Strategically Speaking: Forecasting the LED Lighting Market

Providing an accurate LED lighting forecast requires an analysis of the different forces that are currently shaping the market, as Vrinda Bhandarkar and Robert Steele explain.

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STRATEGICALLY SPEAKING: Insights Into the LEDs & Lighting Marketplace
Introducing our new Editorial Column, brought to you by Strategies Unlimited

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Forecasting the LED Lighting Market

As is often the case with emerging technologies, there is a lot of hype about the adoption of LEDs by the lighting industry. It is widely believed that LEDs will eventually conquer the lighting world. But the question that LED industry would like answered is: “When?” After the meltdown of the economy that was not forecasted by the majority of economists (with the possible exception Nouriel Rubini, author of The Black Swan) forecasting has become something of a hazardous profession.

An art as much as a science

At the basis of every investment decision is a vision of the future, and LED lighting is no exception. Since it is not possible to build a multivariate model of all variables that can affect the market, the relative importance attributed to market forces will affect the decision. It is difficult to measure many of the variables that affect the market in real time. Collecting data can take time and can be expensive. Some of the data is very difficult to obtain, e.g. breakdown of revenues along product lines and by market segments.

An analyst will make estimates based on multiple data points and base a forecast on the assumptions about forces that change the market. This makes forecasting an art as much as a science. Therefore, it should not be a surprise there are as many forecasts as the number of analysts.

Confidence in a forecast depends on the reputation and track record of the analyst, the methodology of forecasting and the logical consistency which is in harmony with previous market experience. Since there is always limited visibility to predict market movements, forecasts have to be updated as changes become visible.

Adoption of LED lighting has few precedents

Strategies Unlimited has been analyzing LED markets for 15 years and thus has a good understanding of the LED industry, including applications, technology and market drivers. However, the adoption of LEDs in the lighting market has few precedents. Historically, the lighting market has seen the emergence of many new technologies. But the circumstances around those introductions were different than what we see in the market today.

The transition from oil/lamps to wax candles, to gas lamps and then to electric lamps is a continuous progression in the efficacy of conversion of energy to photons. (Even with these advances in lighting in the developed countries, there is a large part of the world without access to electricity that to this day uses fuel-based lighting.) Lighting technologies once discovered take time to find a product design which optimizes photon production. Because of their high price, new technologies are initially adopted in the high-end market first, as an exotic replacement for existing technologies. The new technologies typically offer higher energy efficiencies and/or better quality of light, but initial costs are high; and form factors are not standardized, which further increases the initial investment in changing sockets and power management paraphernalia. The new fixtures cannot initially be mass produced because the volumes demanded by the market are too small.

As market demand grows, the cost of production can be reduced by realizing economies of scale. It is only when the manufacturing scale increases that the technology achieves broad adoption. There have been no exceptions to this rule. The speed of adoption depends on how fast the market realizes the value of the new technology. If left to the market, technology adoption processes tend to be slow. The market is not necessarily a good mechanism for quick technology adoption.

In the case of compact fluorescent technology, the commercial and industrial sectors and regions with high sensitivity to energy costs adopted the new technology quickly, especially in ambient lighting applications. However, market intervention techniques — both demand pull and supply push methods — had to be employed to get the broader lighting market to adopt CFLs.

Market forces lining up perfectly

What is the forecast for the LED lighting market? LEDs have come of age at a time when energy issues are of paramount importance to all governments around the world. Energy policies are encouraging technologies that can offer maximum energy savings and LED technology falls in that category. Although LEDs don’t yet offer efficacies as high as some of the more efficient fluorescent technologies, the development trajectory of LED technology suggests that in the long run, it has the potential to offer better efficacies than any other competing technology.

The ban of the incandescent bulb is one of the policy instruments used for hastening energy efficient lighting technology adoption. But there is a large base of sockets that will need to be replaced with more efficient lighting sources.

Part of the market for incandescent lighting will move to CFL, especially for ambient lighting applications. But in the case of directional lighting, LED replacement lamps offer substantial energy savings and have no competition in terms of controllability, dimmability and a choice of color temperatures that can fit in form factors compatible with the existing base of sockets. Today the cost of LED replacement lamps is high because they are not mass manufactured; thus, there is a high potential to reduce the cost of manufacturing over time.

Strategies Unlimited offers a market forecast of the replacement lamp market in its latest report, LED Replacement Lamp Market Analysis and Forecast (June 2009), while the LED fixture market has been analyzed in LED Lighting Fixtures Market Analysis and Forecast (January 2009).

The CAGR for the LED replacement lamp market is forecast to be high because of the demand-pull conditions created by government energy policies and stimulus disbursements, utility promotion programs, and the favorable cost of ownership in a variety of commercial applications.

On the supply side, LED manufacturers are rapidly increasing their production capacity for lighting quality LEDs. Moreover, there are a large number of manufacturers worldwide ready to invest in mass manufacturing of LED replacement lamps and fixtures. Market forces have never lined up so perfectly before for the adoption of any other lighting technology.

Although the worldwide economic recession is certainly a hindrance to the near-term adoption of LED lighting, the effect is only to somewhat slow the rate of adoption, not stop it altogether. Taking into account the factors outlined above, tempered somewhat by current economic conditions, Strategies Unilmited is forecasting a compound annual growth rate (CAGR) of over 100% for LED replacement lamps in the next five years.

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