Value Partners 2011 newsletter

1. VALUE PARTNERS NEWSLETTER - NR. 05 - APRIL 2011 - POSTE ITALIANE SPA - SPEDIZIONE IN ABBONAMENTO POSTALE - 70% - DCB MILANO
Power-Up Power-Up Pow
April 2011
N EWSLETTER

2. Value Partners Newsletter
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3. NEWSLETTER
Anyone who’s ever played Pac Man, Bubble Bobble or Mario Bros – and there are
millions of such people all over the world – knows what a power-up is: an extra Power-Up Power-Up Pow
advantage. Power-ups are objects, abilities and qualities that let you exceed various
levels of play, and win or extend the game. Being lucky’s not enough to get a power-
up, though. You have to be good from the very start, brave, and determined – in a
word, skilled. And if you are, you’re rewarded.
With this in mind, we’ve called the first edition of the 2011 Value Partners new-
sletter Power-up. It introduces companies and sectors that, even during the recent
economic crisis, focused on their skills and capabilities, and then emerged with an
advantage that looks hopeful for the start of the decade.
Power-up
April 2011
No sector was left untouched by the crisis – not even the automotive sector, which fifth issue
witnessed successful turnarounds, as with the case of the Italian company VM Mo-
tori or the Carraro Group. In this issue, Enrico Carraro shares with us the most chal- 4 Moving with the times: managing
lenging moments of his group’s global turnaround. We also take a look at China – a for value in the automotive sector
market that is set to buy a quarter of all cars sold worldwide this year. 6 Carraro 2.0: growing globally beyond
the turmoil
It’s also interesting to discover the power-ups in the luxury goods and fashion indu-
stry, which sharpened its marketing tools, centring every initiative on the new cer- 9 Automotive components in China:
tainty that consumer choices are based on emotions. Value Partners met Riccardo opportunities and challenges
Bellini, vice-president of Diesel, a company that successfully focused on authenticity, 13 The consumer is my lover
innovation, and brand distinctiveness, beginning with the assumption that the con-
sumer is no longer the marketing manager’s boss, but rather his or her lover. 14 Green economy Cassandras:
are we headed towards a solar
The energy sector is also at a turning point. The uncertainty around government in- photovoltaic bubble?
centives for renewable energies in all countries is forcing operators to defend them- 17 Green energy bubbles:
selves from the risk of a possible bubble, as we hear from Vittorio Chiesa, Professor an academic perspective
at the Politecnico di Milano, or to look for new investments in energy savings sec-
tors, where LED lighting technology – an extraordinary power-up – shows promise 19 LED there be light: are you ready
of a new revolution. to replace your light bulbs?
21 The electric car: last century’s idea,
Under the pressure of reducing emissions and dependency on fossil fuels, the largest this century’s future
car and utility vehicle manufacturers are investing in the electric car, which is pre-
paring for mass production and a real gain in popularity. It will be interesting to see 27 New needs driving the change
not just the winning models, but also the strategies and investments from public in health-care business
and private players to create the necessary infrastructure for recharging points.
Even in the health-care sector, the crisis and increasing competition from generic
medicines has brought about an original power-up: the gradual shift towards a
‘patient-centred’ model. Pharmaceutical companies are looking for the key to suc-
cess in an ongoing relationship with the patient, by emphasising prevention and
promoting a healthy lifestyle.
‘Power-up’ is also the recurring theme with which Value Partners has searched for
value creation niches since its launch, even in more conventional businesses, in order
to gain a competitive advantage during a crisis, and be ready to take off again with
new energy, new products, but most of all, new ideas.
3

4. Power - up
There is compelling evidence that the automotive sector has
Moving with the times: managing for value been hit hardest by the global economic and financial crisis.
in the automotive sector Since late 2008, in fact, the news has been flooded with an-
nouncements of severe supply chain disruptions, the bankrupt-
Alberto Calvo, Milan office cy of tier-1 suppliers, proposals for government bailouts, mas-
sive protests by workers’ unions and the rescaling of production
capacity almost everywhere on the planet.
Still, despite a dramatic slump in sales volumes across all market segments, we believe
that companies along the entire value chain can create solid value by adopting wise and
long-term-oriented management practices – without being forced to consider industry
consolidation as the primary way out of this crisis.
As a matter of fact, numerous industry analysts have praised the spectacular comeback
of Ford in 2009, when all of its direct competitors (GM, Toyota in the US, Daimler and
PSA in Europe, just to name a few) were fighting for survival in the direst of straits. The
performance of Alan Mulally as CEO is even more remarkable considering that Ford has
refused to accept any governmental support to weather the recession, and has focused
only on getting good products out of its plants at the right cost, channelled through a
well-balanced dealership with a fresh, effective marketing strategy.
On a global scale, KIA, too, has recorded an astonishing boost in new car sales, both in
Europe and in the US. The company has been able to match the cash saving needs of
most of its users and customers during the crisis, with a well-tailored, no-frills product
offering, built over good quality product platforms and supported by innovative com-
mercial policies.
In the industrial sector (such as agricultural and construction equipment manufactur-
ing), bottom-line success stories in mature economies are still difficult to see. This is due
to the relatively high intensity of capital and the strong correlation with the large cyclical
up-and-downs of the real estate, construction and engineering markets. However, the
leading players are undergoing profound restructuring programmes to get themselves
in better shape – before demand will bounce back.
In this business environment, we have a remarkable story of turnaround to offer, which
allows us to illustrate and pinpoint the core ingredients of a successful “surfing the mar-
ket tides” strategy.
VM Motori, an Italy-based, tier-1 supplier of high-performance diesel engines on a global
scale for both automotive and industrial OEMs, experienced – like many of its peers – a
dramatic wake up call in November 2008. This was when most of its customers suddenly
decided to stop all engine purchases, thus reducing internal activity to almost zero.
Management, however, quickly realised that the world had changed for good, and put
in place a very aggressive action plan to keep its operations alive during the storm and
ensure healthier conditions when a “new normal” would set in.
Start preparing now
for future growth
Managing a deep crisis: Resize your capacity
a three-pronged approach
to corporate restructuring Stop the bleeding
› Ensure cash flow for 18 months › Get internal saturation › Reshaping portfolio
close to 90% › Launching new products
› Entering new markets
› Forging alliances
4

5. NEWSLETTER
As was the case for VM Motori, all industry players that are hit hard by this sort of abrupt
market downturn and want to preserve their ability to thrive and succeed in the future
should draft plans centred around the following overarching goals.
At the very beginning, make sure your operations have enough cash to survive the 18
months ahead
It is essential that company management quickly engages and builds a fruitful collabora-
tion with lenders and shareholders, discusses the situation in a transparent manner, and
presents the board with a bold action plan – along with any impact on company figures.
