Will China’s ban of incandescent lamps help the LED lamp market in the short term?

It would appear that investors think that the ban will have an immediate impact on the market for LED lamps, as Chinese consumers will be required to purchase more efficient replacements. This is a gross overreaction, as the timeline of this ban and the role CFLs have to play do not appear to have been taken into account.
By Philip Smallwood, lighting analyst, IMS Research November 8, 2011

IMS research: excellence in market intelligneceChina will ban sales of incandescent lamps (bulbs) that use 100 watts (W) or more of power starting Oct. 1, 2012. The ban will be expanded to cover any bulbs that use more than 60W in 2014 and to 15W in 2016.

From the reaction of the market, it would appear that investors think that this will have an immediate impact on the market for LED lamps, as Chinese consumers will be required to purchase more efficient replacements.  This is a gross overreaction, as the timeline of this ban and the role CFLs have to play do not appear to have been taken into account.  

The most important decision factor for most consumers looking to purchase a lamp is the initial cost.  This is especially true in less developed regions where disposable income is much smaller. While consumers in the United States may be reluctant to purchase a $25 LED lamp, in China a consumer may find a purchase of this amount to be impossible. It will be argued that the overall savings of switching to an LED product from incandescent will be larger than that for a CFL. But in a country where the average cost of electricity is $.07/kWh will these savings be enough to sway even the most analytical of residential consumers?  

The graph on the left shows the payback period of replacing a 60W Incandescent ($0.11, 1,000 hour lifetime) with a CFL ($0.75, 13W, 6,000 hour lifetime). The graph on the right shows the payback for an LED ($8, 9W, 30,000 hour lifetime) replacement. At four hours of use a day, the CFL will only have a payback of 2 months and return on investment (ROI) of 200%, while the LED will have a payback period of 17 months with a ROI of 7%.

Payback period incadescent and CFL costs, Source: IMS ResearchPayback period incumbant and LED costs, Source: IMS ResearchIf a consumer were to replace the CFL with an LED, the payback would be 40 months, with a negative ROI.

Payback period CFL and LED costs, Source: IMS ResearchAssessing how the general consumer will react to the ban is extremely important, as 84% of all incandescent and CFL lamps installed in China today are found in residential applications. Additionally, the average number of sockets per household is expected to increase as the country continues to develop.   

It is true that 100W incandescent lamps will be gone in 2012, but currently there is no reasonable LED replacement at this wattage anyway.  Not only cost, but effective heat dissipation management from the LEDs is a major constraint. This means that the ban will primarily help the 100W CFL replacement lamp and supply chain until 2013. This begs the question of whether or not 100W incandescent suppliers will continue to produce these lamps for export or effectively switch over to CFL production worldwide. There is nothing in the ban as far as we know that says they can’t export 100W incandescent bulbs, but with the China 100W incandescent market going away, producers may believe the global 100W incandescent market isn’t far behind.

Importantly, 60W and 75W lamps are the most widely used incandescent lamps and they will be sold in China until October 2014. This means that LEDs won’t really have an opportunity to benefit from this ban for three years, and they will still have to compete with low cost CFL bulbs once it comes into effect.  

Nonetheless, we are optimistic on the adoption of 60W-75W LED lamps from late 2014 and will revise upward our forecast for LED penetration into China from 2014 in the upcoming issue of our Quarterly LED Supply/Demand Report.  We would expect this demand to boost capacity from late 2013/early 2014 as LED manufacturers prepare to serve the China market.

With supply now growing slower than expected on reduced MOCVD shipments expected in 2012 and demand now growing faster than expected on the new incandescent ban, the MOCVD outlook is improving for the 2014-2016 period, especially as older tools installed in the 2009 – 2011 period will need to be replaced. MOCVD shipments could reach record levels in this time period. However, the outlook for 2012 – 2013 is expected to remain weak on an elevated surplus of around 40% due to excessive tool installations resulting from the Chinese MOCVD subsidies during 2010 and 2011. With the LED lighting market expected to surge from 2013 and the surplus expected to narrow significantly in 2014, LED manufacturers need to hold for two more years when conditions improve.