Green Lighting on a Road to Gold
The world's top lighting companies are ready for the LED revolution, but what about Taiwan's? Where can they find niche opportunities and what are the challenges they face?
Green Lighting on a Road to GoldBy Fuyuan Hsiao, Hsiao-Wen Wang
From CommonWealth Magazine (vol. 423 )
The world is in the midst of a lighting revolution.
Wang Tzu-chien, Taiwan general manager of Philips Lumileds Lighting Company, who only joined the manufacturer of high-efficiency LEDs (light emitting diodes) last year after a 16-year career in the semiconductor industry, is so excited about the changing landscape that he has been eager to get out of bed every morning for the past year, and finds himself full of vigor to begin each day.
"I knew early on that the LED market would grow dramatically," says Wang, who previously supplied lighting manufacturers with power chips and has seen the LED go from a small, obscure light source to a dazzling torch. Wang believes this is the most spectacular revolution to hit the lighting industry since Thomas Edison invented the light bulb 127 years ago. "LEDs are writing history, and they have just finished writing the first chapter," he says.
At the end of April, Taiwan's government approved an ambitious green-energy plan that declared that the country will become the world's biggest producer of LED light sources and modules. Suddenly, an industry that is not even 3 percent the size of the semiconductor sector emerged as a star, the most likely next member of the trillion-Taiwan dollar club.
Green Movement Puts Light Bulbs in Spotlight
There is no better way to describe the rise of the LED industry than as "a hero that is the product of its time." In this era of global warming and high crude oil prices, the environmental movement has targeted the lighting sector as its top candidate for a revolution, because it has remained relatively stagnant in recent decades and sells products that consume about 20 percent of the world's electricity.
In today's global lighting sector, incandescent bulbs, which waste 70 percent of the energy they consume, still have a 75-percent share of the market, while energy-saving bulbs account for the other 25 percent. Some 13 billion incandescent bulbs were sold in 2007 alone. To reduce carbon dioxide emissions, many countries have recently passed legislation that will phase out the sale of these traditional sources of light.
This year, Ireland became the first country to actually enforce a ban on incandescent light bulbs, and the United States, the European Union, Taiwan and other countries are set to ban the sale and production of the bulbs over the next four years. (Table 1)
Philips Lighting's headquarters in the high-tech center of Eindhoven in the southern Netherlands is a shining example of the new revolution. On a May day when the thermometer climbs no higher than 10 degrees Celsius, the building's lobby appears unusually warm, glistening under its warm white LED lights.
Harry Verhaar, senior director for Energy & Climate Change at Philips Lighting, has been with the world's biggest lighting vendor for 23 years. As he recalls installing LED lights for his two young children in his family's new house, he still feels the sensation that everything has turned out like a dream, beyond anything he could have imagined.
Five years ago, Verhaar created a task force within Philips on lighting and global warming to push LED lighting and plan to promote it in other European Union countries. He calculated that LED lighting saves at least 40 percent of the energy used by traditional light bulbs, and if all lights around the globe switched to LED, the world would save 120 billion euros in energy costs and reduce carbon dioxide emissions by 630 million tons every year.
"That is, 1800 million of barrels less," says Verhaar, who is known inside Philips as "Mr. Green." He believes that using LEDs to replace traditional light sources will be the green revolution with the fewest negative effects and the best results.
Six thousand kilometers away, in Taipei County's Tucheng, stands the headquarters of Taiwan's biggest LED packaging vendor, Everlight Electronics Co. Its president Robert Yeh waited for several difficult years before seeing the dawn of the LED green revolution.
Yeh looks back at his 32 years in the lighting business with a tinge of emotion. Everlight got involved in the LED business in 1995, a time when many scoffed at the sector's prospects and derided it as not worthy of being called a "high-tech" sector. Only over the past 10 years, when blue and then white LEDs came on the market, did the product begin to thrive as though it was the lighting industry's savior.
As Yeh has personally experienced, LED technology is now making daily advances, improving at least 30 percent every year. Applications that could not have been imagined in the past are now emerging one-by-one and being introduced "so quickly that there's no time to prepare."
Niches and Threats
Traditional lighting giants U.S.-based General Electric, Japan-based Nichia, Netherlands-based Philips and Germany-based Osram have long been sharpening their swords, consolidating patents and making acquisitions in preparation for the "green lighting" war centered on LEDs.
In contrast, Taiwan's development of the LED lighting industry may find some niches but also faces several challenges. In terms of time, Taiwan's niche opportunities are now, while the challenges will come in the not-too-distant future.
Niche: The LED's similarity to the semiconductor means that Taiwan's upstream and midstream supply chains are complete and highly competitive.
Taiwan's LED output value is second only to Japan's, and its industry has a complete division of labor, from upstream LED chips to midstream modules and packages. B.J. Lee, the chairman of Taiwan's biggest LED producer Epistar Corporation, says Taiwan is the biggest producer of red and white LEDs, and with the semiconductor industry providing strong support, the country has an inherent advantage in developing its LED sector.
Threat: Taiwan only has an LED components industry, not an LED lighting industry.
The threat to Taiwan's LED industry stems from its excessive tilt toward the semiconductor niche. Manpower is deployed in upstream and midstream businesses, while the huge consumer and business-to-business downstream lighting market has been largely ignored. Simply put, Taiwan only has an LED components sector but not an LED lighting industry.
In contrast, the world's two biggest lighting vendors, Philips and Osram, have vertically integrated their LED operations, from chips, light sources, drivers and modules all the way to downstream lighting fixtures and other applications. In recent years, the two companies have acquired more than 20 LED chip and lighting makers to gain complete control over the entire value chain.
