The light bulb revolution is going to make someone rich

The latest developments in LED lighting have got investors excited, says Tom Bulford. Here, he reports on some of the companies best-placed to profit.

According to consultants at McKinsey, sales of light emitting diodes (LEDs) are projected to soar from €9bn in 2011 to €65bn by 2020. LED technology is a much more efficient way to light than ordinary bulbs. It’s cheaper, reduces global warming and has the support of governments around the world. What’s not to like?

As an excellent paper from Edison Research explains, this is more complicated than it seems at first glance. The LED sector is, in fact, complex with competing component types and technologies. Everyone sees the potential in LEDs, so the competition to control the market is fierce.

A 2011 Havells-Sylvania survey found that 85% of LED lamp buyers were unhappy with the quality of the light and would not be buying again. So there’s a lot of work still to be done.

Getting light right

The market is split into a few sections. The residential market is one big one. But the real prize is the commercial market – things like offices, shops and industrial units.

To win these markets companies will have to get the product just right. You need the right kind of lighting in the office, to keep employees happy. The wrong type of light can make supermarket vegetables look blue and horrible. Architects like the idea of illuminating their creations in many colours. And factories need a good reason to replace strip lighting, which already functions adequately.

LED companies need to define their target markets and their place in the supply chain. It is not just a matter of making a light bulb. LED lights are made of semiconductor chips that emit light. These are then packaged into units that convert narrow spectrum light into broad spectrum. The next step sees these LED packages placed into modules containing electronics and additional optics. Finally, the module has to be built into the rest of the lighting system, including the control panel.

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LED chips are the key determinant of cost and quality. Good LED chips make a lot of light and not a lot heat. And the choice of material is key.

This choice of substrate says Edison, is “the key strategic battleground”. 90% of commercial LED devices use an aluminium oxide substrate, while most of the remaining 10% use silicon carbide.

However a number of companies, including Toshiba, Lattice Power and Plessey Semiconductor have released LEDs based on new gallium nitride on silicon (GaN-on-silicon) substrates. These are tricky to make, and wafer yields need to improve at least ten-fold for them to become commercially viable.

Each material has its own advantages. While aluminium oxide is likely to remain dominant, GaN wafers are a highly efficient way of producing light. They could turn out to be the standard where very intense light is needed.

So who’s winning?

Another important factor is the quality of light. LEDs do not produce the natural colour we’re familiar with. The shade of light emitted from white LEDs is softened using phosphor. An alternative is to mix this harsh white light with other colours within the same package, a conformation that also offers the chance of varying the colour. This is the approach used by Photonstar’s Chromawhite technology.

A second option involves the use of ‘quantum dots’ – tiny particles of semiconductor material that can tune the colour of light. Nanoco signed a joint venture with Osram in 2011 to do exactly that.

Weighing it all up Edison likes Dialight (LSE: DIA), Photonstar (AIM: PSL) and Nanoco (AIM: NANO); while it says that Aixtron (Nasdaq: AIXG) and Veeco (Nasdaq: VECO) “look the most reliable beneficiaries from mass market LED uptake.”

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