Neo-Neon Gears Up for Massive Marketing Campaign

Neo-Neon Holdings Ltd., which is listed on the Hong Kong main board and is the world's top manufacturer of decorative lights, is set to launch a massive promotional campaign for its light-emitting diode (LED) products.

The company opened the first shop dedicated to the sale of its own-brand products in Kowloon early this year. Executive Director B.Y. Fan says that more will be added in Taipei next year, and that 2,000 wholly owned stores will be opened throughout China over the next three to five years at an estimated cost of RMB500 million (US$73 million at RMB6.8:US$1).

“I would say that 2010 is the start of Neo-Neon's official marketing campaign, because developing markets is the centerpiece of our efforts this year,” comments corporate chairman and chief executive Ben Fan, B.Y.'s brother. The company opened its first store in Kowloon, he says, to take advantage of Hong Kong's position as a global financial hub; more outlets will spread out from the former English colony.

In fact, the firm kicked off its massive marketing campaign in 2010 mainly to cash in on robust market potential. “The LED lighting market has grown sharply so far this year. Our company's sales of white-light LED lamps alone hit a high of about US$30 million in the first half of this year, shooting up around 50% from US$20 million in such sales scored throughout last year,” the chairman notes.

China is already playing a major role in the company's growth. Neo-Neon LED lamps and fixtures are lighting up many of the pavilions at Expo 2010 Shanghai and will also illuminate streets for the 2010 Asian Games. “We started the systematic development of the mainland market only two years ago,” reports the chairman, “and we find that the market for LED lighting there is growing at a shocking speed.” It now markets its lights in China through franchised stores.

The company is also expanding outside the greater-China region, having opened offices in Germany and the United Kingdom and acquired three lighting wholesalers in the United States.

Fan says that he has not seen “a ray of light in the dim LED-lighting market until this year,” when a steady stream of orders has been flowing in from big retailers. He ascribes the robust market to the steep drop in LED prices and the vast improvement in LED lighting efficiency in recent years. These trends, he says, are “speeding up the replacement of traditional lights with LEDs, and inspiring the expectation that half of all traditional lights will be replaced by LEDs by 2018.”

Drastic Cost-cutting

Neo-Neon's own strategies have also played a part in bringing in the orders. Besides offering a complete range of mainstream products to provide clients with one-stop shopping, the company has also effectively shaved its production costs.

LED products now account for 80% of its sales, and the company currently operates integrated manufacturing facilities that handle almost all stages of production from epi wafers and ceramic substrates to packaging and lighting fixtures. This is a strategy similar to the one the firm adopted 10 years ago, which helped it capture over half of the global market for incandescent decorative lights. In mainland China, where Neo-Neon is headquartered, the Taiwan-born Fan enjoys the sobriquet, “Emperor of Global Lighting.”

Fan claims that integrated manufacturing has shaved his production cost by more than 70% compared with Neo-Neon's rivals. In 2001 the company opened a packaging plant that, Fan says, alone “has helped bring down our LED lighting production cost by 60%.” Ceramic-substrate production lines that were set up later have slashed packaging costs to “around 15% of total manufacturing cost.”

The firm's five metal organic chemical vapor deposition (MOCVD) chambers began mass-production operations in 2009 with a combined monthly output of 12,000 two-inch epi-wafers containing around 400 million chips. “Thanks to that plant,” Fan comments, “our LED lighting fixtures now cost only 3 to 4.5 times as much as traditional lighting fixtures. Our competitors—especially Japanese suppliers—are selling products at prices 40 to 50 times those of traditional lights.”

The company's expansion plan calls for a total of 30 MOCVD chambers, all of which should arrive by the end of this year and join the existing ones in the Yangzhou Economic and Technological Development Zone in Jiangsu Province. Once in full operation, they will have a total capacity of 60,000 epi wafers a month. Fan claims that they will cut production costs by another 10%.

The expansion plan is the result of fear that a global shortage of LED chips beginning in the second quarter of 2009 would kick up production costs

Good Prices Bring Great Orders

Attractive prices convinced Home Depot to order Energy Star-certified LED lighting fixtures from Neo-Neon. Home Depot joins 4,000 retailers in 80 countries, including Target and Canadian Tire. The company has even sold US$10 million worth of LED decorative lights to Russia, despite the high tariffs on LED lighting products which are imposed there to protect the country's own industry.

In addition to lamps that are compatible with existing lighting fixtures so that buyers can easily plug them in by themselves, Neo-Neon also supplies complicated lighting systems for lighting designers and homebuilders. “Whatever kind of products they are,” Fan comments, “they all go to market bearing our own brand name. We do not turn out products for other companies on an OEM basis.”

Fan knows well that hardly any LED streetlight manufacturer has ever made money on public-works projects in mainland China. “The reason for this, I understand, is that they have indefinite collection periods for their accounts receivable,” Fan explains. “I never do business with project contractors; instead, I sell our lights to retailers. I'm not sure who the retailers sell to, but I'm pretty sure that they have no problem collecting bills on time.” Such sales usually bring the company a gross margin of 30% to 40%.

The booming demand has brought stress along with the profits. “Contract volumes are growing bigger and bigger, while lead times are becoming shorter and shorter,” the chairman explains.

The flourishing market has prompted the company to revise its epi-wafer strategy. The firm originally reserved all of its chip production for its own use; but now, Fan notes, “we sell high-performance chips, which account for about half of our total output, to boost profits, and reduce costs by buying low-end chips from other chipmakers to use in our decorative lights.”

With the strong market upturn, Fan expects his revenues this year to return to the pre-2008 average level of US$200 million.

Neo-Neon was born in Taiwan and migrated to China in 1979, when it opened an RMB10 million (US$1.4 million) plant in Heshan City, Guangdong Province. The plant earned meager profits at first by assembling semi-finished products, and Fan quickly realized that he would have to set up an integrated manufacturing capability. Soon the plant had production lines turning out a wide range of components, from mini bulbs and tungsten filaments to semi-finished parts. There were even machines for making electrical cable. Vertically integrated manufacturing capability remains the foundation of Neo-Neon's competitive edge, even today, in both traditional and LED lighting.