Welcome To The Wild, Wild West!

By Nancy Pasternak

As companies adapt to the new world of LED lighting, you can expect to see more mergers and acquisitions in upcoming months and at least one analyst believes it will be three to five years of rapid changes and consolidations before things settle down.

Last week in its 3Q earnings, Hubbell took time to talk about its lighting division and ongoing pressure over pricing and competition. Chairman, President and CEO David G. Nord said, “The lighting markets, specifically, unit growth was offset by continued price pressure.” Price pressure and competition led to at least seven notable acquisitions and mergers in the last year including Holland’s Nordeon Group picking up Lamp Lighting and Schmitz-Leuchten, Philips Lighting acquiring Luciom, Sweden’s Fagerhult Group bought WE-EF Leuchten, and US controls company Leviton acquired lighting firm ConTech and Birchwood Lighting.

That pressure is expected to continue into 2018. “It’s just beginning,” according to Mike Marks, analyst and co-founder of Indian Rivers Consulting Group, who expects to see more acquisitions and more changes coming into this business.

Marks cites four large-scape forces at play in a lighting industry that has been forced to change dramatically with the introduction of LED Lighting:

1) Low start up costs: The relative low-cost of starting up a lighting company selling LED-lighting has led to a flood of new people competing with the traditional light manufacturers or the “big guys” as he calls them. There are thousands of lighting companies in Europe, Asia and the United States and not all can survive on their own in a market pressured more than ever by the costs, competition and confusion of how to profit in the new LED market.

2) Product Life Cycle: The second big thing that’s going on is the issue of product life cycle. Marks explains, “Here you have all of the incumbents that were in the industry and they’re big, they’re expensive and they are great companies that have great people and all of the sudden, their product has been replaced with better technology. The product life cycle from one version another with LED is probably – I’m sure there’s some people in the big companies that have done the science – but my bet is that the product life cycle is less than 24 months. In other words, one version of this light bulb is going to be replaced with a better, more efficient version in less than 24 months. Sometimes it’s less than 12 months.”

3) Channel Conflict: “The third thing that’s going on – and this is really big and nobody wants to talk about it – is there’s a channel conflict,” according to Marks, who says the big companies had the traditional hold on electrical distributors who were only selling incandescent and fluorescent and other lighting.  But the small LED companies went through other channels to create demand by customers and now, the distributors have to get into this business because their contractors are asking for it.

4) Technology still very young: The LED industry is changing so fast in terms of product innovation.  The rapid innovation has confused many who are trying to make sense of it and trying to make a profit.   Ultimately, the winners will be consumers and the people who are light on their feet in being able to respond quickly to rapid changes.

Marks believes more change is on the horizon. “You’re going to see more acquisitions”, “Marks says, “You’re going to see more people coming into the market, new companies. Some of those companies will be acquirers, some will end up being acquired. You’re going to have this very frothy market.”

It’s a market where prices have tumbled and products last a long time, virtually wiping out the classic replacement market as a source of revenue. “This is the wild, wild west,” says Marks, “People haven’t seen this in the electrical industry since the fight back in the turn of the century with Edison and Westinghouse about should the US have direct or alternating current? That was the last big fundamental technology deal. This is as big as that.”