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In these times of fast technology change and increasing competition from China, India and other countries across the world, I am very critical of incumbents and how they deal with the challenges they are facing. This is the case in the industry where I work, energy, but it is not confined to this industry.
Kodak is an excellent example; it led the global film industry for close to a century. It went bankrupt in 2013 and that despite having invented the digital camera. Whatsmore, the company saw the huge market opportunity around this new technology. However, Kodak was not able to understand how these new technologies would be used (mobile phones) and how they would be stored (online) and shared (Facebook, Flickr). In the end, Kodak was a sorry tale of how not to adapt to a changing future.
Today, when I look across the energy landscape I despair at the utilities, grid operators and their equipment suppliers who are often resistant to change and have no desire to embrace the changing energy world and the opportunities it brings. To do so requires leadership, entrepreneurship and bravery; this is often lacking in businesses that have spent decades in either monopoly or oligopoly positions.
This is also the case in lighting, where three players Siemens (through Osram, now an independent company) GE and Philips dominated globally for over a century. That is now changing, largely because these companies have been too slow to adapt to LEDs. They focused on “milking their cash cows”, and preventing LEDs coming to market. The issue was simple. They preferred their customers to buy a new light bulb every year, rather than every five years, as would be the case if they bought LEDs. This strategy may have been financially effective in the short term, but the end result is that their positioning in global lighting has suffered, and they face a wave of new competitors both from household names, such as Samsung, Sharp and LG, and new Asian competitors, such as Silan Azure, Epistar, Sanan Opto and Everlight, as well as cutting-edge, technology companies, such as Universal Display, Cree and Nichia.
It was thus not a surprise when Siemens spun off Osram in 2013, listing it on the Frankfurt stock exchange. What they were saying was we can not “suck any more milk out of the cow”, and “we don’t want to restructure Osram’s transition to the new world of LEDs”.
The new Osram management immediately set about cost cutting and restructuring the business. But there was no real focus on LEDs, and in particular LED manufacturing. This strategy may make financial sense in the short to medium term, and may even push profits up, but in the long term it is suicidal because eventually the new Asian manufacturers will just bypass the Osrams of this world and go directly to the customer.
The most sustainable strategy is to invest in the future of the business which means spending money on R&D, being more creative around new business models, and being faster to the market with new innovations and products. However, this is highly risky, and large businesses are often slow to go this path and instead focus on cost cutting and M&A. Thus it was with great interest when Osram announced last month that they would invest 2 billion euros in R&D and 1 billion euros in manufacturing plant through 2020, in an “innovation & growth initiative”. The financial market reacted negatively to this, and the share price has fallen back quite significantly (30%), but I think Osram management are doing the right thing for the future of the business.
Osram calls its new strategy “Diamond”, which targets new LED production capacity in Malaysia, using their own proprietary sapphire technology. The view from Osram is that this new production will allow them to further reduce the costs of LEDs by an impressive 50%. And Osram’s aim is not take on the Chinese with their low cost production but instead to aim at high quality solutions for the commercial and industrial markets. In addition, Osram will invest heavily in new technologies such as OLEDs and laser lighting. OLEDs allow the light source to be ‘sheet’ rather than ‘point’ orientated, and are already being used in some smart phones and high-end TVs. Going forward, they will be used for displays, for screens and in our homes and businesses, and have a huge growth potential. As to laser lighting, Osram is the clear leader in this technology; it is used for example in the BMW 7 Series to illuminate the road up to 600m ahead! In both cases, the company is focusing on differentiating itself from low cost producers. And this is the only sustainable future for the company, and I applaud Osram management for being brave and showing leadership.