Why do international vendors invariably opt for vertical integration?
Philips Taiwan general manager Edward Po observes that the LED sector is now in its initial development stage, when the vertical integration model is most advantageous. The most profitable segment of LED lighting is downstream applications (billions of light bulbs are sold globally every year with output value in the tens of billions of U.S. dollars). Once control over downstream applications has been gained, whatever kinds of modules or chips are needed can be made most efficiently in-house. This is the opportunity international vendors are targeting. Only after the industry matures does a vertical division of labor occur. The big multinationals release their hold on the business because it is no longer profitable and farm their needs out to subcontractors.
In other words, the multinational vendors have entered the market through the downstream applications and distribution segment, and then put resources into midstream and upstream functions. Taiwan's LED makers, on the other hand, have entered the market through the components segment and are pouring their resources into the supply side while ignoring downstream functions such as lighting fixtures, design, branding, and distribution.
Turning Supply Niche into Trillion-dollar Industry
Local LED vendors are not unaware of the problem. Everlight's Yeh acknowledges, "Only with lighting applications can there be a trillion-dollar industry." Yet most LED operators have semiconductor backgrounds and do not understand the lighting business. They excel at subcontracting but are unfamiliar with what consumers and special customers want.
"Ultimately, those who have the ability to sell end up winning," admits Frank Chien, the chairman of LED epitaxy maker Formosa Epitaxy Inc. Taiwan can produce hundreds of millions of LED chips, "but where is the outlet for the products?" Chien wonders.
In the boundless expanse of LED light, Taiwanese companies are, in fact, working hard to develop market access for their products. Unity Opto Technology Ltd., Taiwan's biggest LED backlighting supplier with sales of more than 10 million LED bulbs last year, formally entered the LED lighting market in 2008. In search of an outlet for the company's products, Chairman C.H. Wu traveled to the United States to meet with distributors, offering to make LED desk lamps and lighting fixtures to order, and he ended up building a network that exposed his company to numerous opportunities.
Wu, who has converted all of the lighting in his house and office to LED lights, is not pessimistic. He believes that the demand for lighting right now is in the replacement market and in the future will be the creative market, leading to a battle between the two extremes of distribution and high-quality products. The upscale market involves customized and low-quantity/high variety shipments, which are Taiwan's strong suit. Unity Opto Technology's efforts in cultivating their own fixture and lighting designers could represent a future trend, leading to the emergence of an LED design industry just as the IC design sector emerged in Taiwan to complement local IC manufacturers.
Patent Land Mines Everywhere
As Taiwanese enterprises navigate the world searching for new outlets, patents invariably are the sirens that tempt them into capsizing.
Yeh mockingly calls the LED sector "a high risk, high danger but not necessarily high profit" industry. The high risk refers to fast-paced changes in technology, which means that when new products hit the market, a new updated technology has probably already been introduced. Even a market leader like Philips has had products that have become obsolete after just two months on the market.
The high danger hints at the constant fear in the LED industry of carelessly stepping on a patent land mine. The key LED technologies are in the hands of the world's top five vendors (GE, Nichia, Philips, Osram and US-based Cree). In particular, the big multinationals control the technology to convert monochromatic light from blue LEDs to broad-spectrum white light.
Even Epistar, which has more than 1,000 technical patents and dominates the LED chip market, cannot escape getting entangled in lawsuits over patent infringements."The patent war has been over for a while now. The big five have given each other reciprocal authorization, keeping everybody else out," says a resigned Epistar chairman Lee, who began his career at Taiwan's Industrial Technology Research Institute. Unless local vendors are able to stand on their own and develop patents that they can use to barter for authorization rights with the big five (such as Everlight's trade of a packaging patent in exchange for Osram's blue-to-white patent, which can be used in regular lighting or automotive lighting applications), Taiwanese suppliers will have to pay royalties or serve as subcontractors to the big international players.
Little Gleam for Little Greens
Aside from coping with distribution and patent challenges, the most fundamental test for Taiwan's LED sector in becoming a trillion-Taiwan dollar industry is quality.The first company in Taiwan to get involved in the LED business was Lite-On Technology Corporation. Unity Opto Technology's Wu, who left Lite-On to start his own business, cannot stop himself from getting angry every time he notices LEDs in traffic lights that are not working. "Go take a look at how many LED traffic lights are broken," he says.
As a big customer of LED lights, JK Yao of the architectural lighting design firm Chroma33 has his own stories of woe. An architectural lighting project can use more than 1,000 LED lights, which are supposed to last for tens of thousands of hours, but he has often experienced a 5 percent defect rate within two years. To fix the problem, either entire fixtures have to be removed and discarded (which can harm exterior walls or lead to water leaks) or replaced completely.
"This is called a short life, not a long life," complains Yao, one of Taiwan's earliest, and heaviest, users of LEDs. "I guarantee that I will never see LEDs replace traditional lighting in my lifetime."In fact, to be able to see LEDs supplant Edison's invention during this era in which we live is still an impossible dream.Pricing is a major impediment to a breakthrough, as LED lights are three to five times more expensive than energy-saving light bulbs and have a payback period of more than 10 years.
The cost of electricity is also a critical factor in how widely LEDs will be used. According to a study done by Formosa Epitaxy's Chien, the regions buying LEDs from Taiwan in the biggest quantities are those with the highest electricity prices, such as Europe and Japan. Because Taiwan's electricity is relatively cheap, there exists little incentive to convert to LED lighting.
This is just one of a number of key issues Taiwan must address before the government succeeds in transforming the LED sector into a trillion-dollar industry and the island becomes a major global player in the LED industry.
Translated from the Chinese by Luke Sabatier