The biggest selling point of the light-emitting diode (LED) lamp is its already legendary longevity, which far surpasses the life expectancy of incandescent, halogen or fluorescent light sources. But it raises an interesting question for members of the electrical supply chain: What are the cash flow implications for manufacturers, distributors and installers of a product that they may not have to replace for a very long time?
Throughout the 20th century, there was a cynical, albeit misinformed, belief in the general public that lamp manufacturers always had the technological capability to provide a product that would last for a lot longer than the lamps available on retailers’ shelves. Thomas Edison’s light bulb represented two iconic ideas, one bright, one dark—the cartoon image of the bulb going on over someone’s head indicating a bright idea and that same light bulb as a symbol of planned obsolescence that would keep generating considerable after-sales-bucks ad infinitum for the manufacturer/distributor/contractor supply chain.
First of all, it might be a bright idea to dispense with the planned obsolescence argument before getting into the LED issue.
“There is a direct inverse relationship between product life and light output in incandescent and halogen technology,” said Steve Briggs, vice president of marketing and global product management, GE Lighting Solutions, Cleveland. “The thinner the filament, the more efficient it is, but the more susceptible it is to shorter life and breakage. A very thick filament would last a very long time but produce very little light. That’s why none of the three or four major global players made a light bulb that would last 10 years. All of them settled on a 15–18 lumens per watt lamp with a life of 1,000 hours for optimal light output and efficiency. It was simply a question of physics.”
The bulb that doesn’t quit
So now we have the LED that lasts for years, not hours, and has a much different maintenance, repair and overhaul (MRO) profile than incandescents, halogens or fluorescents.
“The supply chain is experiencing a revolution from the light bulb to the LED system,” said James Hibberd, vice president of global sales and business development at the Gexpro division of Rexel, Shelton, Conn. “This is no longer a price-product-buy scenario where all you needed was inventory, a delivery truck and a good price. What we’re seeing is a shift from single-product replacement sales to long-term systems sales. There are more technical issues involved that the electrical contractor has to clarify with his end-user customer.”
But where does this leave the electrical contractor who has historically depended on follow-up lamp replacement for ongoing service and maintenance income?
“The growing use of LEDs will certainly lessen socket turnover, just as CFLs have been doing for the last 10 years,” said Peter Soares, director of consumer channel marketing at Philips Lighting Co., Somerset, N.J. “This is something the supply chain will need to work on and adjust for—a matter of fewer lamps sold at higher price points. So this becomes a much different business model. Rather than a consumable that is repeatedly bought, used up and repurchased like paper towels, lighting will migrate toward becoming a durable goods purchase like electronics.”
No matter whether the LED lamp is theoretically viewed as a consumable or a durable, what does this mean to the bottom line of the electrical contractor? One independent electrical distributor broke down the numbers this way: “An incandescent lamp costs 40 cents compared to a $40 LED lamp, so the basic dollar value is significantly different. If it’s a 10 percent profit margin, you’ll be making $4 compared to 4 cents, so you have to look at the situation in terms of the life of both products. Even if, over the long haul, the end-user doesn’t have to buy a replacement LED for 20 years, it’s all relative. You make $40 right now rather than piecemeal replacements over a number of years.”
Selling systems, not units
The consensus among industry observers is that contractors have to start thinking in terms of an integrated lighting system, not a screw-in light bulb, in order to compensate for lost lamp-replenishment income.
“While the life of the light-emitting diode itself is significantly longer than traditional light sources, the driver—or transformer/ballast equivalent—is still 20,000 hours on current averages,” said John Broxmeyer, New York regional manager for Cooper Electric Supply division of Sonepar. “I believe this is a largely unaddressed issue that is not being adequately explained to the end-user. Maintenance contractors and the distributors who service them should be aware of the inevitable market for these drivers and stocking up on them because they will be getting calls for them in the not-too-distant future.
“Another area that both distributor and contractor should be focusing on is the control end of the product, which is not well understood by many in the supply chain and can be a lucrative market to be in if you take the time to educate yourself in its technicalities and potential. This would include dimmers, lighting control panels and sensors.
“What we have to do is get away from the old socket replacement mentality, if we want to stay in the game, because this LED technology is changing faster than any other light source in history,” Broxmeyer said.
And that relentless ongoing change is the essential characteristic of this market. Manufacturers were the first in the supply chain to have to address this attitudinal change by restructuring their organizations.
“LEDs have altered the landscape of the lighting industry, and unit sales are going away,” said Briggs at GE. “The traditional light bulb companies have to create more value in what we provide to the supply chain to replace units sold. We now make all of our own LED luminaires, have assembled applications engineering and project management teams, and vertically integrated to provide systems rather than replacing units.
“Manufacturers have to ramp up the value-added side of their business to support distributors and contractors and transform the platform from traditional lighting products to LED systems,” Briggs said.
On-site LED applications
Technology sometimes has a way of getting ahead of day-to-day reality, so how does this LED lighting revolution fit into the business planning of the electrical contractor?
“Historically, the majority of the electrical contractor’s work was in new construction,” Rexel’s Hibberd said. “But since ’08, this has shifted dramatically to retrofit and renovation, whether it’s in the residential, commercial or industrial markets.
“Many larger electrical contractors have already responded to this shift by redesigning their strategies and mobilizing an energy-efficiency task force that is targeting retrofit and renovation work—a significant part of which involves installation of LED systems.
“And electrical distributors should be doing all they can to help electrical contractors of all sizes to move into this retrofit-renovation space. The distributor can put the LED package together and train the contractor’s people on the technological aspects of the system.
“Working together, the distributor and contractor can offer the end-user 50 percent energy savings by installing an LED fixture with a lighting control and dimming system. This moves the discussion from light bulb price to a comprehensive systems sell based on demonstrable energy efficiency,” he said.
The LED sell isn’t that complicated and not very different from the way contractors have presented lighting packages to their customers in the past. The key selling point here is that the contractor is offering a system that combines not only greatly enhanced longevity but also considerable energy savings over that extended lifetime of the lighting system.
“One way to approach this is with the significant energy savings that LEDs offer,” said Soares at Philips. “A consumer can put more light points in the home without increasing the overall energy consumption. So ‘layers of light’ can be installed in a room. This could include general ambient light in a given space, task lighting for specific activities, or decorative points of light for décor purposes. These three lighting applications wouldn’t necessarily be operating at the same time, so there wouldn’t be a waste of energy or increased operating costs. It simply makes the room much more versatile and enjoyable to use,” Soares said.
In the final analysis, the traditional bulb replacement light may be going out while a new array of lighting system opportunities are about to be switched on. But don’t count out LED system replacements either.
“The replenishment issue isn’t as dim as it might seem,” said Hibberd at Rexel. “We recently worked with six electrical contractors on a $15 million contract to install LED lighting for a major international fast-food chain. Once it was done, we expected our MRO business with this customer to plummet to zero given the life expectancy of LEDs. Interestingly, the customer told us that they had done some independent research and learned that LED technology is changing so rapidly that, within two to three years, they would probably have to change out their LED lamps to achieve even greater energy savings.”
QUINN reports on a broad range of business and industry issues for journals in the United States and Europe. He can be reached at 203.323.9850 and firstname.lastname@example.org.