Look for Price Increases in 2017, led by BigChinaLED

The word ‘influential’ is not the right word to describe China’s growing role in our industry. It is more than that. Much more.

There are 30,000 lighting manufactures in China and they have one thing in common.  Jack Zhang.   Mr. Zhang runs a media company in China focused on the Lighting Industry, and he owns the GG LED Conference, which your humble editor recently attended.   You won’t find information about GGLED on the Internet, as Mr. Zhang prefers We-Chat, which is a combination of Skype/WhattsApp/Facebook/Venmo and even Uber. 

Your humble editor was asked to speak at the event and it was unlike any I have ever attended. 

Have you ever been in a large conference and the speaker cracks an inappropriate joke, and you just cringe a bit, but no one else seems to mind?  What if that speaker continued talking about a subject that you found very uncomfortable, but at the same time you were quite curious. Would you leave the meeting?   What if you had spent a few thousand dollars to fly across the world to attend that meeting and the other 499 people in the audience found it perfectly normal.  Would you stay?

That is the dilemma I had in early January.  The subject:  Price Increases. 

While we may dream about price hikes in the U.S., they are rarely discussed in an open forum, much less with competitors present. 

EdisonReport has always believed that price increases are healthy for our industry as it allows us to invest in R&D and funds our employees to be active in organizations, such as IES, that further the art and science of lighting.  However, we in the U.S., have to follow the letter and the spirit of the law. Our industry is now very dependent on China and they have different laws.  This is the conundrum. 

In the old days, ballast companies led the industry-wide price increases.  Luminaire price hikes, without a prior ballast increase, happened on an irregular and ugly basis.  With BigChinaLED controlling so much of the US market, I have often thought price increases were improbable especially with 30,000 lighting manufactures in China.  However, after the GG LED conference, I have reversed course.  Not only do I not think that price increases are improbable, I now think meaningful rises are likely in 2017.  

GG LED isn’t a typical conference; it is unlike anything in the U.S.  I tried to compare it to our typical Western events, but none came to mind. 

It’s not like an IES Annual Conference, as there are 500 people in attendance, but not one committee meeting.

It’s unlike LIGHTFAIR, as there is no tradeshow.   

It is not like Strategies in Light in that I did not meet one investment banker or VC and there were few technical talks.

It is unlike GE’s Edison Awards, in that hundreds of trophies are given, but they are presented to manufactures, not lighting designers.

It is an open discussion of ideas, more market-based than product-based.  

The purpose of GG LED doesn’t necessarily seem to be to report on the industry, although Jack and his team do that brilliantly.  Jack seems to manage and promote the industry.  You leave the meeting with the sense that he has the industry’s back, and he unabashedly speaks of the need for price increases throughout all three Tiers. 

Although there are Chinese 30,000 manufactures, in a way, it is a closer community than the U.S.  While there are several commonalities between the China and US markets, one stands out.   A fierce competitor for one product may also be your customer for another product.

All the big names were in attendance Lumileds, Inventronics, MLS, Epistar, Leedarson, Honglitronic, MTC, PAKYankon, HC Semitek, and Nation Star.

GG LED celebrated its 10^th anniversary and entertainment was provided by people who work in the industry. One segment included an amazing rendition of Amazing Grace, after which Jack discussed his faith in God in front of the 500 audience members.   This is Shenzhen and you read the above correctly.  It was touching and I don’t’ recall hearing religion mentioned, ever, at any other conference, anywhere.  

Thursday evening there was a full dinner with much alcohol—followed by a two hour Q&A session.  When your humble editor was IES President, I had to stand before our audience at the Annual Conference and field questions—and I was a nervous wreck.  Bill Hanley planned this for early in the morning, as he said,  “So you can be as sharp as you are capable of being.” The GG LED conference held their Q&A after two hours of heavy drinking.  Business is different in China.

