June
2010
Volume 11 Issue 6
Fragmentation
by Ted Konnerth
Life was simple
when electrical meant 120 volts or higher. High voltage was high voltage, and
low voltage belonged to people who installed doorbells. Then alarm systems
became popular, along with security systems and dimmers went from line voltage
to electronic. Ballasts went from magnetic to electronic and motor controls
began talking to PLC's and the explosion of computer technology in the office
led to 'premise wiring'. Throughout the steady expansion of electronics and
low voltage controls, the industry became more complex, not less so. The issue
of trade influences became murky; who actually installs premise wiring or
occupancy sensors?
The
industry is in a rapid state of fragmentation. Corporations that are renowned
for their sales of sophisticated switchgear, motor controls or variable speed
drives are hiring electronics engineers, partnering with electronics vendors
and meeting regularly with electronics distributors. The definition of 'electrical'
has become as confusing as the definition of a US-made automobile.
As the channels fragment, the clear borders of who builds what, who sells what
and who buys and installs what is in flux. The rapid growth of new alternative
energy sources such as wind and solar have created a new industry virtually
overnight. The design, procurement and installation of solar is a maze of
conflicting sources of influence. Electrical distributors have mostly dragged
their feet in transitioning to new technologies. The traditional channel
partners are now being sorted into narrower identities.
Lighting
companies are now either traditional or LED. Adding LED into traditional
channels is murky at best. The path to market for traditional
lighting companies hasn’t changed dramatically in over 50 years. Lighting
reps ruled the roost for the new construction channel and still remain largely
in control. But the advent of LED technology has introduced literally hundreds
of new companies, all with the same message of better, faster and cheaper and
all trying to garner a portion of the huge US market. Lighting reps have
ignored the retrofit market, the ESCO market and the industrial market;
abdicating those segments to their 'partners'; the electrical distributors.
What
happens to those markets when the electrical distributors don't step up and
promote LED lighting products to their industrial or remodel or ESCO
customers? The nascent LED companies have stepped into that void. LED
companies are currently selling millions of dollars of equipment every day to
customers who are simply not being well-represented by traditional channel
sources. The creativity and efficiency
of the new entrants' approach to the market is surprising and elegant. The
gamesmanship of the past with huge overage payouts and secret deals won't ever
go away, but the market share size will dwindle.
Electronics
companies have a different mindset. They focus on rapid innovation, often with
little regard to the end-user of their products. They march to a mantra of
better, faster cheaper and let the end customer decide how to apply their
products. Electrical manufacturers carry much more embedded costs and
traditional relationships that naturally cause their product development
cycles to be slower and their product life cycles to be much longer.
It's a difficult
mindset to promote a high priced product with the expectation that it will be
twice as robust and half the cost in the near future. Electronics
manufacturers regularly work with their customers (mostly electronics
distributors or retailers) to mitigate the effects of price degradation. Other
than pure metals manufacturers whose cost of goods sold can be attributed to
over 75% metal (wire, connectors, conduit, etc), it's rare for electrical
manufacturers to regularly entertain a dialog on price erosion from their
channel partners.
The absorption
of electronics into 'electrical' is changing the game. Electrical distributors
are naturally technology-averse, as are electrical manufacturers. As an easy
example, we queried 800 electrical distributor executives 60 days ago to ask
them if they are currently selling LED 'bulbs' (another testament to cultural
change, as bulbs have slowly replaced the more elegant term 'lamps'). Less
than 100 were selling them, of the 100, less than 10 were actually stocking
them. LED is clearly the wave of the lighting future, and that future began
over a year ago, yet the traditional mindset has been to promote items once
there is a demand for them. LED demand is being built by the new LED
companies, not the traditional manufacturers. As such, it will be some time
before those LED companies will ever show up on the doorstep of electrical
distributors. In the meantime, they'll just sell them.
The electrical
industry in large measure abdicated the premise wiring market to the 'low
voltage guys' and literally watched as CEDIA created a national standard and a
separate mode of distribution and installation. Solar and wind has also begun
a new channel of distribution and solution selling. ESCO's still tend to buy
their products from electrical distributors, but that channel has already
begun fragmenting away from the traditional approach. 'Energy saving' is the
new premise wiring. As distributors slowly explore how to serve that market,
the new entrants in this market; focused on faster, better and cheaper will
carve out a new channel and reap the benefits.
I've
met with scores of manufacturers, from huge traditional manufacturers that are
industry icons to the small, nimble startups and I’m convinced the industry
has changed in fundamental ways that will leave the current list of players to
'play' in a much smaller sandbox than ever before. If you're in lighting and
you've not noticed that Mitsubishi, Samsung, Toshiba, Smart and Citizen were
in attendance at Lightfair; then you've already lost share. Both Asian and US electronics companies have the financial wherewithal, the staying power and
the technology leadership to completely change how lighting is sold in the US.
They will not enter the market playing the game the same way as it’s been
played. The same statement can be made in varying degrees for those
manufacturers of switchgear, controls and automation. The game is on and
it’s going to be exciting.
We are the #1 recruiting firm in the
electrical industry. Isn't it about time you called to find out...
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