More importantly, this eliminates complacency and “happy ending” biases, which most
of the time, don’t fully consider the possible extent of the crisis. A top-level, scenario-
based new industrial plan, which makes full reference even to the worst case of the new
competitive context, is key to ensuring good financing.
At the same time, a war room aimed at finding and protecting all possible internal sourc-
es of cash generation and freed-up capital must be established. Usually, fixed production
costs, general expenses and working capital dynamics are the main target of such a task
force, which must also typically reset priorities in capital spending.
Take the opportunity to significantly adjust and resize the capacity of your operations Stop the bleeding at
In a world that will run at two different speeds (replenishment and substitution in ma- VM Motori: 1st year impact
ture economies; expansion and growth in emerging countries), both your physical as-
set base and your staffing levels are probably inadequate for mid-term market demand. Production fixed costs -10/15%
Many players have to come to grips with reality and to take decisive actions to restruc-
ture on both fronts. General expenses -30%
If it is more difficult for management to readjust production capacity in the short term, Inventory (% on sales) -50%
the institutional framework devised recently by many governments allows for smooth
transitions and the displacement of labour capacity across different industries and com-
panies. However, this critical task requires a proactive, hands-on approach and skilful
negotiation with public authorities, government representatives, local communities and
stakeholders, which have to be carefully managed through a proper communications
strategy.
Lay down the foundations of your company’s ability to compete in the future now
Even in standardised, consolidated industries which are characterised by high levels of
economies of scale, creative business models can prove successful in the competitive
arena. Each company must ask itself on the basis of which distinctive assets or capabili-
ties it can deliver material value to selected customers. Interestingly enough, VM Motori
has, over time, crafted a unique selling proposition to OEMs unable to afford the de-
velopment of purpose-built, low-volumes production lines within those OEMs’ product
ranges. With a modular “core” engine platform, and by making enough customisation
available for customers (for example, in ancillaries, interfaces, and accessories), the com-
pany has gained a strong reputation and distinctive positioning among its peers.
Most players in any business may realize large benefits by fully embracing a true, open
co-operation approach with selected customers, suppliers and competitors, in all of those
situations where stand-alone strategies are not sufficient to address fundamental indu-
stry barriers, such as in product development, distribution networks, and supply chains.
Despite the fact that co-operation has long proved successful and is widely used in to-
day’s management practices, it is quite common to come across situations where
management resists a true open boundaries mindset. This denies them the opportunity
to create possible synergies – for example, teaming up with competitors by pooling the re-
sources allocated to non-critical phases of their business; slashing costs by allowing low-
cost country suppliers to provide larger portions of component production, redesigning logi-
stic footprints and quality control procedures to speed up deliveries, and reducing material
5

6. Power - up
inventories. Strategic partnerships, joint ventures and licensing contracts in untapped mar-
kets are typical examples of such moves.
+
Diesel engines competitive map:
strategies must reflect distinctive
capabilities % captive
revenues Large scale, OEM -
Selection driven integrated
players,
competing on
volume
Niche/stand -
alone players, Large/
competing by independent
“extracting engine producers,
complexity” in open markets
from big OEMs competing
operations (speed,
customisation, low
volume batches)
- +
% of non-automotive volumes
Moreover, a critical task for managers is a structural business portfolio de-risking: most
of the time, an internal “natural hedging” against market fluctuations and business vo-
latility can be obtained by rebalancing the weight of businesses within a portfolio. For in-
stance, automotive and industrial can be, by a non-negligible extent, counter-correlated,
thus limiting the exposure of the company bottom line to unpredictable events within
international markets.
Finally, as our experience shows, in difficult times like these, the best CEOs consistently
stand out because of two critical capabilities:
• A bold, energetic leadership style, enabling them to mobilise company ranks, rede-
sign the company and banish the negative attitudes that very often leak into line
managers. This is especially valuable for small and mid-size companies (e.g. “This has
never worked here, we’re too small, when the big guys show up; we’ll just follow….”).
• The ability to quickly frame a problem, simplify internal decision-making and identify
high-value options amidst a jungle of possible alternatives, which always get enthu-
siastic support by any sort of advisors in the midst of a deep crisis.
Carraro is an international group that leads the world in highly efficient,
Carraro 2.0: growing globally eco-compatible power transmission systems. Founded in the 1930s by
beyond the turmoil Giovanni Carraro, it is divided into four independent business units, con-
trolled by the Carraro SpA holding, each with a specific mission and with
An interview with Enrico Carraro
a different risk profile and targeted strategies. The Group’s core business
consists in the design, manufacture and sale of integrated drivelines (ax-
les, transmissions and electronic controls) for off-road applications, and agricultural and
earthmoving machinery. Carraro is a longstanding partner of the main international
OEMs, such as AGCO, CNH and Caterpillar.
In 2006 the Group took over Elettronica Santerno, a company specialising in power elec-
tronics. This operation enabled Carraro to combine mechanics and electronics, and also
to enter into new, rapidly expanding sectors, such as renewable energies.
6

7. NEWSLETTER
The financial and industrial crisis in 2009 had a dramatic effect on the Group, as it had
to deal with a drastic slowdown in the markets and also the loss of orders from the main
OEMs, which turned to their own warehouse stocks.
After years of growth the Group suffered a loss in turnover, from almost € 1 billion to
€ 500 million, however thanks to a quick, committed turnaround process, it managed to
contain operational losses to € 1 million in terms of EDITBA, and to tackle the recovery
with success. Today Carraro has reached a new competitive position, approaching pre-
crisis turnover figures (> € 710 million), with a business model that has been completely
updated, more competitive products, and a stronger team and client portfolio.
Value Partners met with Enrico Carraro, Executive Vice Chairman of Carraro Group, to
analyze the phases and the difficulties of a successful turnaround in a mature industry.
Enrico Carraro joined the family
A relaunch and reorganisation process is unsettling and risky in itself, but it becomes business in 1985. In 2007 he
even more so in the framework of a crisis. The Carraro Group has managed it, but how? accepted the office of Executive
A fall in demand, such as that which took place in 2009, has no precedents. Nobody, not vice chairman of the Carraro
even our clients, could have forecasted it. What’s more, we were coming out of a double- SpA board of directors (BoD),
figured period of growth. The destocking effect along the chain increased the already working alongside the Chairman
considerable reductions in volumes, which were close to 70% in some cases. In 2009, our in leading the Group. He also
turnover halved. promoted the new business
development initiatives, under
Such a situation couldn’t be dealt with using ordinary measures. We realised right away which he co-ordinated the
that a total rethink was required, with regard to the company, our business model, and definition of new businesses
geographical position. Therefore short-term intervention was required to ensure the and the relative development
‘survival’ of the Group, while maintaining long-term vision. programmes over the medium
Consequently the Group’s strategic relaunch plan, known as Carraro 2.0, was created, and long term. He chairs
with two fundamental guidelines: first, to maintain and strengthen research and inno- the Group’s strategic committee,
vation activities, crucial for sustaining the Group’s competitive position, and second, to a consulting organization to the
look to emerging markets, working within a local framework. BoD. Enrico Carraro is also director
on the board of Assosolare,
What aspect did you start with? the national association of the
With the most important one, the customer. Basically because never more than at that photovoltaic industry affiliated
point, during such a difficult period, had we realised how important it is to listen to with Confindustria Energia.
our own partners, to work out how to ensure the presence of the Group in the various
markets together. Nothing was how it was, no long-term forecasting could be done, we
just had to play it by ear. A high level of flexibility was required of everyone.
