State of Illumination 2014

Below is an article I contributed to the June issue of TED Magazine, reprinted with permission:

The American Institute of Architects’ Consensus Construction Forecast predicted nonresidential construction spending to increase 5.8 percent in 2014 and 8 percent in 2015, a rebound led by the commercial sector. Combined with a healthy market for lighting upgrades, this promises good opportunities for lighting sales. Within the lighting category, tightening energy codes, product regulation and rising energy costs are promoting demand for the most energy-efficient solutions such as LED and robust controls. As advances in LED product manufacturing reduce cost, LED lighting solutions are becoming increasingly economical as retrofit as well as new construction options, which is expected to drive significant growth in sales for luminaires and controls over the next few years.

As a result, lighting and control manufacturers see big opportunities in the coming years for themselves and their electrical distributor partners. TED talked to top executives at five leading lighting and control manufacturers to get their take on the current state of the lighting industry—and what lies ahead.

The LED revolution

LED lighting has come a long way since the first major commercial general lighting product introductions of the mid 2000s, and is now the primary driver in change in the lighting industry. Today, LED luminaires and lamps are being produced and sold in significant volume, competing with conventional technology in virtually every application. Utility rebates are now strongly supporting the technology. While LED is still a young technology representing a small portion of the overall installed lighting base, it is carving out a rapidly increasing share of new luminaire and lamp sales—a trend driven by steady improvements in efficacy, service life and cost.

“The table stakes for the transformation away from traditional sources in terms of efficiency in lumens per watt, costs in lumens per dollar and fixture life have been met, and adoption in new construction and retrofit in existing installations is significant and accelerating,” says Steve Lydecker, senior vice president, technology solutions for Acuity Brands Lighting. “Third-party projections for 50 percent conversion by 2015 are easily on track, and many of our segments are past this conversion benchmark already.”

For evidence of the importance of LED technology, one need look no further than Cree, launched less than a decade ago to specialize in LED product manufacturing and now a $1.4 billion company. Greg Merritt, vice president, marketing, lighting, says the combination of LED product performance and cost has reached a sweet spot for upgrading conventional lighting systems in many applications in existing buildings, creating a growing wave of opportunity. “For distributors, this transition to LED is probably one of the largest opportunities they have ever seen,” he says. “Distributors can go back to their existing customers and offer them a solution that will pay for itself.”

Kraig Kasler, vice president, marketing and product management for Eaton’s Cooper Lighting business, agrees. “Due to the total cost of ownership and the ongoing savings, LED solutions have already become a compelling choice for retrofit/upgrade projects,” he says. “What this means for distributors is the opportunity to become more of an energy solutions provider. Rather than just showcasing solutions that might appear cost-effective, many now have a much better understanding of the benefits of LED technology and can clearly explain the energy value propositions and paybacks.”

LED technology is arguably the most disruptive technology to impact the lighting industry in decades, and the pace of change has been dramatic. The industry has had to produce new standards in a very short period of time. And manufacturers have had to adapt to the unique characteristics of a new light source.

“The biggest change we’ve seen is the ability to fully integrate LEDs within the fixture to optimize optical performance and thermal management,” Kasler points out. “This is in stark contrast to how things have been done in the past, with manufacturers typically designing around existing lamp and ballast standards.”

LED is expected to be particularly disruptive in the long term as the anticipated long service life of LED products takes its toll on the maintenance, repairs and operations (MRO) segment of the electrical distributor’s business. Various industry forecasts have predicted a decline in industry sales starting sometime in 2017-2010. Merritt puts it frankly: “The long life-cycles of LED lighting mean that businesses built on lamp and ballast replacements will likely no longer be viable. Manufacturers and distributors alike will need to offer solutions that deliver real value to their customers rather than depending on product failure.”

He adds, however, that there will still be opportunity, but that opportunity will center around optimization rather than replacement. “As digital devices, the full potential of LED luminaires is still unrealized,” Merritt says. “As more intelligence and capabilities are built into fixtures and efficacies continue to improve, there will likely be new reasons for customers to upgrade fixtures unrelated to product lifespan. If a solution offers a compelling return on investment, users will continue to upgrade their lighting.”

