Global LED Market Is Characterised by Bidirectional Trends

03 Sep 2015 • by Natalie Aster

The global LED market goes through a very interesting transitional phase. It is quite difficult to talk about this market in unified terms as it is highly fragmented (on a regional, sectoral or corporate basis) and involves multiple downstream, midstream and upstream players, manufacturers and distributors, regulators and stakeholders, innovators and consumers, to name only a few. All of these actors might have different agendas and diverse development trajectories.

However, despite this diversity it is possible to talk about some commonalities and general trends. First and foremost, the future development of the market, despite current and expected pitfalls, seems quite optimistic, which is predetermined by the whole range of factors, including intrinsic advantages of LED lighting solutions, environmental concerns and current proliferation of innovations. On the verge of the United Nations Climate Change Conference which will be unveiled in Paris in the end of 2015 and with an urgently needed consensus on GHG reduction, the attractiveness of green and clean technologies, such as LED, is immense. It is worthwhile to mention that the potential of LED in the GHG abatement was strongly substantiated in the influential report entitled ‘Reducing US Gas Emissions: How Much at What Cost?’ by McKinsey and Company (Creyts, et al., 2007), which clearly showed how the application of LED lighting in residential and commercial buildings combined relatively high GHG abatement potential with low (actually negative) marginal costs.

According to the Report, ‘lighting today accounts for 19 percent of the emissions associated with buildings’ and ‘lighting retrofits offer 240 megatons of annual abatement potential by 2030, making it one of the largest and most-effective ways to abate GHGs.’ Thus, the importance of LED lighting opportunities could not be overestimated.

The role of LEDs in GHG reduction acts as one of the most important drivers of the today’s LED market urging many governments to phase out old and inefficient lighting technologies in favour of new and clean ones. The proliferation of LED technologies was shown in the paper by Dechezleprêtre, Martin and Mohnen (2013), which demonstrated how knowledge spillovers from clean technologies (incl. LED lights) received on average 43% more citations than dirty technologies. On the basis of this finding, the paper contains a call to increase governmental subsidies for such technologies as LED lighting and provide bigger public support to them. This is what actually happening right now via adoption of various legislation, programmes and other measures. For instance, the French government will be giving away one million LED bulbs to low income families in the country, according to The Connexion.

Another example is the Government of India, which is going to replace all street lights in the country with LED bulbs in next 24 months. The Chinese government has given prime significance to energy-saving renovation projects by including them in ‘the 12th Five-Year Plan’. Such regulatory measures undertaken by many governments proliferate, and they act as another important driver of the global LED market.

Dechezleprêtre, Martin and Mohnen (2013) explain the above-mentioned dissemination of clean technology knowledge by the fact that clean technologies have more general applications, while they are radically new compared to more incremental dirty innovation. The increases in usability of clean technologies, like LED, are really breathtaking. Nearly each month brings us new possibilities and novel ways of using LED in outdoor applications (street and area lighting), science, industry, architecture, medicine, office and homes, retail and hospitality, day-to-day life, to name only a few. Many applications arise via the intersection and cross-penetration of various technologies and fields. For example, a novel LED application implies the use of electric current-generating biological objects, like plants, powering traffic-related LED fittings, which has been already applied in the Netherlands. Another driving force comes from the premises of Haitz’s law which states that every decade the cost per lumen falls by a factor of 10. This actually means good news for customers since the cost of the technology is dropping every year as the products improve.

However, further proliferation of LED technologies and imminent market maturity comes at a cost. The global LED market is currently hit by oversupply, extremely high competition, reduced demand (at least in some sectors like large backlight displays and mobile appliances), eroded profit margins and other ensuing consequences. Lower barriers to entry, which is characteristic of the LED lighting industry in comparison, for example, with PC engineering, increase the number of LED providers and cause stiff price competition. Thinner profits of LED manufacturers will be partially offset by the technological advances (like CoB technologies), which may reduce labour and manufacturing costs. This will be particularly true for LED drivers and thermal modules, whose manufacturers are placed better to retain the value.

The situation on the global LED market may be further aggravated by the volatility of the global economy and the current economic slowdown in China, which over the years has become the largest producer and consumer of LED components and devices. The outcomes of such competition are twofold or actually multi-fold with some companies trying to struggle, some surrender and some winning. For example, Sharp (affected by prolonged revenue losses and in need for restructuring) is recently considering closing its LED plant in Mihara. Similar decision was previously take by Philips, which decided to sell a major stake in its lighting business.

According to Taiwan-based LED Forum 2015, organized by LEDinside, ‘the destructive competition has forced manufacturers to shift their strategies and focusing on the niche market, which covers automotive LED, UV, IR, flip-chip, CSP, and other highly profitable LED products, for margin improvement.’ It is important to mention that market segmentation imposes specific requirements for LED products, constantly shifting attention to new trends and new possibilities. For instance, LED used in the automotive segment must comply with various specific requirements, like the conformity with automotive standards, usability in harsh and unpredictable conditions, weight minimization, general applicability for such a complex system as a car, special needs of after-service replacements, criticality of some functions, etc.

The tough competition leads to the promotion of various LED-related services, approaches and technologies. For example, connection of LED lighting with HEMS (home energy management system) is a way of increasing added value. According to WinterGreen Research, there were about 500,000 homes introducing HEMS in Japan at of the end of 2013 and the goal in Japan is to increase the number to five million. Another potent strategy to combat high competition includes acquisitions, spin-offs and existing business restructuring. For example, there were 10 acquisition cases in China only in June 2015. Struggling Japanese manufacturers have to either close down their LED facilities or to transfer them elsewhere, like the move of Panasonic which mulls the transfer of its LED-manufacturing plant from Indonesia to Japan in October 2015.

Thus, we associate the LED market with growth opportunities, various intrinsic and external driving forces and a large potential for bright future, on the one hand, and doom and gloom of harsh realities marked by oversupply, decreased capacity utilization rates, price reductions, sunken margins, acute competition and patent legal battles, on the other hand. These bidirectional and often confronting trends make the current LED market state and future development scenarios even more interesting.

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Natalie Aster
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