Comments On What The New OSRAM Will Look Like
By Julie Allen
The Osram Management Team have released more information about how they are going to re-structure the company and what they expect that will deliver. At yesterday’s meeting, the supervisory board of OSRAM Licht AG gave the green light for a mandate to examine the carve-out of the general lighting lamps business. As an independent entity, the business could operate more freely in the market and realize strategic options such as, for example partnerships, more easily. The businesses with opto semiconductors, automotive and speciality lighting as well as luminaires, lighting systems and solutions would, as a result, form the future core business of Osram. With this move, the company will increase its focus on growth, innovation and technology leadership and address the different dynamics and requirements in the changing lighting market.
The rationale they give is that there are two different business models emerging in the lighting market. One is based around technology and the other around volume.
They believe that a fully integrated player that covers the entire value chain will not achieve synergistic benefits and will actually lose advantage. Those of us who have worked for large lighting companies will fully recognise this. It takes a different kind of sales force, product management, manufacturing and infrastructure to cope with customised solutions and lighting design as opposed to mass market distribution. What we used to call ‘box shifters’. The surprise is why it took the lighting giants so long to realise this.
Once the change is complete, the Lighting business will have 4 main business units; Opto Semiconductors, Speciality Lighting (including automotive), Lamps and an as yet un-named ‘New Segment’ which will consist of luminaires, light management systems and services.
According to Osram, the Technology segment split will allow them to focus on being the undisputed #1 in automotive lighting, a strong #2 position in semiconductor optics components, be among the top European luminaire players and focus the organisation on technology and innovation driven businesses. This will enable them to build up a clear design-in and customizing products and solutions infrastructure to take advantage of the growing wireless and networked digital lighting revolution.
Conversely, the Volume side of the business will maintain its #2 position in lamps worldwide, allowing them to balance the shrinking but profitable traditional, and growing LED lamp business. We call that ‘managing the golden tail’. It sounds easy but traditional lamp manufacturing needs high loads on the machines to remain profitable. As volumes decline this becomes quite a juggling act. Both Philips, Osram and GE would like to be the ‘last man standing’. What will probably happen is those machines or business units will eventually be sold off.
The top three have a number of strengths in this area such as high brand recognition, a broad customer base with strong retail/trade sales channels and a global production network close to regional markets. They are also working with industry associations and governments who are managing the adoption and deployment of energy saving legislation. In many countries, legislation has already been enacted to ‘ban the bulb’. But the phase in/phase out process is far more complicated than most people realise, leading to gaps in the market, hoarding and grey market practices. By being part of the entire process, these lighting giants ensure that the changeover is managed appropriately, its not done too quickly to disrupt the market and new products are readily available to replace those that are phased out.
The programme Osram are running to manage this transformation is called ‘Push’ and will run until 2017. As can be seen from the graphic on the left, there will be a significant reduction in the number of employees and they plan to achieve a very high level of cost reductions.
But to grow their ‘New Segment’ of lighting solutions and luminaires, they will need to add expensive software designers, system integrators, lighting & controls experts and probably acquire some companies that will bring IP, technology and products to round out their portfolio. All of that will come at a cost. Of course, your humble Editor is not privy to the details of the cost reductions and future plans of Osram. But it doesn’t take a rocket scientist to know that head count reduction alone is not a good measure of a healthy business strategy that involves both growth & decline of businesses.
The good news is that despite the turmoil of the lighting market, Osram have confirmed their outlook for the rest of 2015 and are confident in their numbers, achieving revenue comparable with 2014. They expect to see gross savings of roughly €400m from the Push programme however, the biggest yearly share of transformation costs will lead to a sharp decrease in net income and ROCE.
More details about each of the segments are covered in the presentation. You can download the full presentation from the Osram Management Team here.OSRAM Management Presentation Q2 FY15