The development of Solid-State Lighting (LED) solutions has been the major shift in lighting technology over the past five years. Tom Smith, Associate in Livingstone’s Industrial sector team, explores some of the current core dynamics in the global lighting market:
McKinsey research estimated that the global general lighting market was worth €73bn in 2011 and that the market will grow at c. 5% per annum through to 2020.
An increasing awareness of energy consumption and efficiency amongst consumers, driven by public and political opinion, volatile energy costs and legislation, has altered the way electric light is delivered and has had a transformative impact on the lighting industry.
Adapting to changing technologies is crucial
A technological shift towards LED lighting and away from incandescent lighting is altering lighting applications and shaping the lighting industry and its competitive landscape. This is ultimately creating opportunities for ‘switched-on’ market participants across the value chain.
This increased penetration of LED lighting will clearly be the main dynamic in the global lighting market over the next five years. The market share for ‘non-green’ traditional products has been declining rapidly since 2011, both in real and proportional terms. The market share of ‘green’ traditional products (i.e. energy-efficient) is expected to remain steady in monetary terms through 2016 but lose market share to LED products before falling in both real and proportional terms through to 2020.
The increased adoption of LED lighting products with longer lifespans is forecast to result in the value of the replacement market for lighting being eroded. Research by Memori indicates a reduction in revenues from sales of traditional replacement products, with suppliers in these markets diversifying into LED fixtures and complete lighting solutions to compensate for the decline.
Away from technology, the lighting market is inextricably linked to the construction and refurbishment sector. In the UK, spending that had been postponed during the recession is now a major driver in the sector, with an increased awareness of the aesthetic benefits of lighting design also a positive factor.
Legislation and cost-efficiencies accentuate drive towards LED
In 2014, LEDs comprised c.11% of the global lighting market, an increase from a base of 0.3% in 2010, this growth is expected to continue.
Frost & Sullivan research indicates that the LED market is expected to grow at a CAGR of 31.8% between 2012 and 2017 due to growth in industrial, outdoor and residential applications. By 2020, it is estimated that LEDs will comprise 61% of the overall lighting market.
The increase in LED light market is driven by both legislation and cost efficiencies (LED products use c.90% less energy than incandescent products). Within the EU, the European Commission aims to have phased out all halogen bulbs by 2016 (potentially now delayed until 2018), driving LED adoption, elsewhere in the world, although usually slightly behind Europe, legislation is heading the same way.
Upsides for early adopters and potential pitfalls
Those companies which are early adopters of new technologies will initially have an opportunity to realise strong gross margins on innovative products as strong ‘value-add’ (perceived or actual) drives product pricing.
As the LED market continues to grow, increasing competition and commoditisation in the market will increase pricing pressure. Any companies wishing to maintain potentially strong margins will need to be willing to invest in R&D to ensure that their products remain ‘ahead of the curve’.
For smaller players in the market, the level of investment required may be inhibitive and consequently they may struggle to compete against larger, better-resourced companies. Maintaining a culture of innovation and a focus on efficient NPD will thus be key.
A current hot topic in the lighting market is Philips’ patent licensing program for LED-based luminaires. Philips’ hold c.1,000 patents covering various elements of LED lighting technology with a fee of up to 5% of net selling price applying to companies using the patented technology. Many companies are already signed up, however, there is a lag, and those companies not already affected may find the additional cost an unwelcome drain on margins.
What does this mean for M&A in the sector?
As the LED market matures, the growing pace of commoditisation will be a driver of M&A activity. As pricing pressure increases, large companies will want to lower cost bases and realise economies of scope and scale in R&D to remain competitive, M&A is the most obvious method of achieving this.
In a commoditised market small companies may struggle to remain profitable and therefore be vulnerable to opportunistic approaches from larger competitors looking for market share. It’s certainly not all bad news for smaller companies, however, as it is those companies that are seen as innovative and/or have found a demonstrable market niche are most likely to deliver a price premium in this kind of environment.