Philips and Osram’s complex lighting systems race

Royal Philips NV (PHIA) and Osram Licht AG (OSR), two lighting market leaders have been adapting to the changes in the lighting industry that have come about with the light emitting diodes, and they’re doing a great job so far.

Image credit: flickr User: irondaze
Image credit: flickr User: irondaze

Long gone are the days when we bought bulbs that had to be replaced in a year or two. Now, LED technology offers bulbs that last over 20 years, so not just about selling a product anymore. It’s about maintenance as well.

According to an article on Bloomberg, both Philips and Osram have been adapting really well to this new era of servicing whole cities, as opposed to households. Namely, Philips was awarded a contract to upgrade 13,000 lighting fixtures in parking lots, along with a 10-year maintenance deal by the city of Washington. Both parties benefit from the deal since the company has a long-term income and the city cuts the energy usage by 68%.

Osram, the second-biggest lighting-maker in the world, claims that solid state lighting, meaning LEDs, infra-red and laser-based products, will account for two thirds of the global lighting market by 2020. Providing long-term services is what these companies try to achieve.

“It’s not about product anymore: It’s about product, systems and services,” said Eric Rondolat, Head of Philips’ lighting operations in an interview in Frankfurt.

“It used to be the case you could leave a light bulb in a warehouse for three years without any problem,” Osram Chief Executive Officer Wolfgang Dehen said at a Munich conference on March 18.

“Now, LEDs are developed, produced and sold all within six to nine months.”

The race is on. Both Philips and Osram now have to demonstrate they can provide entire lighting solution and they’re doing a great job so far: Osram announced it would design and equip the Sistine Chapel in Rome with 7,000 LEDs, while Philips got an order to equip the Notre Dame Cathedral in Paris with 400 luminaires.

However, Philips and Osram are not the only competitors in the race. General Electric, the inventor of the LED (1962) also wants a piece of the action. GE sealed a deal with Wal-Mart Stores Inc. to equip hundreds of the company’s sites across US, UK, Asia and South America.

The growth potential seems boundless, so Asian competitors like Toshiba Corporation have also started to seek manufacturing opportunities in Europe.

The cost of LEDs keeps declining, pulling down profits.

“Light bulbs were a commodity,” Dehen said. “Now with semiconductor competition from Asia, it is again heading in the commoditisation direction.”

LEDs may chip away from the manufacturers’ profits, but the technology has opened up new markets in countries where people have limited access to electricity. For example, Osram leases out battery powered packs to local fishermen along the Kenyan shore of Lake Victoria so they can harvest their catch during the night and then return the packs to solar-powered energy stations.

Philips on the other hand has installed 100 light centres across  Egypt, Morocco, Ghana, Kenya, Ethiopia, Tanzania and South Africa.

Further, both Philips and Osram offer lighting solutions for cities that enable them to shut off lighting and air-conditioning when no one is around.

As far as profits go, both companies can’t complain; however, Osram’s Dehen says they have a long way to go.

“There has been a dramatic change in the market, and a massive change in the company,” he said. “The traditional lighting industry didn’t earn too badly, but in the new business it’s hard to achieve economies of scale and make money.”

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