LEDs are poised to take a big share of the general lighting market, with ramifications for EMS.

Over the past several years, the emergence of light-emitting diodes (LEDs) as a form of lighting for residential, commercial and industrial applications has steadily gained acceptance. While still prohibitively expensive on a cost per watt or lumen basis, LEDs are expected to reach parity with traditional forms of lighting (incandescent, flouresent and halogen) sometime around 2015. However, because LEDs have lifetimes up to 50 times longer than the standard bulb, they naturally appeal to a wide variety of commercial and industrial applications where fixed costs are high. General lighting is often viewed as the largest and last bastion of traditional lighting: Governments are legislating changes that seek to ban or phase out inefficient and chemically toxic technologies.

The total general lighting market, including lamps, ballasts, controls and fixtures, is worth approximately $55 billion and is expected to grow to $73 billion by 2015, an annual rate of 6%. The leading market segments are residential (42%), commercial (23%), industrial (12%) and outdoor (23%). Unit shipments of incandescent, fluorescent and HID lamps will give way to LED lamps, which produce greater luminosity per lamp. Although the overall lighting market declined 15% in 2009, the LED lighting lamp market grew a robust 32%. In 2010, the market started to see major outdoor area and commercial retrofit adoptions using LED modules, pushing LED penetration of general lighting to a little above 2% of the total market. Products are still highly variable in terms of quality, but improving rapidly.

To date, cost remains the biggest obstacle to LED adoption in general lighting, if cost per kilolumen is considered. Yet if costs are amortized over their entire lifetime, LEDs are cheaper than other technologies. Most people are not willing to pay the higher upfront cost of an LED light, even though it can last up to 50,000 hr. (Incandescent bulbs have an average lifetime of 1000 hr.) The initial cost and cost of ownership are expected to improve dramatically over time, however. Manufacturing LEDs is a semiconductor process that requires high tolerances, and precision process control and cost reduction are still in the early stages. Board assembly for LED light bulbs is highly automated, but involves a considerable amount of manual labor for attaching components, heat sinks and optics. The total PCB bill of materials is expected to fall by an estimated compounded rate of 34% over the next five years, as greater integration is achieved among the LED die, interconnect, packaging, circuit drivers and other hardware. Box assembly costs, including ordinary materials such as glass, plastic, reflectors and metal base, will not decline nearly as sharply.

The LED lamp assembly market is very fragmented, with companies – large and small – introducing their own lines of light engines for general illumination, which are then sold to luminaire manufacturers. Many suppliers, mostly Asian, tend to eliminate margin from finished products in an attempt to establish market share. Strong unit growth and declining ASPs combine to generate positive revenue growth, but solid earnings are difficult to achieve. Because the market is overpopulated and highly fragmented, suppliers then push costs to the margin, leaving very little for profits. There has been a slow trend toward consolidation, generally resulting in a loose collection of smaller divisions that cater to different application segments. Only multinational companies like Philips, Osram, General Electric, Panasonic, Toshiba, NEC and Hitachi are quickly building manufacturing scale and process discipline. LEDs are expected to emerge as the dominant lighting technology beginning sometime in 2015.

Though designed for local markets, manufacturing of mass-produced solid state lighting (SSL) fixtures is increasingly outsourced to low-cost manufacturers in China, Vietnam, India and Bangladesh. Hundreds of Chinese/Taiwanese and Japanese LED suppliers are looking for manufacturing scale and distribution. Outsourcing seems to be only attractive for export, except among leading manufacturers and suppliers.

Taiwanese LED chip companies like Epistar are following a foundry-type strategy. Other LED makers, such as Cree and Seoul Semiconductors, are trying to extend their business by reaching further down the value chain to LED modules and fixtures.

The Japanese are very active in the LED chip business, as well as partnering with OEMs such as Nichia, Panasonic, Sharp, Stanley and Toshiba. Panasonic in China obtains its LED light sources in the US and sends them to Chinese factories for assembly, which is cheaper than Japan. Sharp reportedly has adopted a massive outsourcing strategy to further reduce the cost of LEDs and power supplies.

The Koreans have targeted the LED market in a similar way to the LCD display market and are actively pursuing OEM component business via Seoul Semiconductor, LG Innotek and many other small suppliers. Outsourcing will likely not be the result, as vertical integration is the normal business model.

The wild-card in LEDs is Osram, which appears to be pursuing a strategy of internal manufacturing (former Sylvania with facilities in Malaysia and China) and outsourcing as long-term partners with leading EMS firms.

Foxsemicon Integrated Technology (FITI), part of the world’s largest contract manufacturer Foxconn, has formed close partnerships with major global semiconductor equipment, LED chip manufacturers and suppliers such as Charm and Ci out of Korea. FITI’s products provide a quick retrofit solution for many applications. The company is generally viewed as a competitor in LED outsourcing, similar to their component supply business.

Cree has contracted with Flextronics, the second largest contract manufacturer, in addition to plans to fill 300 jobs at its Durham, NC, LED manufacturing facility by the end of 2012. Flextronics provides final assembly services in its plant in nearby Charlotte.

The third largest EMS, Jabil, is interested in LED lighting, but only on a limited basis. It is believed that relationships with Osram and Avaga are in discussion.
Sanmina-SCI has specifically targeted LED Lighting as part of its Renewable Energy program. No assembly programs or customers have been identified, although Avago is being pursued.

In March 2010, Philips Lighting selected Elcoteq as a global growth partner of its SSL business. Elcoteq has begun production of SSL products in its factory in Dongguan, China, and expansion to Mexico and Hungary is ongoing.

For more details on the emerging market for LEDs in General Lighting, see our recently released research report, The Worldwide Electronics Assembly Market for LED General Lighting - 2011 Edition. This report sizes the market for LED chip or ICs, chip packaging, thermal management, optics, printed circuit board assembly, including drivers and related electrical components, plus final (box) assembly and test of the LED fixture for a wide variety of applications.

Randall Sherman is president and CEO of New Venture Research Corp. (newventureresearch.com); rsherman@newventureresearch.com. His column runs bimonthly.

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