Philips' Bright Future for Lightbulbs

In the 19th century, Dutch consumer electronics giant Philips (PHG) made its name as one of the first manufacturers of lightbulbs. Almost 120 years later, new lighting technologies and increased global demand for energy-efficient goods is offering a unique opportunity for growth. And Philips, the world's biggest lighting company with $10 billion in annual sales, is at the forefront of what Philips Lighting CEO Rudy Provoost calls "the most profound change the industry has witnessed since the invention of the electric light."

The revolution is known in industry parlance as solid state lighting, or light-emitting diodes (LED). The technology produces light by passing electricity between thin layers of semiconductors. And just three years after selling its semiconductor business, Philips is reaping the rewards of the technology. It's one of three major companies, including Siemens (SI) subsidiary Osram and General Electric (GE), that have invested heavily in so-called LED—bulbs that last five times longer than today's energy-saving fluorescent bulbs.

Philips has forked out $5 billion over the past five years on acquisitions in large part to expand its LED business. Unlike many of the smaller players that focus on components or fixtures, Philips covers the entire spectrum making the bulbs, fixtures, controls, and systems.

To date, LED is mainly used to light electronics, cell phones, stadiums, and other industrial buildings. That's because the lights, while more energy efficient, are much more expensive. LED bulbs cost between $30 and $50, compared with around $14 and 70¢ for fluorescent and incandescent bulbs, respectively. "LED technology is developing very rapidly, and the cost will become much more affordable in the next few years," says Marc de Jong, a member of Philips' management board and CEO of Philips' professional lighting division.

Seeking Affordable LEDs The company already is working on making LED more accessible to consumers. On Sept. 24, Philips was the first to submit an entry to the U.S. Energy Dept.'s $20 million lighting competition. The contest is aimed at developing an affordable LED replacement for the common 60-watt lightbulb.

According to the Energy Dept., more than 425 million 60-watt incandescent lightbulbs are sold each year in the U.S. Replacing them with LEDs could save enough electricity in one year to power 17.4 million homes, saving 5.6 million metric tons of carbon emissions annually in the process. As the first entrant in the competition, Philips stands to gain a sizable cash prize, as well as access to lucrative U.S. government procurement opportunities, if it wins.

Although a limited number of consumer LED products are on the market, analysts reckon it will still be a few years before the technology becomes mainstream. Estimates vary, but LEDs currently represent around $4.6 billion of the estimated $75 billion global lighting market. And so far, the technology accounts for just 5% of Philips' $10 billion in total lighting sales.

The Great Recession hasn't helped the company's ambitious plans. The global downturn in the housing industry has particularly hurt lighting manufacturers, including Philips. For the six months ended June 30, sales for Philips' lighting division fell 18% compared with the same period last year. But with new building set to pick up again, many analysts believe the company's sales for the second half of the year also will recover.

A Fast-Growing Market The LED market may be a small part of the lighting industry, but it's expected to be the fastest-growing segment over the next decade. Freedonia Group, a Cleveland-based market research firm, projects the global lighting industry will grow at around 5% a year through 2012. In contrast, the LED market is forecast to expand at 28% annually over the same period, according to estimates from Mountain View (Calif.)-based consultancy Strategies Unlimited.

Initially, government programs will likely stimulate demand, especially as technological improvements drive down LED costs, says Peter Vogel, a technology consultant with Sydney-based investment bank Lincoln Crowne. For instance, U.S. goals to improve new building efficiency by 50% and existing building efficiency by 25% over the next decade will lead more companies to turn to LED.

While the up-front costs are higher, the investment typically can be recouped in just two years through greater energy savings. In addition, the U.S. stimulus package and recently signed omnibus appropriations bill carved out a direct opportunity for lighting. Roughly $25 million has been set aside for LED-related research and development this year.

Another boost will come from the global phaseout of traditional incandescent bulbs, which convert only the first 5% of electricity into light. Thanks to lobbying efforts from lighting giants, the cheaper incandescents are rapidly being mothballed. As of Sept. 1 the European Union banned most incandescent bulbs, with stores forbidden to buy or import them. Retailers can still sell their remaining stock until it runs out. And the U.S. is set to follow suit, first in California starting in 2011, then nationwide a year later.

The shift will boost sales of energy-efficient fluorescent bulbs, but manufacturers say the real opportunity is in LED over the long term. Says Philips' de Jong: "In the next few years the price premium over fluorescent lights will be very modest, making it much more attractive for consumers to make the switch."

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