What was the next move?
We concentrated on the product. We analysed and re-analysed cost structures, asses-
sing new component standardisation processes, reducing complexity and re-organising
design and manufacturing processes. TTM (time to market) improved immediately, and
hidden costs relating to lack of quality were eliminated.
At the same time we operated within a local framework, thanks to industrial platforms
located in various emerging geographical areas, in order to guarantee the best products
for each market, with the solutions and level of sophistication most suited to the various
contexts. Another reason for this is that technology in itself does not always meet every
requirement.
On the established markets we followed the specific actions of the main OEMs, by
working on advanced transmission systems (automatic transmission with electronic
control, hybrid power trains, and continuously variable transmission).
How would you define Carraro now, after such extensive reforms?
Carraro is a Group that has been strengthened, with a holding that defines strategies
and has 4 heavily focused business units, with independent objectives. Aptitude for
change is in our DNA, and we are now experiencing the umpteenth significant expan-
7

8. Power - up
sion phase. From the agricultural equipment we were producing in the ‘30s we went
on to tractors, and from complete vehicles to transmission systems. Now we’ve ope-
ned the door to electronics applied to mechanics and the renewable energy sector. The
Carraro brand has always been recognised as a technological partner by the Group’s
customers.
The Group has been active for several years in the renewable energy sector with Elettro-
nica Santerno, a company with a distinctive business model and a double-figured rate
of growth, compared with the mechanics sector. Has this aspect further complicated or
supported the relaunch process?
Integration between mechanics and electronics has been a key factor for some time now
in the industry, with applications ranging from electric vehicles to large earthworks ma-
chinery. With the acquisition of Santerno we capitalised on our technical knowledge of
the consolidated businesses, and at the same time we seized the opportunity to extend
the solutions we offer, also with regard to new applications linked to renewable energies,
such as photovoltaic and wind energy.
We found ourselves dealing with markets undergoing exponential growth, which
have a logic that is completely different from traditional thinking. We started
with a solid product range, with inverters which are very advanced technological-
ly, and very competitive. Quick success soon followed and the undisputed leader-
ship position of the small company at Imola, which grew exponentially in a very
few years.
What did you give priority to during the relaunch process?
Straightaway, and day by day, to managing cash flow. In a serious crisis situation cash
flow has to be monitored continuously. Strengthening financial position is the founda-
tion on which an industrial relaunch plan should be based. It’s a rule that shouldn’t be
disregarded.
The Carraro Group is one of the iconic companies of Italian industry - family company,
longstanding reputation, connected to its roots, now a multinational. How did this tran-
sformation come about?
We are entrepreneurs, we’re passionate about our business. Over the years we found
ourselves dealing with various market scenarios, and we never lost our industrial spirit
for advanced technology, cutting-edge products, and new production platforms. That’s
just how we are. Our pioneering experience in India followed in the ‘90s, and then the
globalisation process that led to us being present with production activities on every
continent. Now it’s a case of foreseeable, compulsory choices. Ten years ago, that’s not
how it was.
Management is a critical factor in this phase. Is it possible to make a radical change in
strategy, without changing the management team?
We entrusted the relaunch to a new CEO, Alexander Bossard, and capitalised on in-hou-
se talent with new challenges, by assigning significant amounts of responsibility. As a
result we showed we were changing direction, but also confirmed one of the Group’s
values - team spirit.
Do you regret not having done something, either sooner or better?
I don’t have any regrets, but I often think of how to avoid difficult situations in the future.
This doesn’t curb our desire to grow. Short-term measures should only represent a small
part of a much broader plan. The objective has to be permanent transition towards new
markets, in terms of applications and areas of the world. There’s always an opportunity
to be taken. However anyone wanting to run a company now is called upon to make an
extra effort, compared with the recent past.
8

9. NEWSLETTER
What do you feel has been the most decisive action taken, and of which you’re most
proud? And the most upsetting one?
It’s not about my direct actions. I’m proud of the cohesion, which has been demonstrated
by the facts, the management team, my father, my brother Tomaso (chairman and CEO
of Gear World, Business Unit Components), the managing director Alexander Bossard,
and the new BU and department managers - all - working together and in full harmony.
The most upsetting measure was, without a doubt, having to plan a significant reduc-
tion in staff, about a year ago. Now our colleagues almost number that of pre-crisis le-
vels. A positive sign however you look at it.
China has been the world’s largest automotive mar-
ket since 2009, and it continues to hold great poten- Automotive components in China:
tial: auto sales – particularly for fuel-efficient com- opportunities and challenges
pact vehicles – are expected to keep growing in the
near future, and China is likely to account for about Enrico Lanzavecchia, director, and Tiger Shan, principal, Beijing office
a quarter of global car sales by the end of 2011.
The government’s stimulus policies – Growth in China’s auto market
Total vehicle new sales: China vs the world
transition from an investment-driven Million units, %, 2007 - 2011E is accelerating and soon China
economy to a consumption-driven
economy; incentives to consumers CAGR 2006-2011E will account for a quarter
and producers of world auto sales
71,9 74,5
Increased personal disposable inco- World 68,3 68,8 1%
65,4
me – 15% GAGR 2000-2009, set to total Note: 2010-2011E China vehicle new
exceed US$ 2,000 in 2011 sales are forecast by JP Morgan; world
88% 86% 79% 77% 76%
vehicle new sales are forecast by WW
More developed consumer financing Global Insight
market
-3%
Competitive market and more Source: CEIC, JP Morgan, The Econo-
affordable vehicles – from luxury mist Intelligence Unit, Value Partners
to everyday consumer product analysis
Improved road infrastructure – 19%
national highway and intra-city
transportation systems China 12% 14% 21% 23% 24%
2007 2008 2009 2010 2011E
2009: Government stimulus
PV penetration: 39 vehicles/1,000
people vs global average of 120
vehicles/1,000 people in 2009
Several factors are driving this expansion:
• The positive economic trend results in increased disposable income for Chinese con-
sumers, who also benefit from the developments in the consumer financing market
• The government stimulus policies are increasingly oriented to sustaining private con-
sumption, through incentives to both consumers and producers
• Competition and offer enrichment are making new car models affordable for larger
shares of the population (overall car penetration is still below 2 percent in China), and
improvement in road infrastructures are facilitating usage outside the main urban
centres.
