Investor's Business Daily, July 18th, 2007
The proverbial light bulb flashes on a lot at Siemens' Osram Sylvania unit. It has to -- new ideas are crucial to compete in its industry.
As the world's top lighting seller, followed by Royal Philips Electronics PHG and General Electric GE, Siemens' SI Osram Sylvania spends $350 million a year, or 5.5% of its sales, tinkering with ways to build better bulbs.
The lighting industry is more than 100 years old -- but has been in the dark for the last 90, says Osram Sylvania chief executive Charlie Jerabek.
That's changing, thanks to the rise of compact fluorescents. These energy-efficient, longer-lasting and higher-priced bulbs may soon replacing old-fashioned incandescents -- only to be supplanted themselves by light-emitting diode technology, or LEDs, Jerabek says.
He spoke with IBD about the switches underway in lighting.
IBD: Are incandescents going to become a thing of the past?
Jerabek: Ultimately, yes. It's all a matter of timing. Some of the energy legislation pending will rule out the less energy-efficient incandescents.
The time period we're talking about is outlawing some of the least-efficient types of products five years from now, and so, between a five- and 10-year period of time, gradually phasing them out.
(Australia and the European Union have agreed to a phase-out. The U.S. hasn't thus far made any commitment.)
IBD: What are the biggest technological changes happening in lighting?
Jerabek: In terms of what's already hit the market it's clearly compact fluorescents. As incandescents get phased out you'll (also) see a lot more halogen being used. They'll never be as efficient as a compact fluorescent but they can be much more efficient than an incandescent.
LEDs are clearly the future of lighting. They're probably, from a consumer standpoint, seven to 10 years away. But we're starting to use them more and more in commercial and industrial applications.
Compact fluorescents have been around since the mid-80s but we really had a tough time making all their attributes known.
So acceptance hasn't been great until the last couple years. Now they're literally doubling in sales each year.
IBD: Why is that?
Jerabek: There have been a lot of issues surface: the high cost of energy, the global warming discussions, and because lighting offers a good solution in both of those categories, you've had celebrities promoting the products. Prices have more than been cut in half, just in the last three or four years. It used to be that you'd pay maybe $4 to $6 for a compact fluorescent lamp. Today they're $1 to $2.
IBD: What's been driving the price down -- just economies of scale?
Jerabek: It's mostly scale. Now we're in the hundreds of millions (bulbs made and sold yearly). That drives the cost of electronics in the devices down, and we can automate the process more.
IBD: How profitable is Siemens' lighting business?
Jerabek: Worldwide it's referred to as Osram. They 100% own us here in North America and our brand name here of course is Sylvania. Osram, sales-wise, is running about 4.5 billion euros. So that's pushing $6 billion, and profitability (operating profit margin) is running at 10.5% of sales.
IBD: What are some innovations you've worked on for compact fluorescents?
Jerabek: One which has caught on and gained a lot of acceptance has got a warmer color temperature -- it's not as harsh (a white) as what had been produced previously. But it still has, in consumers' minds, some issues. It doesn't fit in all lamps, so we're driving to make them smaller.
A product we're just about to roll it out two months from now is called a micro-mini. The tube diameter is smaller, as well as the bulb itself. It puts out the same amount of light.
We've got three-way bulbs and we will also be bringing out ones that have dimming capabilities. We advertise on a package that this light bulb will save you $37 compared to an incandescent light bulb. The energy savings is really the payback.
In our opinion the market (for compact fluorescents) will continue to grow, 40% to 60%, for the next three or four years.
IBD: What about the health issue of mercury content in the bulbs?
Jerabek: Another improvement that's been made is that ourselves and other companies have now committed to have less than five milligrams of mercury in all compact fluorescents. So that kind of weeds out a lot of the lower-quality players. (According to the Environmental Protection Agency, five milligrams of mercury is 100th of what older thermometers contain.)
IBD: What's your view of the current competitive environment?
Jerabek: It's a race, there's no question. We're firmly entrenched already in LEDs -- we're the world's second-largest producer -- the first isn't even a lighting company, it's called Nichia. So I think we're really well-positioned as LEDs come into play. We make the chips themselves.
We don't think anyone else spends near what we spend in R&D. It's nice to see especially some of this pending legislation catching up to where we've been putting our money. The whole change this industry is going through is really coming into our realm, where we're strongest.
IBD: How do you assure that the supplies you need are available?
Jerabek: In most cases, we've backwards-integrated -- we've got the capability to control supplies. What we need to do from a business standpoint 19 obviously scale up our capacity to produce these energy-efficient products, which is what we're in the midst of doing, and at the same time try to transition our older plants and employees who produce the older technologies, over into more energy-efficient products.
One further improvement we've got is what we call an electrodeless compact fluorescent. We take already a long-life product and we can double the life again. Incandescent is probably 1,000 hours. Compact fluorescent, 5,000 to 7,000 hours; and these, 15,000 hours.
They cost more -- today maybe we're talking $25 to $30 apiece. So the consumer's not going to really be buying it. But Macy's came to us. They wanted more light and they wanted to be able to save energy. So we took their Fashion Island store (in Orange County, Calif.) and we retrofitted 350 lamps with the electrodeless compact fluorescent. It gives out more light at the life we already spoke about, and they're saving $5,000 a year just on one floor of one department store, in electricity.
See investors.com/tech for a searchable archive of past I&T Q&As.