Jamie Irick, general manager, North America Professional Solutions for GE Lighting, sees lighting controls as an avenue to generating additional revenue opportunities in an LED future. “LED is transforming the lighting industry from a short product life cycle to a long digital product lifecycle,” he says. “With these longer cycles, the industry transforms from units to value. Manufacturers can begin to build more value-based systems that combine multiple users’ needs into lighting systems. We no longer need to think about lighting systems as purely utilitarian, providing only light. With the evolution of the Internet of Things, we can begin to understand user needs and what outcomes they desire. Integrating various sensors, communications and software capability creates a ceiling network that is capable of delivering more value to users than simply light.”

Kasler, meanwhile, says that while the MRO market is weakening, the existing buildings market is strong, stating: “There is a huge installed base of legacy technology that will continue to provide upgrade opportunities.”

The controls revolution

Adoption of ever-tightening commercial building energy codes across the United States has resulted in significant growth in demand for automatic lighting controls. Digital control has produced sophisticated solutions offering unprecedented capabilities. Wireless control is delivering the benefits of automatic lighting controls to existing buildings. As digital devices, LED lighting is highly compatible with lighting controls, which can accelerate energy savings while extending the life of the source. As a new light source, however, LED also presents compatibility challenges.

“The desire to control light has never been greater,” says Brian Donlon, vice president, sales USA for Lutron Electronics. “In addition to the energy savings you get from dimming any light source, customers appreciate and expect better ambience in their offices and homes. As the price of wireless and digital technology continues to drop, and people become used to controlling their everyday devices through their iPad or even their phone, the desire for wirelessly and digitally controlled lighting will only grow.”

Donlon sees the lighting controls category evolving from centering on devices to systems, which requires a change in thinking. “The number one thing, which is both an opportunity and a challenge,” he points out, “is the need for the lighting industry to better educate customers about the differences between light sources and how to effectively control them. Lamps and fixtures are no longer a commodity—where a product from one manufacturer acts exactly the same as that from any other—and education is key moving forward as people adapt to the ever-changing market.”

From monitoring to color tuning to using LED lighting to communicate information to mobile devices, the future for controls carries exciting potential for how owners use their lighting and users interact with spaces. “Future LED systems will feature integrated dimming controls within every fixture as an add-on option, networked together into a responsive and controlled system across a customer’s site,” Irick says. “This network of fixtures will further drive energy reduction, efficiently controlling light levels in response to sensors that provide feedback on building occupant activities, as well as an understanding of ambient lighting as part of the day/night cycle.”

The distributor’s role

The lighting industry is undergoing transformation, but the fundamental relationship between manufacturers and distributors remains the same. And the key to sales growth and higher margins is to promote the most efficient, effective solutions for both new and existing construction.

“Distributors want to give their customers the best solutions,” says Merritt. “Manufacturers still need distributors for their local relationships and fulfillment capabilities. Technological changes mean that users often look directly to the manufacturers’ website for detailed product information. However, distributors are often the trusted adviser who has the final opportunity to make a recommendation.”

As such, distributors should develop their lighting expertise, keep up with technological changes, and align themselves with quality products. “Distributors should invest in education upfront to stay abreast on the evolution of technology,” says Kasler, “and lean on manufacturers they can trust to provide them with innovative and reliable lighting and controls solutions.”

Irick believes distributors have extraordinary opportunity and influence to generate demand, but that role is not guaranteed. “The biggest threat distributors face is maintaining the status quo and allowing others to fill that role,” he says. “The result at best would be lower distributor margins and at worst would be to be placed on the sidelines. Many new entrants and alternate channels are already selling around distribution.”

Geoff Marlow, senior vice president, sales for Acuity Brands Lighting, offers the final word: “Electrical distribution benefits by moving further along the value creation curve. Benefits in energy savings, controls integrated solutions—smart fixtures and applications, quality of light, and evolving markets such as renovation—essentially a market as big as you want it to be—all pose tremendous opportunity for our partners. Cutting a path through the noise and a partnered commitment with the manufacturer creating value with and through electrical distribution, not around it, will be increasingly rewarded.”