The rapid ageing of vehicles park will also result in a sustained expansion of the post-
sales auto parts market.
9

10. Power - up
Potential in China’s auto parts Revenue of total Chinese auto parts industry China’s after-sales market is growing rapidly:
as the age of the country’s car fleet increases,
market has been unleashed and US$ billion, %, 2005 - 2015E the demand for spare parts will grow faster
than vehicle sales growth
rapid growth is expected in the
CAGR 2006-2011E
years to come
The market is open for 100% foreign owner-
350 ship and most global brands have already
established a presence
20%
Domestic capability is still limited: more
advanced parts, especially for high-end plat-
forms, are still imported from overseas, but
the government has stepped up their “locali-
sation efforts”
100
67 Backed by the government, there are subsi-
Source: KPMG, JD Power, Value Partners dies for R&D by domestic players
analysis 2005 2008 2015E
Auto parts offer attractive opportunities for foreign producers, because the constraints
are lower than in vehicle production (for instance, 100 percent foreign ownership of local
operations is allowed) and the capabilities of domestic players are still limited (especially
in electronics systems, transmission systems, fuel efficiency and safety solutions). In fact,
foreign players dominate in the Chinese components market, with an estimated share
of 60 percent – growing to about 80 percent for sedan components. Because domestic
capability is limited, more advanced parts – especially for high-end platforms – are still
imported from overseas.
Continued growth will be accompanied by some substantial changes in the composition
of both local demand and local offer:
• On the demand side, small models are likely to increase their dominance, while the
geographical focus of sales will shift towards 2nd and 3rd tier cities and energy effi-
ciency and environmental compliance will increasingly affect consumer choices, hel-
ped by explicit governmental incentives
• On the offer side, the government will push the development of domestic production
even further, directly sustaining R&D investments and local procurement and pos-
sibly promoting aggregations among the Chinese manufacturers, while the foreign
manufacturers will try to expand their distribution coverage and deepen their pre-
sence by moving towards a fully fledged “local for local” approach.
Since the Chinese government favours domestic development, the number of domestic
players is rising and the competition with foreign players is intensifying. For western fir-
ms, the recipe for success in the Chinese automotive and auto parts market will be based
on becoming as local as possible, acting on three key levers:
• Making the most of local partnerships
• Turning the “local for local” approach into an effective business model
• Strengthening the direct contacts with the local market, not only in the major cities.
Establishing and developing local partnerships remains a necessity for operating in
China, and requires a proactive approach. The western company must carefully as-
sess the potential contribution of the Chinese partner, and ensure that the agree-
ment benefits from a preferential policy context. They must also anticipate any pos-
sible issues, knowing that no contractual mechanism can be fully relied upon for
ex-post settlements.
Specifically, the organisation must be balanced to leverage the respective streng-
ths of each party (for example, accounting for the geographical focus of the partner,
which can seldom boast a nationwide influence) and conflict mitigation mechani-
sms must be introduced in the ordinary planning process to avoid the escalation of
minor disputes. At the same time, a number of examples in the automotive industry
indicate that extending the localisation of the value chain beyond manufacturing
10

11. NEWSLETTER
and sourcing is not just feasible but convenient, notwithstanding the unavoidable
risks in know-how protection.
IPR rules are still far below western standards, but to grow successfully in China, the
research and product development activities must be tuned to the specific needs of the
Chinese market, and this can be done most effectively by locating them in the country.
Leading automotive players like GM, Volkswagen and Hyundai have already taken impor-
tant steps in this direction and it is a safe bet that all the main component suppliers will
soon be forced to follow.
Product development Sourcing & manufacturing Distribution & sales
Foreign automotive companies
Successfully launched Buick Sophisticated supplier develop- Around 800 dealers with na- in China: best practice
GL8, star MPV model in China ment to nurture local suppliers tionwide coverage penetrated
to many tier 2 & 3 cities in localisation along
the value chain
Launched Lavida, a specific mo- Suppliers are clustered around
del developed for China the local production base In 2004, established first auto
finance company in China
Established a wholly owned Very high level of local produc-
R&D subsidiary in Guangzhou, tion, about 90% Source: industry research,
China, to produce a specific mo- 50% customers are Chinese
OEMs, with Chery as the lar- Value Partners analysis
del in 2010
gest customer
Investment announced to triple
local production by 2013
Launched longer wheelbase
versions of 5 & 7 series to meet Balanced dealership coverage.
local requirements 69% are located in fast-growing
Manufacturing facilities are tier-2 and tier-3 cities
spread across six locations in
China, close to the OEM clients
Downward product mix to
capture the local market de- Plans to expand sales outlets
mand (PVs no higher than 1.6L High level of local production. by 180%, reaching 1,200 in
account for 60%) Camry has a local content ratio 2010
of around 85%
Extensive product launches High-profile marketing acti-
planned – 7 in 2010 to respond In 2009, increased local produc- vities to increase local brand
to rapid local market develop- tion of engines (new factory awareness. Audi sponsored the
ment with annual output of 100,000 Beijing Olympics
units) and started local produc-
tion of continuously variable
Offering specific products solely transmissions (annual output of
for China, such as the 408 140,000 units)
Spare parts are distributed
through multi-channels, e.g.
Developed localised Elantra online
Invested US$790m in its second
Yuedong – the bestselling A- plant in Beijing, expanding
class sedan in 2009, with sales production capacity to 600,000
of 240k units – to better cater units by Feb. 2010
to Chinese consumers’ taste
Finally, the commercial responsibilities can no longer be delegated to loosely managed
distributors. The evolution of the local market needs to be closely monitored, and althou-
gh in most sectors, the distributors cannot be bypassed, the control mechanisms must
be upgraded and the indirect sales coverage must be selectively supplemented with the
deployment of direct sales forces, promoters or manufacters’ own outlets.
Increasingly, the success of the commercial and distribution strategy will depend
on the flexible adaptation of the go-to-market approaches to the different features
of various regional and municipal markets, because in most sectors, the bulk of fu-
ture growth will come from newly developed areas strongly diversified in coverage
requirements.
11

12. Power - up
OF DEALERION
REGINTEREST
RISK FACTOR
ASSESSMENT
BRAND MIx
CROWDING
LOCATION
MANAGED
RELIABILITY
FINANCIAL
OVERALL
REGION
BRANDS
DEALER
BRAND
SIzE
For distribution network Beijing Dealer R1
build-up, it is key to analise in 1 (exF)
detail the distributors in each Beijing Dealer n.a. Mi, Ae
region Tiajin 2
Beijing Dealer n.a. n.a. DC,
3 Mi, M
Tiajin Dealer n.a. n.a. Ae
4
Low
Beijing Dealer n.a. n.a. TR
Medium 5
High Hebei Dealer R1, M
D1 selected for visits 6
First choise D1 Hebei Dealer R1, M
7
Second choise D1
Overall, these pressures result in an accelerated shift of the organisational paradigm for
the foreign players. The Chinese subsidiary that so frequently accounts for a major share
of the expected growth must rapidly evolve from a representative office to a fully fled-
ged operative entity, reporting directly to the CEO (or at least highly visible to him) and
staffed with high potential resources in continuous contact with the HQ functions and
competence centres.
