it retains a 17 percent stake and a seat on its supervisory board. Philips is preparing to sell or IPO its "lighting solutions" unit this year, and is disposing of its LED components unit separately.

What's going on? Grossly inefficient conventional light bulbs are headed towards extinction, forcing incumbents to cut costs and slash jobs.

Not Lighting the Path
Philips lighting division's organic sales have been declining
Bloomberg Intelligence

That's not to say the world is going to sit in darkness. It's just the industry's future is based on semiconductors, not filaments.

Light-emitting diodes (LEDs to you and me) open up a host of new lighting applications and they can be connected together via the much-ballyhooed "Internet of things." But that technological shift is a source of anxiety for industry incumbents as it's attracting new competitors and it's not clear which segments will prove profitable (and which will be commoditized).

So far at least, the Philips plan to get out of LED components looks more appealing than the strategy set out by Siemens' offshoot.

Osram is selling its conventional light bulb business, which has about 2 billion euros ($2.2 billion) in yearly revenue, a move investors welcomed. But CEO Olaf Berlien destroyed most of that goodwill by announcing a 1 billion-euro investment in a new LED chip plant in Malaysia.

Osram's Plunge
Light company's shares fell sharply in November after LED plant announcment
Bloomberg

The worry is the spending spree will depress margins and Osram may struggle to compete against Chinese and Taiwanese rivals who could add capacity. Focusing on profitable niches such as laser headlamps for cars would be a safer bet, as barriers to entry are higher. Siemens was peeved enough to issue a press release noting that the strategy shift had caused the value of its stake to slump.

While Philips has suffered its own disappointments in lighting, its strategy is, on the whole, better. The Dutch conglomerate is separating from lighting (7.4 billion euros in sales in fiscal 2015) to focus on healthcare technology (16.8 billion euros in sales) which should help it more usefully allocate capital. 

Unfortunately, its attempt to sell its automotive lighting and LED components unit -- Lumileds -- to a Chinese company collapsed this month because of U.S. opposition. Chief executive Frans van Houten acknowledged in a Bloomberg TV interview Tuesday that he may not get as much from a new sale as the $2.8 billion the Chinese were offering.

Regardless, getting out of components remains the right move given the fierce competition from Asia. Look what happened to Germany's solar industry when Chinese rivals appeared on the scene (hint: it wasn't pretty.)

It's a puzzle, however, why Philips didn't just sell the whole lighting division in one go, which would have been cleaner. Lumileds' performance will hardly be helped by several more months uncertainty over the identity of a buyer.

Marginal Gains
Philips lighting unit's adjusted ebita margin lagged other divisions in Q4 2015
Company

The Philips lighting unit (which excludes Lumileds) achieved a 9.5 percent adjusted ebita margin last year -- up from 8.6 percent in 2014. This is well below the Philips healthcare and consumer lifestyle divisions, but a reasonable performance given the rapid price declines in LEDs. Osram achieved a 10.2 percent adjusted ebita margin in fiscal 2015 but expects this to decline this year because of R&D and investment.

That, coupled with the recent punishment by Osram's shareholders, shows Philips is taking the right path.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net