Neo Neon Group Continues to Integrate Supply Chain in LED Lighting Sector

The Neo Neon Holdings Ltd. is a real-world example of integrating the supply chain to facilitate production and enhance cost efficiencies in the LED lighting sector. But the firm has gone even further with its ambitious plan-building its own tech support-by collaborating with the elite South China University of Technology in southern mainland China to open an optoelectronics-technology institute to back its expitaxy-wafer factory, which began production in November 2008.

Industry watchers believe the school will help improve not only Neo Neon's LED manufacturing but also corporate plans to transform from a traditional enterprise into a high-tech manufacturer.

Founded in 1979, Neo Neon is said to lead the world in the supply of mini decorative lamps, currently running 34 subsidiaries across Hong Kong, Macau, Taiwan, the United States and Europe and boasting a client list numbering 4,700 worldwide.

The company ventured into the LED lighting business around seven years ago, and shortly thereafter opened a packaging factory to make LED emitters for its lighting fixtures to bring down costs, a savvy measure that has successfully boosted the gross profit margin of its LED-lighting business to over 40%. To further tap such cost-cutting success, the company opened its own epitaxy-wafer factory to make LED chips, estimating it would shave production costs by up to 40-50%.

Cost-minimizing Strategy

"Our strategy is always minimize production costs to quickly gain market share," stresses group president B.H. Fan. "Investing in fully-integrated LED manufacturing enables us to escape the fate of conventional lighting manufacturers, who are relegated to do exclusively assembly for their operations are dictated by key-component suppliers."

"The investment," says Randy Cheng, general manager of Neo-Neon's Taiwan branch "has enabled us to cut costs of LED lights faster than projected." Cheng touts that the group's LED production is much more cost-competitive than rivals' for streamlined production. The chips will be installed in both indoor and outdoor lighting turned out by Neo Neon.

The Taiwanese-founded company is headquartered in Guangdong Province of mainland China, where its factory is built on 300 acres and outfitted with five German-made, high-performance metal organic chemical vapor deposition (MOCVD) chambers to turn out 12,500 wafers with some 400 million chips initially, meeting about 70% of the demand from its LED-emitter production line.

Fan says that the wafer factory's chips will be used to make various lamps according to qualitative levels, with top-grade chips going into high-power lighting and outdoor signage, mid-range chips for other applications, and low-end chips into decorative lamps.

Brighter LED Revenues

The company's LED-lighting sales in 2007 and 2008 have contributed around 50% and 60% of its overall revenues, estimating such sales to further grow 20% this year. Part of such growth is expected to come from contracts, for which the company is vying, from four cities in Guangdong Province, whose total value of some 1.2 billion Chinese yuan (US$179 million at US$1:6.7 yuan) is earmarked for LED streetlights.

In spite of the company's fast LED sales growth, Fan has become prudent towards LED investments as he says the LED-lighting market is still nascent, adding that new investments in chip-making equipment are temporarily halted until its latest market study is done.

Fan, however, still sees bright light at the end of the LED tunnel. "LED is incrementally replacing traditional lights, but it's still too early to say if total replacement is coming. Some manufacturers are just exaggerating," he comments. But so far the numbers don't lie: the company has shipped far more LED Christmas lights, LED stage lights and LED cabinet lights than conventional ones.

Tech Solutions Needed

The Neo Neon president blames the lack of adequate tech development for the immaturity of the LED-lighting market: inadequate LED luminous efficacy and uniformity simply have not been solved. "As is, I'm afraid LED lighting fixtures are too expensive for many consumers," he says.

Fan believes that cost and efficacy determine whether the LED-lighting market can fly. "LED lamps will need average luminosity of 150 lumen-per-watt and be 80-90% cheaper to compete against traditional counterparts. We believe LED lamps have the potential to take over traditional lighting, but the replacement will not happen tomorrow," he comments.

Slow market gains by LED lights have not seriously dimmed the group's sales for its product-diversification strategy, which has helped retain the group's 2008 revenue at US$200 million. However, such encouraging turnover in 2008 pales relative to its 2007 results mainly due to the ongoing financial crisis, soaring commodity prices and labor costs, surging value of the Chinese yuan against greenback, depreciating asset value, and deteriorating business environment.

The president is somewhat optimistic about 2009, believing however the global lighting market will flicker due to the recession, predicting the company's 2009 revenues would stay on par with 2008's with improved profitability considering the prices of aluminum and copper, key materials for lighting production, have plunged considerably since late last year. Fan concedes that corporate revenue growth still hinges on the speed, extent of replacement of traditional lamps by LEDs.

Empathy due to Genesis

The company's success is likely due to its genesis: "We differ from pure LED makers for we began as a traditional lighting-fixture manufacturer who has evolved into an LED maker. So we know what a retailer of traditional lighting fixtures need in terms of LEDs than would pure LED makers. A lighting-fixture supplier sees an LED lamp as a mere fixture with, not an incandescent light bulb or compact fluorescent bulb, but an LED light source," he says.

Pure LED-lamp makers, he notes, have delusions of grandeur: always investing considerable capital, manpower in R&D just to stroke their own egos in an attempt to create glamorous LED lamps. "They fail to see, however, such products are affordable to only upscale consumers but not so to traditional lighting-fixture suppliers and budget-conscious users.

"Knowing the decisive importance of the bottom-line, Neo Neon insists that a good LED lamp delivers quality lighting at a popular price," Cheng comments.

Armed with such street-smarts, the company, Cheng notes, positions itself as a mid-to low-range supplier but targets marketing to low-end consumers, which inevitably also attracts upmarket users. "Competition in downmarket is usually crowded. But we offset losses in the low-end of markets with better profits made upmarket, while we usually increase market shares by selling low-priced products," he says. And the company supplies a wide range of LED streetlights, flood lamps to Christmas lights, a strategy allowing it to meet a cross-section of demands.