Neo-Neon's Success in Decorative Lighting Drives Expansion into LED

CEO Fan built success by ruthle

He has held the No. 1 position in the world's incandescent-bulb decorative lighting market for 10 years, and the press in mainland China refers to him as the “Emperor of Global Lighting.” Now the Taiwan-born Ben Fan, chairman and chief executive officer of the Neo-Neon Holding Corp., which was founded in 1981 and today has annual revenues of US$200 million, is drawing up a strategy for the development of the LED lighting business based on his success in incandescent lighting.

“The key to our success in becoming the world's No.1 supplier of decorative lighting was to cut costs--at a steep 90% rate,” recalls Fan. As a result, Neo-Neon bagged over half of the world market for decorative lighting in 2000, when it delivered six billion bulbs.

Neo-Neon has remained profitable in spite of its deep cost cuts, which had a heavy impact on most rival suppliers. “They saw it an unbearable blow,” Fan comments, “because they had adapted themselves to extraordinarily high margins from manufacturing. But we only made a reasonable profit from our sales.”

When mentioning low-cost scenario, Fan thinks of his 1988 tour of inspection of Wuxi of Jiangsu's investment climate. “Land and labor costs were quite low at that time in the mainland because the mainland was still in early days of its economic reform. Today, the costs are high,” he recalls.

In 1999 Fan opened a 10-million renminbi (US$1.4 million at RMB$6.8:US$1) factory in Heshan City, Guangdong Province. The factory assembled semi-finished products for meager profits, inspiring Fan to think about how to make more money by cutting costs further. Finally, he decided to set up integrated production lines for every component ranging from mini bulbs and tungsten filaments to semi-finished parts, and even to install equipment for making electrical cables.

In 1995, following several unsuccessful attempts to produce his own quality mini bulbs, Fan persuaded the Kuang Hung Electronic Co., Taiwan's top mini-bulb maker, to invest in his company and provide the know-how for making bulbs.

Fan's next step was to boost production capacity to keep costs down. He planned to scale up bulb production five-fold to 10 million units a month; Kuang Hung backed out of the partnership because of the high uncertainty of this move, but it proved correct in the long run.

After making a splash in the mini-bulb decoration lighting market with his aggressive cost-cutting strategy, Fan is working on plans to cut costs in his LED lighting operation, which now contributes around 70% of the company's revenue. When Neo-Neon began considering using LED bulbs in its Christmas lights in 1997, Fan realized that the company would need to set up an integrated production capability, just as he had done for incandescent-bulb lighting. “Compared with incandescent-based Christmas lights, LED lights were much more expensive because of the costly chips and packaging,” he recalls. “So we needed to do something to pare costs, and the most feasible way of doing that was to have integrated production.” In 2001 the company opened a packaging factory which, Fan explains, “helped bring down our LED lighting production costs by 60%.”

More Cost Cuts

Neo-Neon reduces costs even further by producing ceramic substrates for its LED packages, which Fan estimates used to account for half of the cost of LED lighting fixtures. Now, Fan reports, “We have brought down packaging to around 15% of total cost.”

In 2006, again to keep costs down but also to assure a stable source of supply, Neo-Neon carried out an initial public offering on the Hong Kong main board to raise capital for its epitaxy factory I project, and the next year invested US$40 million to construct the factory at its Heshan campus. Last year the new factory began production with five metal organic chemical vapor deposition (MOCVD) chambers, which together turn out 12,000 2-inch epi-wafers containing around 400 million chips a month. “Thanks to that factory,” Fan explains, “our LED lighting fixtures now cost only four and a half times more than traditional lighting fixtures. Our competitors, Japanese suppliers in particular, are selling their products at prices 40 to 50 times those of traditional lights.”

Advantageous pricing convinced Home Depot to place orders with Neo-Neon for Energy Star-certified LED lighting fixtures. The manufacturer also sells to 4,000 other retailers in 80 countries, including Target and Canadian Tire. Even Russia, which has imposed high tax rates on imported LED lighting products to protect its own industry, has bought US$10 million worth LED decoration lights from Neo-Neon, according to Fan.

Global supplies of LED chips have run short since the second quarter of 2009 because of recovery-driven demand for LED backlights used in TVs and laptops. Fearing that the shortage could affect his LED lighting production, Fan decided to add more epi-wafer output and plans to build a new factory with 30 MOCVD chambers in the Yangzhou Economic and Technological Development Zone (YETDZ) in Jiangsu Province. “As soon as that factory begins production at the end of this year,” he says, “we will be able to pare cost by around 10% more.”

