A Brighter Idea from Philips

Light-emitting diodes, those silicon chips that burn brightly but consume far less energy than regular bulbs, are in their infancy as an industry. Sales of LEDs last year were about $2 billion, or less than 3% of global spending on lights. Yet the world's biggest lighting company is already bracing for the day LED components shrivel in value.

Philips is aware that, before long, the cost of LED technology will plunge, as it did for semiconductors 20 years ago. It's a problem the Dutch conglomerate knows well: Its DVD players went through the same dizzying cycle. So even as Philips stakes its future on LEDs, it's working hard to prepare for the technology's commoditization.

In the past five years, Philips has spent $5 billion on acquisitions to ensure it controls every link in the LED chain. It aims not only to manufacture the chips, fixtures, and digital controls for the next-generation technology but also to combine all that into sophisticated systems for such customers as city governments and large corporations. "This is where we go beyond individual components," says Rudy Provoost, CEO of Philips Lighting. "We can create a lot of value by offering entire solutions."

In the past, Philips Lighting simply made bulbs and fixtures without much consideration of the needs of individual customers. Now Philips is working with clients from the start and bringing in outside partners to help design specialized products for them. Last year, Provoost created Philips Lightolier, which links distributors, architects, contractors, and even banks (for financing) to help Philips serve new lighting buyers. "We want to make sure we understand what the end-user needs and that all the pieces are connected," says Philips Lightolier CEO Zia Eftekhar.

One new project is JW Marriott's 34-story hotel in Indianapolis, set to open in 2011. Working with a local designer, Type A Productions, Philips has custom-designed LEDs that fit into the ceiling, engineered the power system and light controls, calculated the energy savings, and offered financing advice. The one-stop service "gave Marriott the confidence to put this new technology into a high-profile project," says Sarena McComas, a partner at Type A.

With 85% of U.S. office buildings still relying on 1970s-era lighting, Provoost is counting on snagging more customers. The recession has been hard on Philips Lighting. In the third quarter, sales were down 13%, to $2.5 billion, and operating profit fell 29%, to $60 million. Even so, Philips is pouring 5% of sales into LED research. LEDs were nearly 10% of the unit's $10.5 billion in sales last year, and Provoost says they will hit 80% by 2020, when the global LED market could be $95 billion.

Competition will be fierce. Siemens' (SI) Osram, General Electric (GE), Sharp, Samsung, and Cree (CREE) are all moving into LEDs, although none has made as big a bet as Philips, says Vrinda Bhandarkar, senior analyst at market researcher Strategies Unlimited. Still, she warns: "No matter how big you are, profits will eventually come under pressure. Philips will need to keep innovating."

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