Like many industries, the lighting supply chain is largely globalized. While this produces high volumes of LED products, it is vulnerable to macroeconomic shocks such as tariffs and the COVID pandemic. These disruptive events highlighted vulnerabilities for manufacturers.

In the lighting industry, shipping delays and component shortages of integrated circuit chips used for electronics, notably LED drivers, have extended lead times, affecting product availability. By the end of 2020, 11 percent of building contractors surveyed by the U.S. Chamber of Commerce for its Q42020 Commercial Construction Index reported shortages of electrical products other than copper wire, and 10 percent reported shortages of lighting products. Electrical and lighting products dropped out of the top three in the Q12021 report, but troubling signs remain.

During this period, a number of major U.S. LED product manufacturers announced price increases ranging from two to eight percent on LED luminaires and up to nine percent on LED drivers. They justified these increases by citing higher shipping costs, unstable logistics, raw material shortages, unfavorable exchange rates, and supplier price increases.

In the second quarter, the National Electrical Manufacturers Association’s (NEMA) Electroindustry Business Confidence Index was pegged at 65.4 in May, solidly in expansionary territory but a retreat of 24 points from April. Respondents largely cited labor and materials shortages and resulting inflationary pressures as restraining factors on growth. Comments about future conditions mirrored these concerns, while manufacturers were optimistic about demand continuing to improve.

To better grasp these supply chain issues, it is worthwhile to understand how the lighting supply chain changed over the past decade. In March 2021, the U.S. Department of Energy (DOE) published 2020 LED Manufacturing Supply Chain, which characterized the global manufacturing supply chain for LEDs and LED products. The report looks at its economic impact in the United States, impact of macroeconomic shocks such as tariffs and the COVID pandemic, and opportunities for more domestic manufacturing.

The LED product manufacturing process starts with the LED die or chip, which is typically mounted in packages that include phosphor material for conversion of the LED emission into white light. The packages are then mounted on a printed circuit board for integration into a lamp or luminaire along with optics, heat sink, driver, any control devices such as sensors, and housing. A variety of materials is consumed in these processes. LED product manufacturing has become fairly diversified with specialist companies.

DOE found that LED die and package manufacturing is dominated by Asia as a low-cost manufacturing hub, with LED lamp manufacturing concentrated in China. LED luminaire manufacturing is geographically diversified; the United States is home to a large number of manufacturers. In 2019, the U.S. LED luminaire market was estimated at about $10.2 billion.

DOE evaluated a typical LED 2×4 troffer as a representative commercial luminaire and broke down its cost. As LED package costs have fallen considerably, DOE estimated it to be around five percent of the troffer’s total product cost in 2020, compared to 33 percent in 2014, with an extra 10 percent for the printed circuit board. The rest of the value is in the optics, driver, housing, etc.

DOE estimated overall that 75 percent of the value in an LED troffer is to the U.S. economy and 25 percent to foreign. Based on an average 25 percent markup due to value added from engineering, design, and shareholder profit, the value added to the U.S. economy increases to 89 percent. Analyzing each segment of the lighting supply chain and inherent demand in the U.S. market, DOE assessed that the LED luminaire market represents the biggest opportunity for domestic lighting manufacturing.

Two big macroeconomic events disrupted the supply chain in the past several years. In 2018 and 2019, Trump Administration tariffs on certain goods originating in the People’s Republic of China went into effect, including LED packages and LED luminaires. Generally, the 5-25 percent LED package cost increase was passed on to U.S. customers. To avoid the tariffs, some manufacturers of intermediate components such as light engines moved manufacturing from the U.S. to Mexico.

The second big event of course is the COVID pandemic, during the first 6-9 months of which manufacturers reported supply chain disruptions including shortages and delays, decline in sales and demand, and a mix of inventory shortages and surpluses. A swift, major impact was a shortage in LED packages, materials, and driver components resulting from manufacturing shutdowns in China, which affected the rest of the supply chain. As the pandemic proceeded, a significant drop in demand and attendant drop in sales steadily rose in importance.

DOE cited four major opportunities for LED luminaire domestic manufacturing in the U.S. moving forward. These are high-end LED luminaires, LED luminaires that require quick lead times while able to be maintained in relatively low inventories, niche-product products such as UV and humancentric lighting, and additive manufacturing (3D printing) or other manufacturing innovations. Of these, additive manufacturing offers dramatic potential to streamline the supply chain, though it is currently used primarily for prototyping due to cost and materials efficiency.

Download 2020 LED Manufacturing Supply Chain at https://bit.ly/2Sr5TeN.