A quick look at the transformation of GM China’s organisational chart in the last 20 years
clearly illustrates this point.
In addition, the Chinese operation must be effectively integrated with the activities of
the company elsewhere in the world. Investing in China makes the most sense if the
local competitive advantages can be leveraged on a global scale, which entails shaping
the role of the Chinese structures in a broader perspective, and sometimes anticipating
a radical relocation of the company’s value chain.
Prior - 1995 1995 - 1998 1998 - 2005 2005 - Most recently
General Motors
in China
GM GM GM GM
GM Intl. GM Intl. GMAP GMAP
GMAP GMAP Japan, ASEAN, GM China
GM Corp.
ASEAN Taiwan, Japan Korea (new), BD, PR/IGR to AP
Australia to China
Japan ASEAN, Australia Taiwan JV Global
India (new) SGM/SGMW JV’s Functional
Taiwan GM China GM China WOFE Parts Dist. Alignment
China Rep Office (PR/IGR/Sup- Rep Office fully functional Functional Staffs
ports) staffed (Planning, Purchasing,
Rep Office (HK, China)
Two BD Teams+1 JBGM JV Vehicle Import Sales VSSM, IT, ME, GMPT, Finan-
Vehicle BD
Vehicle Import Sales GM Taiwan JV ce, Legal, Tax, Public policy,
Vehicle Import Sales
EDS (IT) 2 vehicle JVs in China Technology, etc.)
WOFE Parts Dist.
Hughes, Alison, Hughes, Alison, Hughes, Alison, Alison,
Comp. BD in China Delphi in China Delphi in China GMAC in China
Source: Value Partners analysis
With so much change involved, so many complexities to face and so many competitors
already rooting themselves in the local market, it’s understandable that some companies
will wonder if it’s not too late to enter China. Surely there are no more first mover ad-
vantages to be exploited. But staying out of China is hardly a sustainable option. Giving
up on China means not just giving up on a substantial source of demand growth, but
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13. NEWSLETTER
also being excluded from increasingly important product innovation trends and leaving
crucial scale and cost advantages to the local (and localised) competitors.
At the same time, the evolution of the Chinese market is so fast that few local positions
can really be considered as entrenched or unassailable. Latecomers can still be successful
comers, as proven by the examples of Toyota and Iveco, and the governmental push on
potentially disruptive innovation trends like “green” transportation is bound to open up
even more opportunities in the near future.
Value Partners met with Riccardo Bellini, vice-president of brand and marke-
ting for Diesel, to talk about how fashion brands can win consumer trust. The consumer is my lover
In your view, how has this recession affected luxury and fashion consumers? An interview with Riccardo Bellini
The global meltdown has strongly hit a middle class that had been fuelling the
growth of luxury and accessible luxury brands up until mid-2008. Today’s con-
sumer, even the more affluent one, has been burned by the recession, and is becoming Riccardo Bellini has over ten
more and more difficult to win over. Fashion buyers are becoming more educated and years of marketing experience
are able to make knowledgeable judgements: they will buy you, because the product has at Procter & Gamble, where his
distinctive design, true quality and authenticity; if your brand holds up to its promise and last role covered was that of
because the company behind it is true to what it says it stands for. Brands will no longer associate marketing director for
be able to hide or cheat the buyer, as every inconsistency is revealed and amplified by the the European Fine Fragrances
voice of the web. business. He moved to Diesel in
2007 as managing director of
What is the recipe fashion brands should therefore adopt to win the consumer’s trust? Diesel UK and was promoted
Three concepts need to be top of mind for any creative director or marketing manager in in September 2008 to vice-
our sector: authenticity, innovation and brand distinctiveness. president of brand and marketing
worldwide.
In the post-recession scenario, there is a strong need, first of all, for authenticity: on the
product side, this means quality of fabrics and a distinctive style. The challenge for bran-
ds is not to reduce prices and offer value for money but rather offer value for me to the
customer, for example, by increasing the product content value of each of their products.
Marketing without a strong product content value will take you nowhere.
The total look concept is over, as consumers mingle brands and styles in search of indivi-
duality. If you win the consumer over with the coolness of your jeans, you won’t get him to
buy your T-shirt for free, but you will have to win him over with the beauty and distincti-
veness of your T-shirt. Each product category for brand extensions will have to be taken as
seriously as the brand’s core category, and each item of the collection will have to have a
great deal more product and design value poured into it. Dressing today means wanting to
expose your personality, your soul and your uniqueness. I like to talk of “undressing up” by
“dressing up”. Brands have to address this need for individuality by seeking true innovation.
You could label the last few years as the era of clones, in which all luxury brands were bla-
tantly copying each other – without paying any price in terms of credibility.
No art field was able to produce real innovation. Take music, for instance: no new Rolling
Stones, no new Madonna or Michael Jacksons, but a bunch of “me toos” singing along. In
the post-recession world of more demanding consumers, the choice will be about being
distinct or becoming extinct. Distinctiveness will be played on all grounds, that of pro-
duct, that of communication and that of style. Winners will not be those that shout out
their brand to the world louder, but those able to stand out. Think of the success of a
small distinctive brand like Jun Takahashi’s UnderCover, that has become the essence
of Japanese cool, thanks to its different beautifully crafted products – or of the Capital
brand, that owes its following to self-expression without fear.
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14. Power - up
The need for distinctiveness also involves the brand’s image. The post-recession consu-
mer wants more than just a product when making a purchase in our category. He or she
is also buying the values the brands stands for. Brands today are evolving to become real
people, with their own personalities and mindsets, and the challenge for marketers is
to make it clear to the consumer, through multiple touch-points and communication
avenues, what the brand’s soul is about.
This communication is getting increasingly difficult as consumers become more edu-
cated and sophisticated and as their minds are continuously overwhelmed with new
messages and offerings. Advertising needs to evolve from mere communication to con-
versation and dialogue. Companies have to show their real faces; they have to show con-
sumers who the people behind the products they make are and what values they have.
For some brands, this means reaching back to their heritage. Louis Vuitton, for instance,
is banking on reaffirming its roots as maker of beautiful high quality handcrafted pro-
ducts; no longer selling the image of accessing an exclusive privileged club. For Diesel
this means going forward to its roots, rediscovering its product origins in jeans and lea-
ther and re-stressing its rebellious unconventionality.
