LED Lighting Industry and Value Chain Shift

The LED lighting industry is similar to the computer industry in some ways: parts and components are designed and assembled to make up products. The operation of computers is controlled by the CPU and the operating system. For many years, Wintel (Microsoft Windows and Intel CPU) has dominated the market and most of the profits went to the two companies. System integration manufacturers or other component suppliers can earn better economic profits in their respective fields by applying different business models or product differentiations. For example, Dell made profits by conducting B2B direct sales via the Internet and adopting the BTO mode in the early stages. Asus makes products different and builds a brand in order to distinguish itself in the motherboard industry.

Compared with computers, LED luminaires are simpler because they only have few parts and components. The lighting control is optional equipment, which can be directly built into the luminaires by the manufacturer. Or, the architects and lighting designers can enhance the added-value comprehensively.

There is also a component in lighting products (LED lighting module) with the function similar to the CPU in computers. The LED driver drives the lighting module and then generates light and heat. The LED lighting module requires an efficient thermal design to ensure the consistency of the lighting quality.

The LED process is part of the semi-conductor process and is similar to the CPU and memory of computers. The luminous efficiency will continue to increase.

Major marketing research companies have different statistics on output values. Generally speaking, the total annual output of computers reached USD 250 billion and the output value of the entire lighting market was USD 110 billion last year. The output value of LED lighting constituted about 25% of the entire lighting industry in 2014. In the next few years, the output value of the lighting market is expected to account for 40% ~ 50% of the computer market.

As for the market share and concentration, the computer market currently seems to be monopolized by the top 10 brands and the regional brands only have an extremely low share which has been declining. The output value of Philips, OSRAM, Panasonic, General Electric, Acuity Brands, Zumtobel, Toshiba, Cooper Lighting, Cree and Hubbell combined accounted for less than 30% of the market share in the lighting industry.

GlacialTech makes the following development forecast for the LED lighting industry:

The competition in the LED lighting industry will become fiercer than that in the computer industry.
Computers are made up of several components, parts (hardware) and operating systems (software). Therefore, it is more complicated to integrate and products are tested in a more stringent way. Moreover, product differentiation can be clearly seen because of the operating system which each computer is equipped with, hence the computer industry has less price competition when compared with the lighting industry.

The LED lighting module will continuously take less percentage ratio in the bill of materials, lower than the LED driver and thermal module.
The CPU (soul of computers) market is almost monopolized by Intel and AMD occupies only a small portion. In the LED lighting industry, there are several world-known LED package brands and a number of regional suppliers around the world, leading to a severe price competition in the LED package segment. On the other hand, the computer industry is almost dominated by Intel alone. The LED process is part of the semi-conductor process and the price-performance ratio will continue to rise. The price-performance ratio of highly-efficient LED lighting modules will be $0.13/W by the end of the year. We forecast that the price of 150 lm/W or above (85 °C typical) of LED lighting modules will drop to $0.1 (1 dime) /W or below by the end of 2016. The LED lighting module cost for 100W LED luminaires will be around USD 10 by the end of next year. To make a 100W middle and high-end LED luminaires, the cost of the thermal modules or LED driver will be double or even triple than in LED lighting module. The cost of thermal modules depends on the cost of materials and manpower. The materials cost is almost fixed unless the price of raw materials slumps. There is seldom a huge rise or fall. In addition, the manufacturing process is still labor-intensive and has complicated manual operations, unlike the highly automated LED package process. The LED efficiency continues to rise but the price is still declining. On the other hand, the cost of power and thermal modules has limited room (%) for decline.

The average gross profit margin of LED lighting modules is lower than that of other parts and components.
Provided that it is a free economy without governmental protection and intervention, LED packaging requires high capital and human investment compared with the LED driver and thermal design. To establish a packaging house, capital is needed to purchase equipment and high-paying professionals from different fields are required to design highly efficient products and control production quality. Depreciation on the equipment over the years will be marked in the financial statement. In power or heat sink industries, only a few senior design engineers are enough for designing products with the high price-performance ratio, and therefore the manpower cost is relatively low. Regarding the production equipment, the equipment used to manufacture LED driver and thermal module is often generic. The equipment has already been used to manufacture other products for many years. Hence, the machines have been fully depreciated.

The LED COB package has a promising future.
Considering environmental protection, consumption of resources and continuous improvement of COB quality and efficiency, the sales of the COB package will continue to rise in the following years. COB package products are suitable for more LED luminaires design. There are already 100W, 200W and even 300W single COB in the market. It is easy for luminaires manufacturers to make a 100W~300W (system efficacy 100+ lm/W, CRI 80) lighting products with one COB coupled with one quality thermal module, high-efficient power and lens. The materials cost is lower than that of the traditional process in which multiple LED, big size MCPCB and lens were used. In addition, assembly becomes easier, leading to lower manpower costs.

Vertical integration and horizontal division of work are applicable in different production lines.
Whether vertical integration or horizontal division of work is applicable to an industry has been discussed in enterprise management courses and involves different aspects. In the lighting industry alone, bulbs and tubes are relatively low-priced, making them suitable for vertical integration. Low-priced and competitive products should be manufactured with fully automated process at one production area, from LED package, plastic injection, metal press, assembly to the final packing process. As for premium lighting products, they have different applications and differentiated shapes and functions that vertical integration may not efficiently improve the price-performance ratio of individual components to make the products more competitive. Hence, the horizontal division of work may be more applicable only to premium lighting products.

The well-known brands still enjoy high publicity and dominance; however, innovative technology and new generation products often bring development opportunities for many emerging companies. It can be seen from the history.
The computer seems an unthinkable dream half a century ago and it was a huge super computer which required a huge space and continuous inflow of cold air to reduce the temperature during operations. However, the standardization of the industry and horizontal division of work reduced the size of the IBM super computer and DEC (Digital Equipment Corporation) rose accordingly. Minimization continues and Sun Microsystems and SGI were developed and development continues in the personal computer today. The LED industry is simpler than the computer industry. Thanks to abundant high quality LED package suppliers, the luminaires manufacturers have many choices. With the development of COB, luminaires manufacturers only need to add on a thermal module and a LED driver together with appropriate mechanisms and a lighting product is almost done. This is the reason why more and more new companies continue to join the industry in addition to world-known brands and regional brands.

We have described the current status of the industry and made the forecast above. However, each company which finds its own position in the same environment and selects the appropriate business model can generate higher economic profits than its competitors.

Source and copyright :GlacialTech INC.(洋鑫科技)
Published date : August 13th, 2015
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