11 November 2015

Osram investing €3bn in lighting by 2020

In response to the shift in the lighting market toward semiconductor-based technologies creating new growth opportunities, lighting company Osram GmbH of Munich, Germany says that it is to invest about €3bn in new technologies and applications by 2020. Of this amount, about €2bn will be spent on research and development in order to further strengthen Osram's technology and to expand into new markets. Additionally, Osram plans to spend a further €1bn in constructing a new LED chip plant in Malaysia, in order to unlock additional growth potential in both dynamic, technology-driven general lighting markets and niche markets, where Osram is already present.

"With a focus on profitability, flexibility and entrepreneurship, following a phase of strategic realignment, we are now launching the 'Diamond' innovation and growth initiative," says Osram Licht AG's CEO Olaf Berlien. "This means we are switching the focus to sustainable growth, benefitting even stronger from the potential offered by semiconductor-based technologies," he adds.

'Diamond' comprises several strategic measures. In a first step, Osram will invest about €370m in its Opto Semiconductors (OS) segment for a new LED chip plant in Kulim, Malaysia. Since further expansion measures are already being planned, the firm expects to invest a total of about €1bn there by 2020. The new plant is expected to represent the largest 6-inch LED chip production site worldwide. Osram expects that the additional production capacity and its technology should enable it to significantly increase its market share in the fast-growing general lighting market (which is currently about €5.7bn). Given average annual growth rates of 7.5%, the firm reckons that this offers the greatest potential up to 2020. It also reckons that, through economies of scale and synergies, it can also reduce its costs in other market activities such as automotive lighting as well as applications for mobile devices, in which Osram already has a strong presence.

Osram is also planning additional investments in the Specialty Lighting (SP) segment to facilitate the broad-based rollout of new technologies in the market and to realize further growth potential. The firm has been the global leader in automotive lighting for many years, and intends to strengthen activities with innovative lighting modules. For example, Osram is claimed to be the only company in the world currently offering laser modules for headlamps ready for series production. Also for automotive lighting, organic light-emitting diode (OLED) technology is about to be rolled out for broad-based use in the rear lights of vehicles. Osram expects the market for laser and OLED applications in the automotive sector to amount to about €1.1bn in 2025.

In the recently created Lighting Solutions & Systems (LSS) segment, Osram says it will roll out many different measures in the coming years to realize "intelligent, technologically demanding lighting solutions". Following the review of the luminaires and solutions business (LS) announced recently, Osram says it is aligning this segment towards profitable growth. In particular, the market entry and range of integrated solutions offered are to be improved, adds the firm. Given the increasing importance of complex lighting solutions, Osram is also shifting the focus to expanding its electronics and software expertise. Over the next two years, new capacities for electronic ballasts and light management systems will be created for this purpose.

Boost to research

In line with the initiatives announced, Osram aims to increase its R&D budget significantly, aiming in particular to promote development of smart-city applications, wireless lighting control, and laser and OLED technology.

Osram says that, despite consolidation and focusing measures, it has kept its research at a high level of just over 6% of revenue in recent years. After the sell-off of its general lighting lamps business that was initiated recently, the increased research expenditure will account for about 9% of revenue by fiscal-year 2016.

"Investments in research and development have paid off for the company in the past by taking it to a clear number-one position in the automotive sector and leading to groundbreaking applications with opto semiconductors," says Berlien. "Through the intended increase in research intensity, Osram wants to further strengthen its technical expertise for semiconductor-based technology and extend its market position."  

'Diamond' targets growth

The 'Diamond' innovation and growth initiative aims to increasingly focus the company on balanced growth. In addition to high-revenue areas that hold large growth potential, lucrative niche areas - where Osram is already in a good position - will continue to make a valuable contribution to overall returns, the firm reckons. Osram has hence set the following targets, to be achieved in fiscal 2020:

• revenue of €5-5.5bn (corresponding to an average annual growth rate of 8%, after the sell-off of the lamps business);  

• earnings before interest, tax, depreciation, and amortization (EBITDA) of €0.9-1bn (correspond to an average annual growth rate of about 9%); and

• earnings per share of about €5 (equivalent to an average annual increase rate of around 25% compared with fiscal 2015) - the announced share buyback program is included in this target.

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