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Analysing growth strategies of key LED manufacturers

The LED manufacturing is a perfect example of an industry where the government, industry participants and consumers came together to create an energy efficient option which proved to be competitive and helped reduce greenhouse emissions. The lighting market was initially dominated by incandescent and linear fluorescent lamps. However, the more efficient but relatively expensive LED has quickly gained the market share due to a rapid price decline and improvement in product’s performance.

     

                                                                                    *Estimated

The leading companies had to undertake various steps in order to succeed in this quick transitional phase of the lighting industry. The two parallel business models in the LED industry have been vertical integration and diversification. For instance, in 2015, the companies which previously focused on the LED chip market sector such as Cree and MLS started expanding in the downstream lighting sector, widening the scope of their vertical integration. In stark contrast, traditional lighting players including Philips and Osram separated/spun off their key lighting businesses.

Philips sold its LED components business ‘Lumileds’ in 2015, the company bought Lumileds in 2006 when there were only a handful of quality suppliers and Lumileds was the leader in high power LED lighting technology. But, in the present scenario LED technology has matured, Chinese manufacturers have emerged as leaders in production volume and have close to 40% of the market share in LED production due to economies of scale. 

In this new environment as the prices of LED sharply declined due to intense competition from China and oversupplied market, Philips resorted to outsourcing in order to maintain its cost competitiveness. The company adjusted its procurement strategy, 40% was outsourced and 60% was procured from Lumileds. Thus, witnessed an increase in market competitiveness of its lighting segment. Philips realised the cost advantage of outsourcing and returned to its roots. The company concentrated on lighting and spun off Lumileds by selling its patents and brand advantages. However, the firm kept a 20% stake in Lumileds due to its strategic value and role of a significant supplier.

Osram was known as the largest bulb manufacturer and manufactured a third of the world’s bulbs in 1995. The company entered the LED market leveraging on its global distribution and brand advantages. Osram positioned its business in the mid to high-end market. This made it difficult to compete with the low-priced products made by Asian companies and its lamps and luminaries solutions. The company’s EBITDA dipped into red several times. Therefore, the firm decided to separate its less profitable general lighting business (lamps and luminaries solutions) that accounted for 40% of the revenue so that it can focus on automotive lighting and LED component business (speciality lighting and Opto semiconductors), this seemed more lucrative to Osram.

Although the two large players decided to spin off their LED segment, Cree is an epitome of vertical integration with an entirely different development path and the only vertical chip maker in the market. It was difficult for Cree to market its products as no manufacturer wanted to tie down to a single supplier. Therefore, after establishing itself as a LED chip manufacturer, Cree ventured into the LED package manufacturing. In addition, despite its incompatibility in the mainstream technology, it was able to acquire market due to its high brightness expertise. The strategy proved effective and Cree became one of the top 5 LED manufacturers in the USA. However, as the market expanded and price became the centre of competition, Cree was at the risk of losing its price sensitive customers. Hence, Cree once again strongly promoted vertical integration and entered the lighting market. Its lighting products presently form more than 50% of the total revenue and the company is the third largest manufacturer of lighting products in the North America.

MLS, a Chinese lighting company used another success strategy, this was purely based on its cost leadership. In comparison to several other Chinese companies, MLS has been expanding at a higher rate.

The key to MLS’s exponential growth lies in its business model, the company did well under similar operating environment and industry developments. It adopted the cost leadership business strategy which was difficult to replicate by its peers. MLS cost per LED was much lower at RMB 16.5 per LED (FY 2015) as compared to Nationstar and Hongli while Refond is primarily into LED packaging.

However, the cost leadership strategy comes with its own risks, especially in the LED industry, where the market and technology is changing rapidly. For instance, if CSP (chip scale packaging) LED manufacturers succeeded in eliminating LED packaging as claimed by them, then existing LED packaging vendors with considerable package production capacity and technology will lose all their advantages and even risk losing their market competitiveness. Furthermore, like the Chinese government, other economies may also introduce favourable policies for the LED industry to promote upstream integration and bring down prices considerably.

In conclusion, it can be stated that not all vertical integration strategies have been successful. The upstream integration strategy of Philips failed due to cost pressures from Chinese manufacturers. Whereas downstream integration by Cree worked well owing to its better technology, MLS succeeded due to favourable government policies and cost leadership strategies. Therefore, companies need to focus on their core strength and capture increasing market share through cost leadership and advancement in technology and innovation.

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