Smart investors know that, often, the biggest growth opportunities are the ones you can't invest in – yet. New technologies typically have the most potential for growth when they are still under development or in the early phases of market penetration. At that point, fledgling companies have infinite possibility and tremendous risk and need investors who are accustomed to this type of deal. If you have the ability and fortitude to invest in an emerging company at this critical stage, the rewards can be significant.
The creation of new markets is often dependent on component technologies opening up opportunities, rather than the development of entire supply chains of products. This creates interesting supply-demand curves, which has been happening in many areas of clean tech, including in the LED markets.
Established LED players – Cree, Rubicon and others – have successfully built powerhouse businesses around the LED chip itself, investing persistence and cash to bring LEDs to where they are today. Now, LEDs are ready for a broad range of applications and are able to successfully displace conventional lighting technology.
But the risky time to invest in LED chips was 10 years ago when the technology was unproven and high-risk. LED chip makers have grown as the technology has become the de facto standard for displays, indicator lights and has more handsomely rewarding risk-tolerant early investors.
And while some of the LED suppliers have taken heat in the public markets – driven by fear of commoditization and of the impact from China (both from competition and boom-bust incentives), the book is not about to close on the LED story. We are simply getting ready for the next chapter: the downstream opportunity or the 'second wave' that integrates LEDs into intelligent systems that deliver light and more.
Where the smart money is going
For LEDs, the push into the general illumination markets is well under way, driven by the energy efficiency and longevity that are impossible to meet with aging lighting technologies. And LEDs' historically premium prices are rapidly decreasing to more affordable points, opening the worldwide lighting market to this captivating new technology.
Many manufacturers are addressing this market with an evolutionary approach – incorporating LEDs into traditional lighting fixtures and replacement bulb form factors. Others are taking a more revolutionary approach and using the LED chip as an opportunity to rethink the lighting value proposition and leverage LEDs as highly controllable illumination sources that open up new types of applications.
From a broader perspective, the LED market progression is poised to mirror the development of the PC market, where the value was initially in the chip makers (Intel and memory companies), then moved to system makers (Dell, Gateway, IBM PC), and then to the software companies (Microsoft, Netscape, Lotus). Ultimately, there are few long-term winners at each level of the value chain, but each level goes through a massive expansion period that lasts for years before it is dominated by one or two gorillas. We may be well into or through the LED chip phase, with one or two winners. Now, the system and software phase is under way – with a completely open playing field.
Where the action is
The worldwide lighting market is massive – expected to reach $110 billion overall by 2020, while the energy used by lighting is a staggering 25% of the energy consumed last year in the U.S. And the potential reduction in worldwide energy use as LEDs become the new illumination standard is colossal across all sectors.
But the first action will be in the industrial and commercial parts of the market, and not residential, because industrial facilities have high wattage lights that are left on all the time. Reducing lighting energy use in the industrial segment represents the easiest and best path for real, measurable and impactful energy efficiency improvements and load reduction in the U.S. Additionally, businesses also make decisions over a longer time horizon than a consumer, have a stronger balance sheet to invest off of, have more analytical resources to evaluate deals and a single decision can save as much energy as hundreds or thousands of residential energy efficiency projects.
Who will come out on top?
It is far too early to call the winners in the various stages of the LED market development, especially since the competitors have just left the starting gates in some cases. The aging giants in the lighting world – despite size, brand and distribution channels – are not guaranteed a space in the winner's circle. What is clear is that, once again, new underlying technology is opening up tremendous potential to disrupt the status quo.
What is smart lighting?
It is a centrally managed network of independently intelligent LED fixtures that layer on other capabilities for operational insight, facility monitoring and more. Smart lighting provides the ability to manage every aspect of the lighting system – setting operating hours, brightness and dimming levels, how long lights stay on and more. And the system then gathers all the performance data to share with the operations team. Not only are these intelligent lighting systems more efficient; they are delivering all different kinds of additional value to the industrial facilities – many of which typically spend approximately $1 per square foot – that are adopting them.
What is clear is that the infusion of intelligence into historically rudimentary lighting has the potential to disrupt the status quo, while redefining just what lighting can do. It just so happens that this skirmish is taking place out of the public eye – in industrial markets. But what is starting there will rapidly reach commercial and residential segments. And beyond lighting, it is indicative of what is happening across clean technology – where communications technologies (both wired and wireless) combine with software-based measurement and management capabilities to drive greater energy efficiency and new functionality.
Impatient clean tech investors, who have been frustrated with the impact of policies and politics on a number of sectors, such as wind and solar, should take another look at the emerging opportunities in intelligent systems. The smart money looks to the future, but the really smart money looks with eyes wide open to understand the true potential of that future.
