Can a technology invented in the US by General Electric 48 years ago give China its best shot at worldwide technological leadership? There are a lot of Chinese companies, entrepreneurs, investors, as well as billions of dollars in Chinese government money betting this is the case.
The technology is the Light Emitting Diode, or LED. Since their invention a half-century ago in Syracuse, New York, lots of otherwise smart people have been predicting LEDs would replace the traditional incandescent lights perfected by Thomas Edison well over a century ago as a primary source of illumination.
LEDs have numerous advantages – the key ones being they last longer than traditional incandescent and neon bulbs and use much less energy to produce the same amount of light.
In other words, LED sound like a sure thing. Problem is, they are almost as tricky to manufacture as integrated circuits, and so exponentially more expensive to produce than conventional bulbs. LED technology has improved dramatically over the years, but they are solid-state devices, made using a complicated semiconductor-layering technique.
The lights require lots of complex circuitry and heat sinks, and are very susceptible to changes in temperature. Each individual LED is about the size of a Christmas light, and produces a relatively small amount of light. So, an LEDÂ with the same output of a typical street light will actually have dozens of small LEDs pinched together on a single stalk.
Like the non-polluting 500-mile-per-gallon auto engine and supersonic passenger jets, the era of universal, efficient, energy-saving LED lighting is another much-predicted part of our future that never seems to arrive.
Except, that is, in China. Here, there is abundant optimism that the commercial market for LED lighting is about to explode, and that Chinese companies will be the worldwide leaders in a new multi-billion-dollar industry.
There are more LED companies in China, and more investment flowing into them, than anywhere else in the world. On Alibaba.com, there are about two million Chinese companies selling LED products, a hundred times more than Taiwanese companies offering LED products. In Shenzhen where I live, there are 280,000 companies listed on Alibaba offering LED lamps and bulbs.
Last year, I went to one of the main trade shows for the industry in China, and hundreds of companies were crowded into the exhibition space. The majority of them were offering LED street and traffic lights, and systems to control them.
Looking at this, you’d imagine that just about every busy intersection in China was already controlled by an LED traffic light. That isn’t so today. Though the technology is well-developed, LED traffic lights are still very rare. But, the Chinese government is looking to spend a great deal of money to make this a reality. This, in turn, is drawing companies into the industry at an ever-increasing clip.
One small measure of this enthusiasm. The bosses of two companies we work with, including one that’s a leader in the jewelry industry, are now investing in LED street lighting projects. Lots of the venture capital and private equity firms we work with are eager to invest in China’s LED industry.
There are those outside China who share some of this optimism about LED’s future. But, nowhere else is the fever quite as widespread as it is here.
To be successful in the LED industry will require a synthesis of advanced scale manufacturing techniques and some sophisticated technological skills and innovative science. In other words, China has the two essential elements for success.
However, good science and good factories won’t solve the primary problem that LED lights remain uneconomic for most users. Even with the energy savings and longer life, the typical payback period for an LED is eight to ten years. Of course, some of the greenest of environmentally-conscious green buyers will pay that kind of premium.  But, the reality is there just aren’t that many businesses or households that will invest in LEDs when they need to wait so long just to breakeven compared to conventional incandescents.
That leaves only government as a likely big customer. No other government is quite as keen on LEDs as China’s. From the central government on down, there are plans in place now to replace all conventional street lights with LEDs.  In theory, this represents a market worth many billions of dollars. The millions of LED companies in China all seem to be chasing this one market.
Governments everywhere, not just in China, tend to be far less persuaded than private businesses by the logic of a cost-benefit analysis. China’s government wants to cut energy use and wants to foster the domestic LED industry. If successful, the large-scale government purchases in China would drive down manufacturing costs to the point where LEDs become cost-competitive everywhere. If so, China’s LED industry will truly become both world-beating and gargantuan in size.
I’ve yet to see a single LED street light in China. I have seen working prototypes, and they seem quite good. When big government orders will arrive and who will receive them remain collective guesswork in the Chinese LED industry.
That sums up precisely the dilemma of the LED industry. The companies are all reliant on a single, large and very unpredictable customer. When that one customer is government, equally large problems invariably intrude. Government purchases in China, as in the US and elsewhere, are slow to materialize, highly bureaucratic and favor companies with friends in high places, rather than those with the best products.
Buying from the lowest-cost supplier is often less important than buying from friends and cohorts. Basic LED technology is already very well-established and lots of companies can make the lights. The result: the government cash will likely get spread around widely, to thousands of small local firms. If this happens, the risk is that no one Chinese firm develops the scale economies to become truly efficient, and a potential global leader.
For LED lights to realize the huge potential first glimpsed when they were invented 50 years ago, they need to come down very dramatically in cost, to levels at least comparable with compact fluorescents. These CFL bulbs last eight to fifteen times longer than incandescents, and use only 30% as much energy. Their payback period is much quicker than LEDs, and they are already quite pervasive in homes and offices.
China has a chance to take the lead and take LED lighting to another level. I love all the excitement and entrepreneurial activity in the industry. Hope or hype, we’re likely to find out in the next three to five years.
Your analysis is hard to refute. I wonder if the initial adoption of LEDs in China will be in the auto industry. Higher end German cars, like Mercedes and Audi, already use LEDs for some lighting applications. If the usual auto technology trend holds true, LEDs will filter down to cheaper models relatively quickly. Much more difficult to see this happening in the wider lighting industry as quickly as it might happen in autos.