Being unconventional today, however, may be very different than what it meant a few
years ago, with the punk and rock movements, for example. Today, rebellion may no lon-
ger be about being against a system but rather about being for something. What an act
of rebellion Obama’s “Yes, we can” turned out to be. This is what we are trying to achieve,
for example, with our “Be Stupid” campaign.
Are there any implications in terms of how fashion companies structure themselves to
deliver this recipe?
Companies will have to structure themselves to be on the leading edge of innova-
tion – no longer dependent on the sketches of a single designer’s personality, but
with richer and more diverse style and product teams and with new roles, to be
more open to experimentation and to hungrily absorb new trends, material tech-
nologies and styles. Relationships between the merchandising, style and product
departments with material suppliers and production partners will have to become
tighter than ever.
To win the heart of today’s consumer, I would say it takes a mix of being stupid i.e. “ha-
ving the balls to stand out and express what you stand for”, and being smart in under-
standing the importance of authenticity, staying ahead of the pack in innovation and
listening to the consumer’s voice, living with him, understanding his lifestyle, what he
loves and what he hates, in a continuous dialogue. Procter & Gamble’s CEO used to say,
“the consumer is your boss”. Well, I believe that the consumer is my lover: I constantly
need to surprise, over-deliver expectations, cover with attention and give what never
would have been expected.
In times of crisis, when access to capital is limited and
Green economy Cassandras: are we headed stock indexes are plummeting, there is still one sector
towards a solar photovoltaic bubble? that keeps attracting investor interest and government
spending. Green or cleantech stocks have performed in
Gianni Tessitore, director, and Alessandro Leona, Milan office the double digits thanks to a growing concern for the
environment and generous tariff schemes incentivising
clean technologies that wouldn’t otherwise be viable for power generation – with the
1
Condition when renewable energy promise to reach “grid parity”1 in a few years.
cost is comparable to conventional
power prices accessing the grid
But will everything connected to “green” or “cleantech” go through the same turmoil in
the future as the “dot-coms” did in 2000? In November 2008, in the midst of the Internet
stock boom, Eric Janszen founded iTulip, named after the Dutch tulip bubble of 1630s,
to study the financial bubbles phenomenon. In his opinion, “bubbles start with the ker-
14

15. NEWSLETTER
nel of something good” (in this case, energy that causes less pollution) but then some
people start to get rich really fast and the edge of a bubble is very quickly reached. In
the meantime, other things have to happen, such as significant government involve-
ment to focus attention and capital on a specific industry, and then a new source of
credit is needed. In the housing bubble, it was mortgage-backed securities, in this case,
it could be feed-in tariffs or cap and trade emission schemes.
The signs of a green energy bubble are certainly visible: some stocks are registering un-
common multiples with price earnings ratios in the hundreds and regional government
decisions are creating the first victims within the industry.
If we take, for example, the revision of feed-in tariffs in the solar photovoltaic sector, we
can highlight four main courses of action, in four different countries.
In Spain, a combination of factors diverted the attention of investors from solar pho-
tovoltaic. The first factor was the reduction of feed-in tariffs: an average of -22 per- Spain
cent from 2008 to 2009. The second factor was the introduction of a maximum cap of
500MW accessing incentives each year. The effect is clearly identifiable in the stock per-
formances after mid 2009. Even the promise of “green jobs” creation was not fulfilled. A 2
Study of the effects on employment of
study from Universidad Rey Juan Carlos2 reports that for every four “green jobs” created, public aid to renewable energy sources
another nine are lost. Recently, at least three companies that were planning to IPO this
year have put their decision on hold. Moreover, as a consequence of deficit control needs,
the government announced it could reduce incentives even for power plants already in
operation.
Germany, with a cumulative photovoltaic power of almost 10 GW, including around 3.8
GW installed in 2009, alone, remains the world’s largest photovoltaic market. Recently, the Germany
government reduced feed-in tariffs – a move that caused confrontation between the go-
vernment and industrial photovoltaic associations. The highest cuts have been for larger
plants (above 1 MW plants will receive a -25 percent feed-in tariff), while the medium and
small installations received lower revisions (-10 percent and -8 percent, respectively). This
reduction aims to force producers of photovoltaic modules and components to achieve
efficiencies and consolidate in order to reduce prices. At the same time, the reduction will
keep investors in the game by ensuring sector attractiveness in the mid-term.
Fast take off after the
Introduction of the new Cumulated installed photovoltaic
3.000 incentive scheme
power (MW)
2.500
2.000
1.500
1.000
500
0 First ‘Conto Energia’ incentive scheme
New ‘Conto Energia’ incentive scheme
Jan 07
Feb 07
Mar 07
Apr 07
May 07
Jun 07
Jul 07
Aug 07
Sep 07
Oct 07
Nov 07
Dec 07
Jan 08
Feb 08
Mar 08
Apr 08
May 08
Jun 08
Jul 08
Aug 08
Sep 08
Oct 08
Nov 08
Dec 08
Jan 09
Feb 09
Mar 09
Apr 09
May 09
Jun 09
Jul 09
Aug 09
Sep 09
Oct 09
Nov 09
Dec 09
Jan 10
Feb 10
Mar 10
Apr 10
May 10
Jun 10
Jul 10
Aug 10
Sep 10
Oct 10
Nov 10
Dec 10
Source: GSE Gestore Servizi Elettrici Italy
Italy is fifth in the world (after Germany, Spain, Japan and the US) in terms of installed
photovoltaic power. This massive growth was the consequence of introducing a new ge- Italy
nerous tariff scheme.
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16. Power - up
The government in France has recently declared its intention to stop financing ground
France photovoltaic plants, in favour of roof installations from now on, to reduce feed in tariffs
by 20% and to put a maximum cumulative cap of 500 MW on new installed power per
year. This decision has totally upset the sector players and a revision of this drastic cut is
strongly requested by companies that have heavily invested and created new green jobs.
This is unique in the sense that, on top of the energy incentive (around € 0.4-0.43 kWh),
the plant owner can sell the power to the grid at market price or exchange it “in place”,
thereby creating an extra revenue flow. The incentive scheme is being revised and indu-
stry associations are pushing hard to keep the reductions within “reasonable” ranges.
The government intends to confirm its commitment to the development of photovoltai-
cs in Italy in the hope that the country will be able to create investment opportunities,
employment and the development of a national chain, although foreign investments
are certainly welcome. As for the new “Conto Energia”, the new decree, effective from 1st
January 2011, provides for a reduction of tariffs in line with the decrease in the cost of
modules (around 20 percent).
However, incentives will be reduced less for small residential systems, and the incentive
system will remain among the most generous in the world. The target will be a capacity
of 3,000 MW over the next three years – a goal that may require the use of tariffs for a
further 14 months.
Another target is to simplify, but also give certainty, to the rules for accessing incentives.