To raise capital for the planned new factory, Neo-Neon floated Taiwan Depository Receipts (TDRs) last December with the aim of securing around US$50 million. The YETDZ administration has pledged to subsidize each MOCVD chamber bought by Neo-Neon to the tune of 10 million RMB (US$1.4 million), and to offer a preferential 15% tax rate. The administration has also promised to buy 35 million RMB (US$5.1 million) worth of Neo-Neon-made LED lighting products.

The planned factory will be able to turn out 60,000 epi wafers a month once all of the 30 MOCVD chambers are in place, but the company has managed to secure a commitment from equipment supplier Veeco to deliver only 12 of the machines by the end of this year because of strong demand. The 12 new machines will allow Neo-Neon to add an estimated 24,000 epi wafers a month to its production. The rest of the chambers will be delivered by the end of 2011.

Difficult Entry

It is not easy for a maker of traditional products to expand into LED-chip manufacturing. “When we announced our intention to open an epi-wafer factory in 2007,” Fan comments, “a lot of people warned me: ‘You'll definitely screw up your business if you get involved in epi-wafer manufacturing.' But it did not take us very long to introduce backlight-grade chips after we started production in 2009. This year we've beat the expectations of insiders by rolling out lighting-grade chips. Nevertheless, our share price once nosedived from HK$18 a share to just HK$1 or so, due to a lack of investor confidence in this investment project.”

Fan realizes that the success of his company's epi-wafer operation depends on the Taiwanese LED specialists that his company has hired, but the effort is necessary. “Getting involved in the upstream segment of the LED industry” Fan explains, “allows us to not only keep costs down but also to master core technology.”

Fan is upbeat about market prospects for LED lighting. When Neo-Neon began making LED lighting fixtures in 2003, he predicted that LED lamps would replace all light sources one day. “LEDs have already been substituted for most minor light sources,” Fan notes, “and the rate of replacement has been quicker than expected.” He also believes that the LED backlight market will become crowded in two or three years, but that the LED lighting market will still have ample room to grow. “In mainland China in particular,” he explains, “the growth will be more striking than elsewhere. According to unofficial statistics, there are around 180 million road lights across the mainland, and the outdoor-lighting market there is estimated at 20 billion RMB [US$2.9 billion] a year. The mainland has huge market potential for LED lights.”

In response to that potential, Fan plans to shift the company's marketing emphasis to the mainland in a few years and boost sales there to one third of the total, compared with just 10% now. (Europe and North America each contribute a third of the company's revenue at present.). To power a deeper involvement in the mainland the company has opened over 20 sales outlets throughout the country. “So far we've landed orders for 100,000 LED road lights in the mainland, and delivered a tenth of them,” Fan reports. “The mainland market will post explosive growth once the authorities there introduce standards for the LED lighting industry.” He feels that the mainland will likely develop standards based on those that Taiwan unveiled in late 2008.

Competition in the mainland market is fierce, with Fan estimating that his former employees alone have opened over 200 LED-lighting factories. “We're annoyed by their price-cutting competition,” Fan complains, “but we have persistently competed with ourselves rather than them. Unlike Neo-Neon, they do not have the integrated manufacturing capability which has given us mass production scale, low production costs, and core technologies. Furthermore, we have our own retail outlets.” Industry watchers believe that Neo-Neon is the only LED-lighting manufacturer apart from Philips that is capable of producing upstream, midstream, and downstream components, and of retailing its own products.

Testing the Waters in Taiwan

Taiwan will also become a more important market for Neo-Neon, which has opened a showroom on the island and will begin offering LED lights for home uses there in February or March this year. Taiwan's 2010 Lantern Festival, which got under way on Feb. 28, provided a testing ground for the company's LED lights aimed at the Taiwan market.

The company has set up a manufacturing and R&D team to carry out its integrated manufacturing strategy. At a press conference for the company's TDR issuance, Fan said that his company's workforce amounts to over 16,000 during the Christmas shopping seasons and 8,000 during slack seasons. Its R&D specialists, one of whose tasks is to develop patented designs, number around 100. Copycats are discouraged by offering lawyers 70% of court-awarded damages to catch them.

Customers who co-develop products with Neo-Neon are pampered with use of a fleet of 40 luxury cars, 70 guest houses, and five-star restaurant during their stay at the company during the co-development process.

Not all of Fan's investments have worked as smoothly as planned. He went bankrupt three times in the early days of his business because of excessive investment, and had to start over by handling meteor-lighting installation projects for dance halls.

In his youthful days Fan worked as a part-time TV translator of wire-service news and news agencies. His first full-time job was offered by a TV station manager, who needed someone with English-language capability to take care of his lighting import business.

When the import company closed down because of disagreements among shareholders, Fan quickly convinced its American supplier, Tivoli, to give him the dealership. His first big sale was of meteor lights to a dance hall; and the rest, as they say, is history.