ONLINE EXCLUSIVE: Existing incumbents stand to benefit from the energy transition

At the time this scheme was launched, Dutch multinational corporation Philips was the clear market leader in the Indian lighting market. There were several other large Indian firms with diversified electrical businesses. The prominent ones were Bajaj Electricals and Crompton Greaves, with their roots in pre-Independence; Havells, founded in 1958; and Surya Roshni, founded in 1973. Wipro, the international software leader, had a large domestic lighting business, too.

The shift to LEDs shook up the lighting industry. The light sources were being manufactured by semiconductor companies, not by lighting companies. Glass was no longer important, but refractive plastics were. These key components were available to not only the incumbents but also to whomever wanted to set up an assembly unit. Large numbers of companies rushed in on account of the lowering of the entry barriers. By 2018, the prices dropped by about eight times to about INR 39 (about $0.60). In the course of just four years, the technology shifted, entry barriers dropped, and prices plummeted. As the dust settled, however, the incumbents had held on. Philips Lighting (now Signify) was still the market leader.

How did incumbents keep a foothold in the market?

First: They actively engaged. The lighting industry worked closely with the EESL through its existing association, Electric Light and Component Manufacturers Association of India (ELCOMA), to help develop its intervention. Nirupam Sahay, who was heading Philips Lighting India, was elected as the president of ELCOMA in 2012. EESL and ELCOMA discussed the plans extensively in the run-up to launch. For Sahay, “What was good for the industry was good for Philips. We were involved from day one and we built manufacturing scale in anticipation of the plans.” Saurabh Kumar, executive vice chairperson, EESL, explained the motivation of the lighting companies: “They understood it was a new market that we were creating for them. On their own, they would have never been able to tap into the replacement market so quickly. And inside the packaging, the bulbs had the company branding.”

Second: Companies followed a twin process of globalization and indigenization. They set up teams to source key components — such as semiconductors — from China and the Far East. Philips had an advantage in that the company already had an R&D center in Shanghai and relationships with component vendors in China. In 2015, Philips announced that it would sell its own LED unit, and freed itself to pursue market relationships with specialized vendors. The Indian companies did not have their own global units but were quick to set up strong working relationships with global suppliers.

Even as they procured the key components from overseas, the large lighting companies worked with local suppliers to reduce costs. The ability of local suppliers to supply important components grew over time. They manufactured the metals that conducted away the heat produced by the LEDs and the optical lens that converted the point source LED lights to a more uniform glow. In this, too, Philips had a head start. In the many years that Philips had been present in India, when the country followed an import-substitution economic policy, it had developed a network of “co-makers.” These organizations manufactured to the standards prescribed by the company. By 2019, the lighting company now operating as Signify was dependent on LED sales to the extent of 82% of its business. Purchases of stock-in-trade as a share of total income stood at 56% of total income in that year (Source: Signify company annual reports).

Like Signify, other companies also rapidly moved manufacturing to a network of local suppliers, in particular for the domestic lighting line. As prices plummeted, there was little need to protect intellectual property on product design and manufacturing. Vishal Kaul, who has joined as the head of the lighting division in Crompton Greaves Consumer Electronics recently and came from the mobile industry, summed up: “The manufacturing costs for electronics products even out across all players and, in any case, some of the local suppliers are also design powerhouses.”

Third: The companies focused on expanding the market. Companies started targeting the offices of large information technology and services companies with the value proposition that the higher initial costs could be recouped through savings. The message had to be conveyed to the CFOs. The existing sales teams, who had relationships with corporate procurement officers lower down the hierarchy, needed to be revamped. Senior managers got involved. Sahay and Sumit Joshi (now CEO of Signify India) hit the road, meeting the bosses of global companies such as Accenture and Infosys. They pitched a lighting solution, where Signify would be responsible for meeting prescribed illumination standards and providing maintenance as well (this is often called lighting as a service, or LaaS). A lighting application team, headed by Sudeshna Mukhopadhyay, worked with architects and building consultants to come up with the right solution. The team had to contend with the demands of finicky customers and power quality distortions coming both from the grid and the backup generators.