This is the case in the Apulia region, which has seen an impressive boom of photovoltaic
systems and applications, but now requires a careful handling of the authorisation pro-
cess. Terna, the Italian TSO, and the distributors are receiving requests for connections
in excess of 152,000 MW, three times more than the highest ever registered power peak
in Italy. This is a clear signal that there are no investors involved and that many people
are creating an “authorization market”. A piece of land with a solar photovoltaic plant
authorised could trade for € 100,000 authorized megawatt.
So what are the differences between the green/cleantech sector and the dot-coms, and
how can a green bubble be avoided?
The first difference is that with dot-coms, evaluations were based on the promises of
future, uncertain profits, the number of subscribers and unique website visitors – while
the revenues of green developers are guaranteed for a certain number of years, and in
most cases they are drawn not from government funding but from taxes on consumers’
energy bills. Governments should avoid interrupting virtuous circles (as was the case in
the Spanish photovoltaic feed-in tariff) and instead progressively reduce the tariffs ac-
cording to the rate of cost decrease per MW installed.
The second difference is that, through the incentive schemes, some countries were able
not only to develop power plants at a faster pace than others (e.g. Germany, Spain and
Italy for solar photovoltaic) but at the same time, create an industry. As a result, they now
possess leading edge technology (e.g. QCELL and SMA in Germany or Ingeteam in Spain).
So the incentives should be also directed to researching new technologies, in order to
capture a larger portion of the value chain inside the country.
Last, but not least, authorisation procedures have to be simplified to encourage the
adoption of renewable generating technologies. At the same time, there must be a clear
commitment from investors, such as a personal bank guarantee on the request for au-
thorisation, to avoid “easy money”, coming from the trading of authorisations.
What we expect to observe in the near term is a time shift in the solar photovoltaic mar-
ket due to the financial crisis and to the limited access to capital, together with an over-
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17. NEWSLETTER
supply of cells and components coming from countries where the government has cut
incentives. The combination of these effects could introduce a market shift from supply
constricted to demand driven, with a beneficial effect on prices for end users.
Value Partners met with Vittorio Chiesa, head of the
Energy Strategy Group at Politecnico di Milano, to Green energy bubbles: an academic perspective
get his point of view on the possible development
of the renewable energy and technology sectors. An interview with Professor Vittorio Chiesa
Professor Chiesa, in your reports, you highlight the
different approaches undertaken by some countries to promote the development of re-
newable energies. How much did the incentive schemes influence the success or failure
of green energy-generating technologies?
Let’s start by saying that, without incentives, apart from some eolic installations, the eco-
nomics of renewable energies is not sustainable. The total cost of generating renewable
energy is much higher than conventional generating schemes.
With regard to incentives, there are two major considerations. First, the incentive sche-
me must gradually decrease, in correlation with the green technology industry capacity
to reach economies of scale and reduce costs. Second, there has to be a maximum cap
to the total incentivised installed power, but this cap must be reasonable. In Spain, the
abrupt end to the photovoltaic sector was not due to the reduction of feed-in tariffs but
to the announcement of a maximum cap of 500MW per year, whereas in 2008, more Vittorio Chiesa is Full Professor
than 2.5 GW of solar photovoltaic power were incentivised. of Strategy and Organisation
of R&D in the Department
If we look at the multiples of listed companies operating in the renewable sector and we of Management, Economics
track the drop in performance of some Spanish stocks, we observe analogies with the and Industrial Engineering
e-economy. In your opinion, is there any risk of a “green energy bubble”? at Politecnico di Milano.
It very much depends on two factors: how the incentive schemes evolve and the way that He heads the Energy Strategy
single states promote the growth of relevant value chains. For example, in Italy the solar Group (www.energystrategy.it),
photovoltaic scheme (“Conto Energia”) helps the adoption of the generating technology, where he conducts in-depth
but not the development of a value chain. A national economy has grown up around mo- analysis of solar energy
dules and panels, thanks to the initiative of single entrepreneurs, rather than public aid. and biomass energy, issuing
periodical reports that
A green energy bubble could only develop if there were to be a sudden stop in incentive are a renowned reference
schemes worldwide, but since we are far from reaching our declared objectives in green for operators, investors
house gas reduction, the environmental issue will play in favour of green energy. What and researchers.
could happen is a shift of incentives schemes to promote a well-balanced mix of tech-
nologies and a premium to distributed generation solutions (putting power generation
near the final point of consumption), as opposed to big projects.
Which are the factors that differentiate e-economy from green economy?
In the e-economy, skyrocketing evaluations were based on a general belief in a revolution
in operations that then did not, or only partially, happened. The picture is completely diffe-
rent here: in the green economy, there is a potential market. Revenues are based on incen-
tives, and thus on government will to incentivise the growth of clean generating technolo-
gies, either through feed-in tariffs or with market mechanisms such as green certificates.
Are there any particular sectors or geographies risking a green economy bubble?
Again, it depends on governments and on their decisions. The Spanish photovoltaic sec-
tor is an example of a significant reduction of its government commitment, which has
decreased investors’ interest.
Even in Italy, there could be a significant risk – for example, as a result of the decision to
abolish the obligation of GSE (Gestore Servizi Energetici) to collect excess green certifi-
17

18. Power - up
cates from renewable energy producers. This could have a significant impact on green
certificate prices and reduce the attractiveness of renewable energy investments, the-
reby putting employment at risk and destabilising the sector. On the other hand, the
government is promoting the development of lower scale plants (<1MW), which benefit
from a well-defined and generous feed-in tariff (and faster authorisation procedures).
Recently, you released an exhaustive report on biomass energies, highlighting the diffe-
rences in the technologies, supply chains, economics and regulatory issues of agro fore-
stry, biogas, bio fuels and waste to energy. Which of these are the most promising and
how could the incentive schemes or authorisation procedures determine their success
or failure?
In Italy, the incentive scheme is mainly determined by the size, rather than the techno-
logy. Apart from bio fuels, plants above 1MW receive green certificates, whereas below
1MW, there is a feed-in tariff. Having said this, what really matters in biomass generation
is the supply chain. In agro forestry, there is a lack of collection systems guaranteeing a
continuous and price stable feeding. With biogas, the difficulty is in making sound con-
sortia agreements between agricultural farms and breeding industries. As far as waste
to energy is concerned, there is a strong cultural factor against incinerators (“Not in my
back yard”) and waste collection must be well organised.
On the subject of bio fuels, unless we develop second-generation feedstock, such as cel-
lulosic bio ethanol, micro algae or jatropha, there will always be competition in the food
chain and a strong dependence on imports.
How can a country (e.g. Italy) replicate the virtuous path of Germany in the solar photo-
voltaic sector and create a national value chain? And what could be the “next wave”?
