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.