Philips CEO Frans van Houten this morning indicated that the Dutch company could soon cut prices on LED light bulbs, which he acknowledged are too expensive for the average consumer.
His made his remarks as Philips announced a corporate-wide loss of €160 million ($209.8 million) for the fourth quarter, when sales nudged up only 3 percent, to €6.7 billion ($8.8 billion).
LED bulbs augur huge energy and utility bill savings because they require only about 20 percent of the electcity of incandescent bulbs, the traditional form of home lighting. Vendors also claim they last anywhere from 15 to 25 years, all but eliminating replacement costs.
But consumers have balked at paying prices that are stratospherically above what they're accustomed to for a lightbulb, which can be less than a dollar for an incandescent. LED prices have been creeping downward - when I checked Home Depot's website a few weeks ago prices for a Philips bulb ranged from $25 to $40, and are often lower - but still not low enough for the average breadwinner.
"The price point for LEDs in the consumer space is still a little bit out of reach," van Houten said during a conference call with analysts to discuss financial results for the fourth quarter and year that ended Dec. 31, 2011.
He noted that while consumers are moving to CFL (compact fluorescent) bulbs that have a price point and energy savings between LED and incadescents, they are not yet generally adopting LEDs.
In a comment that seemed to signal pending price cuts, van Houten said in response to an analyst's question, "We are making progress. We are launching several hundred LED-based products in the next months," that "for the consumers will make it attractive to make the shift." He did not elaborate on the timing or size of the price cuts.
"We expect that prices of LED light bulbs will go significantly down in the next couple of years because of product/cost innovation and volume, thereby lowering the threshold for LED light bulb adoption," a Philips spokesman said in response to a follow-up question from SmartPlanet. Philips did not permit journalists to ask questions on the analysts' phone call.
However, don't expect Philips to cut prices of other bulb styles. In fact, van Houten said the company is raising the price of CFL bulbs to reflect soaring prices of the rare earth-related phosphor that goes into CFL bulbs. LED bulbs also use phosphor, so that would seem to pose an additional profits challenge as Philips lowers the price of LED bulbs
Van Houten's remarks about LED bulb pricing echoed comments last November from the U.S. lighting maker Nexxus, which said that it would take measures to make LED bulbs more affordable.
Van Houten had warned earlier this month that "pricing" issues would limit fourth quarter sales growth at Philips Lighting (one of 3 main sectors in addition to Healthcare and Consumer Lifestyle) to mid-single digits and would suppress profits. For the year, corporate revenue barely inched up, to €22.6 billion ($29.6 billion), from €22.3 billion ($29.3), as the company lost €1.3 billion ($1.7 billion) compared to a profit of €1.5 billion ($1.97 billion) for 2010.
A full lighting palette
Philips Lighting products span the supply chain.
They include packaged LED chips (LEDs are light emitting 'diodes', or semiconductors) that Philips calls LumiLEDS and that it sells to various industries like automotive, construction, computers and other displays. They also include bulbs - indcandescent, CFLs and LEDs - for the the consumer and professional markets. In addition, Philips Lighting sells lamps - Philips lexicon refers to them as "luminaires, while bulbs are "lamps" - and control systems.
Today, van Houten provided a partial breakdown to help explain the slow growth. First the bad news: A lot of the hit came from LumiLEDs, as an oversupply in the LED chip market pushed down prices. But take the chip-level products out of the picture, and revenue looked much rosier.
Van Houten told analysts that outside of LumiLEDs, sales of LED-related products grew by over 70 percent. Factoring in LumiLEDs, LED sales rose by 37 percent, and contributed 18 percent of Lighting's total revenue of €2.1 billion ($2.75 billion).
Overall lighting revenue inched up by 7 percent in the quarter, which outperformed the corporate wide 3 percent revenue growth for the quarter. Lighting was second in total revenue for the quarter, behind Healthcare's €2.7 billion ($3.5 billion) and ahead of Consumer Lifestyle's €1.85 billion ($2.4 billion). Consumer Lifestyle includes things like appliances and coffee makers. Philips is in the middle of divesting its television business.
In lighting, sales growth was stronger outside of mature markets like the U.S. and Europe. In fact, lighting sales declined in Western Europe amid the financial crisis in the eurozone, while growing 21 percent in "growth geographies" including China, Russia, Central Asia, the Middle East, Turkey and other areas, according to chief financial officer Ron Wirahadiraksa.
In general, "We do expect improvement of the lighting results to be weighed toward the second half of 2012," van Houten said.
How will lighting profits turn up, especially if Philips is cutting the price of LED bulbs amid increasing prices of the rare earth phosphors that go into them?
Van Houten explained that the company's shift to selling lighting control systems will in part help restore financial health. As semiconductors, LEDs are digital devices that lend themselves well to brightness and color control, offering many benefits in public safety, design and architecture. Cities can light public areas and roadways brightly only when needed, for instance.
Philips is also in the throes of a company-wide cost cutting scheme called Accerleate. The program entails about 4500 job losses, and is also designed to infuse the company with an entrepreneurial spirt. About 500 managers will receive shares and options based on performance - rather than on the traditional time served at the company - that emphasizes hitting financial targets by the middle of 2013, for instance.
The Accelerate program will quicken time to market with new designs, according to Van Houten. As an example, he noted that in China, Philips has shortened the amount of time it takes to get redesigned LED bulbs to market, to less than 5 months, which allows Philips to take advantage of the tumbling prices of components that go into bulbs. LED bulbs use chips as well as heats sinks and electricity converters and transformers.
"Price erosion in components is quite fast," he said. "If you can capitalize on that by bringing products to the market faster, you will actually gain a better margin realization. So this is quite a breakthrough, where people collaborate much better with suppliers as well as with the sales force."
New boss coming
In another costly move aimed at tightening Lighting's performance, Philips is re-branding all but one of its non-Philips luminaire brands, as Philips. It will retain only the Massive non-Philips brand.
To help implement all these measures, the company has chosen a permanent CEO for the lighting division and will announce the new executive soon, van Houten said. Currently, van Houten doubles as the acting CEO of the division.
The switch to LEDs has required Philips to completely overhaul its lighting division's supply chain, from one centered around glass and filaments to one that leans on the diodes that are the core of LED bulbs.
Making matters even more challenging: Despite claims from Philips and other vendors that LED bulbs last 15 to 25 years, users are reporting bulb failures (not necessarily of Philips brands) after less than a year.
Philips is not the only company struggling to make a profitable business out of energy saving LEDs.
Two weeks ago, Durahm, N.C. lighting firm Cree reported a 76 percent plunge in second quarter 2012 profits to $12.1 million, from $49.8 million in the same quarter a year earlier. Revenue actually rose 18 percent to $304.1 milllion, but profit margins declined as Cree cut prices on bulbs. Pricing coming down in part because Chinese manufacturers coming in at lower prices, according to Reuters.
"Demand is going to be awesome," Wunderlich Securities analyst Theodore O'Neill a said in the Reuters story, pointing to a 50 percent decline in LED bulb prices at retailers like Home Depot and Lowe's. "The problem is it's going to be a low-margin business."
LED light bulbs will almost certainly one day bask in the spotlight of energy saving products. But before they get there, they'll have to show up at the sort of reasonable retail price that a mass audience expects.
Note: This version corrects Philips' annual 2010 and 2011 profit and loss to read in "billions" not "millions" as stated earlier. Corrected at 10:25 a.m. PST.