Newly Independent Osram Must Act Before the Lights Go Out

Having been spun off by Siemens in early July 2013, the management of Osram Licht AG now has greater flexibility to make the changes it deems necessary to shift the company’s focus towards the rapidly expanding LED (light-emitting diode) lighting category.

A burning platform

Osram is the world’s second largest lighting company after Philips but has seen its share of the global light sources category decline sharply in recent years, from 10.8% to 9.6% between 2009 and 2012. This category was worth US$22.6 billion in 2012, with real annual value sales declining by 2.9% between 2007 and 2009 before recovering strongly to grow by 11.3% between 2009 and 2012.

Like mobile phone maker Nokia, Osram is clearly standing on a “burning platform” as a result of technological development and needs to adapt rapidly if it wants to avoid being marginalised in a similar manner to the likes of Kodak in the photography market.

Managerial flexibility key to a successful transition

Such transitions are notoriously difficult to pull off as they require ripping up established business models, something that is difficult to do amid a conservative management structure with layers of bureaucracy and entrenched (and often competing) interests. In this regard, the spin-off makes sense. Osram has already initiated a major reorganisation that is intended to prepare for the ongoing transition from conventional to solid-state lighting (SSL) technology based on LED. It currently employs around 40,000 people worldwide but is seeking to cut this number by around a fifth and reduce the number of manufacturing sites it operates from 43 to 33 in order to realise annual cost savings of almost US$1 billion.

It has already made significant progress. According to Osram, LED-based products already account for more than a quarter of its revenue, with that proportion set to grow rapidly. The company
manufactures LED chips at production facilities in Regensburg, Germany and Penang in Malaysia. Osram has taken another positive step by settling a number of patent disputes with South Korean rival Samsung in late 2012. This leaves Osram’s management with fewer distractions as it seeks to manage a very difficult and ambitious transition process.

Ending legal wrangles a positive

The smaller, leaner and more flexible Osram that is gradually nudging its way out of its chrysalis is likely to have a much better chance to survive and thrive in the long term than a unit of a conglomerate like Siemens. Facing fierce price competition in the LED category, particularly in Asia, Osram is losing money and its future is on a knife edge, with inertia at this point likely to prove fatal.

While the company’s future remains uncertain in a market undergoing a swift and brutal transition, it has at least nudged the odds more in its favour. Moreover, the potential rewards are great, with real growth of 21.7% forecast in the global light sources category over 2012-2017 as LED technology becomes increasingly mainstream.