Globalization and Energy Efficient Light Bulbs

| About: General Electric (GE)
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by Martin Lariviere

The Washington Post recently had a pair of articles about the evolving world of light bulbs. Light bulbs might not seem a particularly happening market but there are some interesting developments related to goals to improve the efficiency of common lighting. The first article tells the story of GE closing its Virginia light bulb factory, its last domestic plant making standard incandescent bulbs (Light bulb factory closes; End of era for U.S. means more jobs overseas, Sept 8). Incandescents are the old-school, Edison-developed technology we have all grown up with. They are also very inefficient. Consequently, they are in the sights of regulators and will effectively be out of the market come 2014. Thus, the GE factory would need a significant overhaul to switch to a new technology.

A technology vying to replace incandescent bulbs is compact fluorescent bulbs (CFLs) was actually developed by GE but the company is not looking to build CFLs in Virginia or anywhere else in the US. Rather it will import CFLs. The article plays up the irony of a regulatory shift forcing jobs overseas, but given the nature of the product it is hard to argue with the logic:

Following the 1973 energy crisis, a GE engineer named Ed Hammer and others at the company’s famed Nela Park research laboratories were tinkering with different methods of saving electricity with fluorescent lights. … The trouble facing Hammer was that fluorescents are most efficient in long tubes. But long, linear tubes don’t fit into the same lamp fixtures that the standard incandescent bulbs do. Working with a team of talented glass blowers, though, Hammer twisted the tubes into a spiral. The new lamps had length, but were also more compact. “I knew it was a good lamp design,” he recalled recently. In retrospect, in fact, it was a key innovation. … At the time, however, the design had one big problem. Bending all that glass into the required shape was slow and required lots of manual labor. “I used to say you would need 40,000 glass blowers to make the parts,” Hammer said. “Without automation, it was economically unfeasible. It was a lamp before its time.”

So why can we all buy CFLs at the local Home Depot? Enter an entrepreneur willing to work out the bugs in the technology and invest in the capital to drive down the cost. It so happens he is Chinese.

The next major innovator to try his hand at CFLs was Ellis Yan, a Chinese immigrant to the United States, who had started his own lighting business in China and then in the early ’90s turned his attention to the possibilities of CFLs. To make CFLs, he had workers in China sit beside furnaces and bend the glass by hand. Even with the low-wages there, the first attempts were very expensive, clunky and flickered when turned on, he said. But he persisted. “Everybody [in the industry] stayed back and was watching me,” he recalled. “No one else wanted to make the big investment for the next generation of technology.” The business prospered and Yan’s factories in China employed as many as 14,000 – not so far off from the 40,000 glass blowers that Hammer had once imagined would be necessary. With new automation techniques, Yan is seeking to cut the number of his employees in China, where wages are rising, to 5,000 by year’s end. Today, about a quarter of the lights sold in the United States are CFLs, according to NEMA, an industry association. Of those, Yan says, he manufactures more than half.

Now one can ask if this is an all together bad outcome. Yes, it certainly is unfortunate to be one of the workers at the GE plant who lost their job. But it is hard to argue with GE’s logic. Yan has a lead in production and is in a position to exploit economies of scale. Unless GE has some manufacturing magic up its sleeve, it is hard to see how they can match the price of a Chinese CFL. The article reports that Yan is looking at building a US factory even though this will add 50 cents or so to the cost of a bulb. He claims that retailers have told him that the market will bear this added cost for a bulb that says “Made in America”. I think that the appropriate caveat to that is “for now.” The reality is that light bulbs are a commodity. However much GE wants to tout the superior warmth and color of its bulbs, for most people a 60 watt bulb is a 60 watt bulb and all that matters is being able to see what you are doing as you go down the basement stairs. Once CLFs are the standard as opposed incandescents, it will be hard to justify a significant premium in the market for domestic production.

There is another question: Are CFLs the right technology to replace incandescents? Bulbs based on light-emitting diodes (LEDs) are another contender. That gets us to the second Post article, An American innovation in light bulbs, but will manufacturing stay in the U.S.? (Sept 16). It focuses on Lighting Science Group, a privately held, Florida-based company that has been developing innovative bulbs. Notably, it has signed up Home Depot (NYSE:HD) as a retailer (fun fact: The guys in orange aprons sell the most lighting in America).

Lighting Science Group makes bulbs in Satellite Beach, FL. Why do they keep production in the States? In part because of the technology remains fluid. What Home Depot is selling is a 40 watt LED bulb but there is a market for brighter bulbs.

The contest among the manufacturers now is to continue to whittle down prices while also developing bulbs that can match the brightness of 60-watt, 75-watt and 100-watt bulbs. LED bulbs today represent less than 1 percent of sales, but as prices come down that figure is expected to rise. “We make significant improvements every six months,” Maxik said.

The swift pace of innovation is, in fact, one of the most compelling reasons to keep the factory here in this beach town, where workers are paid between $16 and $22 an hour. With the factory nearby, engineers can make alterations rapidly and learn as they do so.

“The engineers need to react quickly and to make the changes as the product is being made,” Maxik said. “But it’s not just a matter of speed. If your factories are on another continent, you lose know-how.”

Another advantage of this location, company officials said, is that the local workforce is blessed with technical skills arising from its proximity to Cape Canaveral. About 70 percent of Lighting Science workers once worked for NASA or one of the space agency’s contractors, company officials said.

Again, there is a logic to this. When technology is evolving swiftly, both product and process will be moving. Indeed, the latter will generally limit the former so there can be big payoffs to having the best available minds working on both parts of the problem. That gets hard when production and engineering are separated by hundreds of miles, let alone thousands. The question is how long this will last. LCDs will eventually stabilize — just like cell phones and big screen TVs did. That’s good news in that it will drive down costs and put the technology into more hands. But it will also increase price pressure and argue for moving production to cheaper and cheaper locations. Indeed, the article reports that Lighting Science Group is already looking to move some production to Mexico.