In the domestic segment, while EESL was focusing on the replacement market, lighting companies focused on couples building new homes. Sanjay Gupta, senior vice president in charge of Wipro’s lighting business, reeled off the names of small towns across India where first-generation home buyers do not think twice about dropping INR 200,000 (about $2000) to make their apartment “look beautiful.” Companies invested heavily in advertising. The former Philips Lighting organization signed up Ranbir Kapoor, a Bollywood heartthrob, as its brand ambassador in 2013. Mukhopadhyay’s team designed the lighting of Eden Gardens. The project generated revenue and made national news in the cricket-crazy nation.

What happened to companies that rushed in?

Most of them failed. The new entrants underestimated the resources required to take advantage of the market. The power-distribution quality in India was poor and the electronic drivers failed to withstand surges and distortions. EESL was strict in holding back a portion of the project cost during the warranty period. With low profit margins, a larger-than-expected product failure could easily push companies into losses. To ensure quality, EESL also put in place qualification criteria that emphasized both financial strength and technical competence. Companies participating in tenders often found their working cycles stretched as payment cycles could be long. EESL's amount owed to creditors on Mar. 31, 2019 was nearly 1.5 times its purchase of stocks during the year (Source EESL Annual Report, 2019, linked above). Companies winning one tender could be crippled with fixed costs if they lost the subsequent one.

Lessons for corporations, entrepreneurs, and investors

In this crucial decade of climate change, governments can be expected to step in with large interventions to create markets for green products. If successful, these interventions can wipe out the higher capital cost of green products rapidly and make wholesale shifts in markets. Large companies with strong brands have certain advantages in these situations. They can engage with the government through existing trade associations and they can quickly acquire the technology from anywhere in the world. Larger companies have the financial resources to weather longer working capital and make bets on markets where governments are not intervening directly.

Entrepreneurs and investors in private companies need to be careful about their choices. One way to succeed is by providing crucial services to the value chain. An example is Dixon, which was set up in 1993 to provide manufacturing services to electronic brands. It had attracted private equity investment from Motilal Oswal, one of India’s largest financial services companies, in 2008. The company went public in 2017 and by 2019 it was manufacturing 50% of all light bulbs sold in the country. All major lighting companies were its customers. Initially, Dixon worked on customer designs but rapidly invested in upgrading its own design skills. By 2019, the company claimed that more than 70% of the products it manufactured were based on its own designs. And yet Atul Lall, CEO of Dixon, is clear that “we will partner with the brands, not compete with them.”

The other opportunity is to focus on a problem and get out early. Blume Ventures, an early-stage investor, made a bet on Promptec Renewables in 2011. Karthik Reddy, founder of Blume, said he was impressed that the company was “tinkering around with the issue of electronic drivers causing LEDs to fail.” The company grew by about ten times in four years and by 2015 — the very year EESL launched its program — had been acquired by Havells.

Conclusion

The time window for preventing unprecedented global warming is collapsing fast. If governments step in to create large markets for green products, existing incumbents may well stand to benefit. If the lessons from this lighting transformation are any guide, they should participate in the market transformation and not worry too much about controlling intellectual property. Instead, they should follow the principles of open innovation to get products cheaply to the market. The ability of new entrants to disrupt the market may well be limited. They would have to establish a very clear value proposition in the ecosystem to be successful.

ACKNOWLEDGMENTS

The authors thank Saurabh Kumar, Nirupam Sahay, Sumit Joshi, Sudeshna Mukhopadhyay, Sanjay Gupta, Vishal Kaul, Atul Lall, Karthik Reddy, and Anil Bhasin for agreeing to be interviewed for this article.

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SANJOY SANYAL is the founder of Regain Paradise, a cleantech advisory firm. He works with both public and private investors to invest in climate-tech ventures. Sanyal is an alumnus of IIM Calcutta and IIT Kharagpur.

RAJIV KHOSLA is the founder of Bignify, which helps its clients improve efficiencies. Previously, he was the managing director of Lumileds (Philips Automotive Lighting unit) in India. Khosla is an alumnus of IIM Lucknow and IIT Kharagpur.

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