In the solar photovoltaic sector, Italy has missed the boat in crystalline technologies, but
in 3-4 years’ time, we will see a growth in thin film technologies (some estimate an opti-
mistic 30-40 percent of share of new installations). There are also excellent prospects in
concentrated solar and in solar thermodynamic generation, where Italy has strong engi-
neering skills and significant manufacturers of components (mirrors, reflecting surfaces,
heat collectors and sun trackers).
If the Obama plans are maintained, there are significant opportunities for these indu-
stries to play a leading role in this field.
In the second-generation bio fuels, companies such as Mossi Ghisolfi are well positioned
to develop a consistent presence in cellulosic wood bio ethanol production. Another in-
teresting project is Mambo (Micro Algae Material for Bio Oil), in which the objective is to
grow micro algae – which won’t compete with the food value chain – to produce diesel
oil. Exxon is also investing US$ 600 million in this field.
Up to now, a significant amount of incentives have been devoted to generation or to
system safety. What has been done to promote energy efficiency?
In my opinion, energy efficiency is undervalued. Energy demand is growing, and the ca-
pacity to reduce consumption is limited and well below the 2020 objectives. Of the three
20/20/20 elements, the most forgotten is indeed energy efficiency. For CO2 reduction,
there is an Emission Trading Scheme. Renewable generation, we already mentioned.
The 20 percent of energy efficiency is totally neglected. It’s a factor that passes through a
process of cultural growth. It entails changing people’s behaviour and making use of exi-
sting solutions and technologies. For example thermal solar is completely undervalued,
it can be easily integrated into cooling systems since the energy production is perfectly
matched with the need and it can be easily integrated in industrial processes. Also low
enthalpy geothermal energy is a possible solution.
The culture of energy efficiency is weak: solutions with low costs upfront tend to prevail,
even though energy consumption is higher. What could help draw people’s attention is
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19. NEWSLETTER
a government intervention on building efficiency – for example, the obligation in Italy to
install 1kW of renewable energy in order to obtain the construction permit of a new hou-
se, or the obligation to obtain an energy certificate during real estate transactions. In the
UK, from 2016 every new house built must be energy sufficient. The growing industry of
ESCO (Energy Service Companies) can help this sector’s growth.
To sum up, in your opinion, which sectors are the most promising in the future?
Renewable energies, in general, will continue to develop, provided that the incentive
schemes survive. In the next few years, the focus on energy efficiency will grow, due to
financial restrictions and government willingness to reduce state aid and promote savings.
Moreover, there could be significant development in the energy efficiency components in-
dustries – for example, in illumination and construction materials.
It is often said that the least polluting
energy is the one that is not consumed. LED there be light: are you ready to replace your light bulbs?
Energy efficiency is often the most ne-
glected measure in the 20/20/20 pack- Alessandro Leona, Milan office
age. In this article, we will highlight
one of the areas of energy efficiency
connected to technology improvement (as opposed to changing consumption behav-
iours) – namely, illumination using LEDs.
Energy consumption for illumination can range from 10-12 percent of total consumption
for households to 40 percent in the commercial sector. For example, in the US, around
750-800TWh per year is consumed in illumination – about the same amount of electrici-
ty produced in the country’s 104 nuclear power plants. Half of this amount is consumed
in the commercial sector; a quarter in houses, and the rest is split between industrial
illumination and outdoor stationary lighting.
Light sources can be divided by technologies in three main areas:
• Incandescent lamps, using a thin filament of tungsten, where luminous efficiency1 1 Overall luminous efficiency is the
is lower than 10 percent, due to the fact that most of the energy becomes heat ratio of total luminous flux emitted
and the total amount of input power
• Gas discharge lamps, where light is produced by a electricity discharge in a mixture total. This measure accounts for input
of gases, such as neon, high pressure sodium or metal halide, with lighting efficien- energy that is lost as heat or otherwise
exits the source as something other
cies ranging from 10-15 percent of the classic T5 lamp2 to 22-29 percent of sodium than electromagnetic visible radiation.
vapour lamps The maximum luminous efficiency
of 100 percent is the ideal green light
• Solid state lamps, using semiconductor light emitting diodes (LEDs), where efficien- (555nm), with luminous flux of 683-
cy is rapidly improving up to 160 lumen/Watt, meaning a LED with this performance lumen/watt
can produce the same illumination as a 60W incandescent light using only 7W. 2 T5 is the common 5/8-inch diameter
neon tube
When it comes to energy efficiency and environment sustainability, incandescent lights
are being progressively banned due to their poor conversion efficiency, while fluorescent
lamps may be banned in the future because of their mercury content. LEDs may thus be
the natural candidates to substitute conventional lights, due to their continuous and
rapid growth in performance backed up by a high product lifetime and by the relatively
low impact on the environment.
Outdoor Shares of energy use by lighting
Stationary
technologies in the US
100% = 760TWh
Industrial
Incandescent
Residential
Fluorescent
Commercial High Intensity Discharge Source: US Department of Energy
0 100 200 300 400
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20. Power - up
Luminous efficiency
(lumen/W)
200
Luminous efficiency trend
of different light sources
150 LED
100
White
LED
Fluorecent
50 Reflector
Halogen
Incandescent
0
Source: Lumileds 1920 1940 1960 1980 2000 2020
LEDs will be experiencing diminishing cost thanks to volume effects. Haitz law (equiva-
lent of Moore’s law for semiconductors) predicts that every decade the LED light output
increases 20 times (around +35 percent every year), while the cost decreases by a factor
of 10 (-25 percent each year). According to the US Department of Energy, this cost reduc-
tion trend suggests that white LED luminous efficacy and costs should compare to com-
pact fluorescent lights by 2013. We believe this evolution will determine a rapid growth
for the LED lighting market.
Overall, the global market for lighting fixtures (excluding automotive and LED television
backlighting) was worth around € 45-50 billion in 2009, according to Philips and other
analysts. Of this, 20 percent is related to lamps and replacements, 70 percent to fixtures
and the remainder to electronics and controls.
Split of lighting fixture market
according to Philips
Total market size: € 45-50 billion
Lamps
Lighting electronics ENTERTAINMENT
Applications/luminaires
HEALTHCARE
HOSPITALITY
INDUSTRY
OUDOOR
HOMES
OFFICE
RETAIL
Source: Philips
In 2009, the market related to LED lighting was only around € 1 billion, but Philips projects
a very fast take up of share over the total: by 2015, the LED market could be worth € 55
billion, with a share of 50 percent of the total lighting market.
This rapid growth could be fostered by a combination of factors, such as:
• The rapidly increasing luminous performance, which has gone above the 100 lm/W
that make LEDs good substitutes for compact fluorescent lamps
• The continuous government attention to energy efficiency and non-polluting mate-
rials (such as the mercury in compact fluorescent lamps)
• The proliferation of lighting fixtures and retrofits based on LEDs that are being spread
across the commercial sector (which alone accounts for half of the consumed energy
for illumination)
• The progressive reduction in LED prices, due to scale-volume effects.
20