Below are my notes from the discussions:

We think of Teir 1’s as large conglomerates, Tier 2’s as large independent luminaire manufacturers, and Tier 3’s,  as the mom & pops.  Not in China.  Tier 1’s are the die companies, Tier 2’s are the packaging companies and Tier 3’s are the luminaire companies. 

Tier 1 (Die manufacturers)

• Tier 1’s must expand if they are to survive.  As they get bigger and control the market worldwide, they can only experience prices increases for a limited period of time; sooner or later they have to lower their costs.  Their key to survival is to improve their technology. If they only play the price increase card, they eventually will die. 

Tier 2 (Packaging)

• Cost competition is number one issue facing the 2^nd Tier.  They must be very careful to manage supply chain.

• There are some very BIG NAME companies now sourcing packaging from China but they don’t’ advertise this.  

• In 2015, there were 1532 Tier 2 packaging companies, by 2020 there will only be 500. 

• LED packaging demand will see a 24.6% CAGR from 2015 to 2020.  Packaging capacity today is only at 50% of what demand will be in 2020, so there are real capacity issues.

• One of the guys who I had dinner with stated that he has been in the business for 26 years and had received 9 different cost increases.  Only one time was he able to pass on the increase, the other 8 times he absorbed the hit. 

Tier 3 (fixtures/luminaires)

• If you are a 3^rd tier and not a big player in China, you are pretty much dead.  A few name brands, not necessarily big players in China, have left, most notably GE and Samsung.  There is a void because name brands left. 

• When the dust settles the industry will be left with 10 to 20 Tier 3 players.  Some in the audience pushed back and think the number will be 30 to 40.  All agree that the number of Tier 3 luminaire companies will drop drastically. 

Controls:

• 5G might be a hope for IoT. 

• Control for smart lighting should be voice or motion.   Controlling lighting with Apps on your phone is old news.

• Controls are now in the adoption state and no longer in the early adaptor state.

• In  2017 CEO’s should focus their attention on money management and cash flow.  To ensure their survival.  Let the CTO worry about technology.

Streetlights:

• Europeans cover the heat sink with a flat shield so bird debris can gently run off and not clog the heatsink. The US and China have open heat sinks. There was a joke that China did not need the shield as pollution had killed off all of the birds.

• Standardizing streetlights in China will always be very difficult, as each province has their own specs to protect local companies. One streetlight manufacture says that the safety requirements required in the US are really meant to keep outsiders out. 

• As efficiency increases, modularity is less important.   Much discussion that it is too early to standardize the modules, because the industry would be forced to standardize on large modules.  Industry should wait for more improvements, then standardize. 

Other

• Much discussion about treating quantum dots as a phosphor, as it is less costly.  Today: blue led plus phosphor; tomorrow:  blue led plus quantum dots.

• MicroLED for backlighting is huge in China as general lighting is still small.   Most companies in China do not make money on General Lighting, but they make it in backlighting. 

• 2016 was the calm the before the storm.  By 2018, the industry will be more settled; it will be pretty clear who the winners are.

• The worldwide LED adoption rate for LED in general lighting is 36% as of 2016 and the rate of increase is declining.

• US LED projected to grow 5% from 2016 to 2017

• China, as a whole, is still a very small portion of LED worldwide sales. 

• Expect price increase across the board—in all lighting.   Everyone will fill the pressure and have financial challenges. 

• Filament bulb manufacturers had a major capacity increase in 2016 

• 2016 saw 30% fewer mergers as compared to 2015.  

• Drivers used to be solely about price. Today reliability and other characteristics are more important.  Drivers were 36% of cost of streetlight in 2014 and 39% today.

• A Taiwanese manufacturer can live on 10% margin because of low R&D costs and low management costs.  U.S. companies must have a minimum of 30% margin to survive.   But Taiwan companies don’t have government sponsorships as some Chinese companies do. Conversely, the Taiwan companies have a huge advantage in that they can sell worldwide whereas some of the Chinese companies can only sell in China because of IP reasons. 

• Industry still has a problem in that we talk about price and not value.