Analysis of the integration strategy of the five LED lighting manufacturers (Part one)

Introduction: multinational lighting companies stripping business sector, the vertical integration strategy out of date?

LED industry is usually discussed in the classic business model, PHILPS and OSRAM two giants from the industry's most upstream LED chip to achieve the most downstream applications, LED industry is a textbook type of vertical integration. China manufacturers, although most enterprises adopt the specialization mode in the LED industry chain, but also serve as a standard Elec-Tech vertical integration strategy, from 2009 began to enter the LED industry mergers and acquisitions jianlongda, through a series of mergers and acquisitions investment and gradually filled the whole industry chain, have from the chip to the package to the application again to link a complete industrial chain lighting brand.

Over the years, vertical integration and specialization of two modes in the LED industry has always run parallel. However, in 2015, and CREE, the original focus on Linsen encapsulation enterprises actively seek to expand downstream lighting industry vertical boundaries on the contrary, PHILPS, OSRAM have to peel off the key business of their own, and sold to PHILPS group, sell Lumileds and automotive lighting department, OSRAM is seeking to divest the original group accounted for a large proportion of the revenue of lighting department. To some extent, the two giants are equivalent to give up the layout of the original and continued for many years the vertical integration strategy, re select the focus of business model. So, the question is, is the business environment has undergone major changes, or that the strategy of vertical integration out of date?

When to use the vertical integration strategy, when should give up?

The reason why the vertical integration, economists have already made a theoretical explanation.

The fair market advantage is that ordinary products by market transactions, can take advantage of economies of scale on the market vendors, because the market for suppliers to supply a number of customers, so even if the purchase is small, can also enjoy a much lower cost than homemade.

Fair market transactions, however, have many disadvantages. When the special asset type degree of the production of a material is very high, through the external procurement and their costs in the production of no great difference, instead, with foreign purchases, but also may have proprietary information leakage and blackmail or curb, that is to say you want to buy only a material the production, it is easy for the supplier to the nose.

Conversely, if the sales of a product over reliance on some channels, such as the single market or a single customer, also produced the channel resources become special assets, if the channel resources excessive reliance on market transaction mode, it will have been the channel resources control of the situation. Imagine a large factory with only one customer.

In order to avoid this curb happening, so the enterprises have to adopt the vertical integration strategy, so that the internalization of the upstream raw material production capacity (backward integration) or downstream sales channel capacity (forward integration).

As a result, when an internal link of the industry chain is not so dedicated, through market transactions can be very convenient access to resources, the strategy of vertical integration is not so attractive. By stripping the business, to avoid the slack and bureaucracy caused by internal transactions, refocusing on the core business has become a more sensible choice. And I am afraid that Philips and OSRAM choose the core reason for divestiture.

Philips and Lumileds, love or business?

As early as 2006, PHILPS has wholly owned Lumileds, because the LED lighting penetration is still very low, in the market of LED represents the new things and high-tech, and Lumileds has high power LED lighting technology on the market at that time the most advanced, while Lumileds was estimated value of $2 billion.

Although the PHILPS does not need to purchase a lot of LED, but in the market to high-quality suppliers and options are not many, then the Asian manufacturers, but is not easy to Nichia way ahead, and in three, Korean manufacturers Samsung, Seoul has just begun to emerge, it is later Seoul semiconductor bullish, is full of arias the world chasing bite on patent, and Chinese manufacturers and most of them are in the workshop stage, rely on to buy chips from Taiwan to do encapsulation. Advanced LED technology and production capacity for lighting companies is a very special type of assets.

As a result, PHILPS through to the integration of Lumileds, internal supply chain, more important is to grasp the LED fluctuation of market change, in advance before the popularization of LED, leading the layout technology, patents and standards, these are not available on the market. In addition to Lumileds, PHILPS had a series of acquisitions to support its vertical integration strategy.

But the passage of time, LED today (2015) is already a mature technology, and whether the technical threshold is very low, just look at the scale of production capacity, the overall rise of Chinese manufacturers, the overall production capacity of more than half of them close, chip production capacity reached 40% in 2015, and Taiwan is as high as 59%. Most of Chinese mainland and Taiwan manufacturers are taking professional orientation, is actively seeking the market channel sales of products from the market, so the purchase price is high, stable performance of the LED or LED chip becomes very simple and very determined.

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