LED lighting has the potential to be one of the true blockbuster clean tech markets. A 2011 report by McKinsey & Company forecasts the global lighting market to reach €108BB($140BB) by 2020 with LEDs taking €64BB($83BB) of that share. This is a 10X increase from the LED lighting market size today. Technology is advancing as well; with Cree producing a record 254 lumen-per-watt device in 2012 - almost a 3X increase over the last decade. Exciting stuff for VCs indeed!!! At Pangaea Ventures we share in the excitement but worry that current thinking just won’t take us far enough.
The LED industry has attracted some of the world’s largest industrial technology companies and is a truly enabling technology for all types of consumer electronics today. Unfortunately, the market penetration of LED lighting represents only a few percent of sales on a per-lumen basis and a trip down to the local big box reveals why. A 60-watt equivalent warm LED retails for $20-25 with an efficiency of 60-65 lumens/watt. Walk down the aisle and you’ll find equivalent compact fluorescents (CFLs) in terms of output and efficiency costing 10X less. It's sort of like putting $700 Gucci jeans next to the Levi's section. Where is the mass market going to go? A quantifiable price premium is justified due to lifetime, but end-market fragmentation, difficulties creating standard use profiles and practical electrical monitoring limitations or costs means that LED lighting will struggle to benefit from low-cost, long dated financing packages that technologies such as solar have enjoyed.
In the simplest of terms, LEDs are solar cells operating in reverse. Incumbents might point to solar cost and price curves that have driven solar electricity to grid parity in many locales and use this to foreshadow what’s in store for LEDs. Unfortunately the LED industry has already enjoyed the steepest part of the cost-curve with the LED component industry already reaching the size of the solar industry of 2007. Unlike the fat solar margins of 2007, LED margins are razor thin and an Asian manufacturing machine approaching full depreciation is already in place. Economies of scale aren’t going to help us much more.
Neither are the following:
By now you might be thinking to yourself that I am such an LED bear, that reverting back to kerosene lamps is the solution that I will propose. Nothing could be further from the truth. By 2025 LED lighting will be a main street technology. But costs and prices need to come down by about 10X to the 2020 targets proposed by the DOE. What is needed to achieve this goal? New breakthrough technology that simultaneously enables a step change in cost structures, while transforming the high efficiency lab devices to commercial products. This new technology must drop into the existing LED value chain as it is today. At Pangaea Ventures we recently placed our first bet on a company proposing to do just this and we hope to hear about other new ideas in the coming years.