Bulbs and LED Chips

Turning Lights Back on at Osram

Olaf Berlien. Source: VISUM
Olaf Berlien.
  • Why it matters

    Why it matters

    Chief Executive Olaf Berlien is attempting a crucial restructuring of the Munich-based firm, and his plan to concentrate on LED technology rather than traditional light bulbs is risky.

  • Facts

    Facts

    • Osram’s share price fell about 30 percent last month after it announced a plan to invest €3 billion by 2020 in R&D and a new factory.
    • Investors were unhappy with the planned spending at a time when the world’s No. 2 maker of lighting has been struggling.
    • Osram competes with Dutch firm Philips, U.S.-based General Electric, Austria’s Zumtobel and a host of Asian rivals, including Japan’s Nichia.
  • Audio

    Audio

  • Pdf

Olaf Berlien, 53, is the chief executive of Osram, a multinational lighting manufacturer based in Munich that was spun off  from industrial group Siemens two years ago.

The firm has struggled with its traditional light bulb business and now is determined to focus on the mass market for light-emitting diode (LED) chips.

Mr. Berlien told Handelsblatt Osram is determined to go through with its planned €3 billion ($3.2 billion) investment program to bolster research and development and build a new factory. He spoke about Osram’s rivals in Asia, problems in the lighting business and criticism from investors.

Handelsblatt: Mr. Berlien, you worked for months on your new corporate strategy. Then you presented it – and the share price fell by almost 30 percent. Isn’t that a vote of distrust by the owners against the chief executive?

Mr. Berlien: No, that’s not how I see it. But admittedly, our communication with the capital market was not optimal. We’ll do better in the future. We will issue regular updates and provide investors with much more extensive information.

What was wrong with your communications?

We should have been clearer about our strategy, our growth initiative and our mid-term goals. For its part, the capital market hates surprises and tends to react excessively.

But the share price hasn’t recovered. Investors continue to be skeptical of your strategy.

Every share that is sold on the stock market has a buyer. And these buyers apparently believe in the strategy. I personally consider the price to be so attractive that I just purchased shares privately myself.

“We are pursuing a balanced strategy. What is more, we have been involved for decades in the LED-chip business.”

Olaf Berlien, CEO, Osram

But the actual problem is that you are doing exactly the opposite of what many investors had expected. They were looking for Osram to shrink and only focus on profitable niches. Instead, you are investing a billion euros in a chip factory in Malaysia, becoming more deeply involved in a risky mass-market business.

Withdrawing into a niche is also a risk. There are well-known examples of that not functioning. Look at the German manufacturers of premium televisions: Not many that hid in the corner during a technological transformation won the race.

So you are taking risks?

We are pursuing a balanced strategy. What is more, we have been involved for decades in the LED-chip business. We are a formidable number two and in 2015 had a nearly 18 percent operating profit margin. And we are involved in three fundamental areas: the Osram Opto semiconductors with LED chips, the business in automotive and special lighting and also the lamp and solutions business.

But even your own chief financial officer is said to have been critical regarding the chip expansion. The word is that he is skeptical as to whether the good margins can be maintained over the long term in the competition with Asian firms.

The management board decided upon the strategy and then proposed it to the supervisory board.

But can’t Asian companies make better chips?

No, otherwise we wouldn’t have been number two in the world for years now. We already have a location with 5,700 employees in Malaysia. Now there will be an additional factory with 1,500 employees.

And it won’t be downsized because of investors’ criticism? Investment firm Union Investment, which holds a 2-percent stake in Osram, has issued an ultimatum and demanded that the expansion plans be halted until the annual meeting.

We have put a lot of thought into this, and that’s why we will not lower our sights. The supervisory board authorized an expansion volume of up to €1 billion [$1.1 billion, HB] that will be invested in several phases depending on market developments.

Your majority shareholder Siemens is skeptical as well. The chief executive of Siemens, Joe Kaeser, said the capital market has delivered its verdict.

The case shows how well corporate governance functions. The Siemens representative on the supervisory board was an active supporter of the strategy. In the meantime, we are conducting intensive discussions with Siemens as well. We’re on the right path.

 

Osram's Restructuring-01
Osram’s fiscal year 2015 ended on Sept. 30.

 

Your new course, with investments totaling €3 billion, is more risky than your current strategy.

Let’s qualify that: The investment in the new chip factory totals €1 billion and Osram has been deeply involved in restructuring. But now we are spinning off of the traditional business; this phase has practically been completed. So we are going into a growth phase and thus also have a different risk profile. Greater opportunities also mean higher risk.

What is the goal of your restructuring?

Put simply: The incandescent bulb was the backbone of Osram for more than 100 years. If I want to create an Osram that will be around in another 100 years, then I have to travel on new paths. The new backbone is the LED. We have been moving at an incredibly fast tempo. What counts in disruptive transformations is speed. We have the advantage of being first movers, and we’re using it.

One has the impression that the golden age of the LED might not come to pass. The price pressure is high before money can really be earned.

With optical semiconductors, we last had an EBITA [earnings before the deduction of interest, taxes and amortization expenses] margin of almost 18 percent. It is important always to be operating the most modern factories. And that’s what we’ll do with our new plant in Malaysia.

Are you worried that the LED market will have a boom and bust cycle, like that of memory chips?

The comparison is made repeatedly, but it is not a valid one: A new DRAM [dynamic random-access memory] factory costs €3 billion to €4 billion; a LED factory €100 million to €1 billion. The product cycles are significantly longer with LEDs, and the facilities can be used longer. What is more, the market grows continuously, whereas there are sharp fluctuations with memory chips.

“No, the lights won't go out at Osram. If you don't move, you don't rub people the wrong way. But standstill is the death of innovation and of the future.”

Olaf Berlien, CEO, Osram

So are you now becoming an LED company?

That’s what we have been since we made the decision to get out of the traditional light bulb business. We already do more than half of our business in the LED sector. The face of the company is changing.

When will the logo change? It still has the light bulb.

A new logo will come. It isn’t at the top of my list of priorities.

It seems more important to sell the traditional business. How are negotiations going?

The data room has been set up, and discussions with interested parties are in an early phase.

Are there many of them waiting in line?

Yes, they have to form a queue (laughs). Seriously: We have a large number of interested parties.

Where do they come from? The word is, primarily from China.

From Asia and another region.

Would you prefer to sell to a strategically interested party or to a financial investor?

We want to sell to the best owner. In the course of my career, I’ve been involved in more than 100 M&A [mergers and acquisitions] deals. I’ve had positive experiences with both – strategists as well as financial advisers.

In the case of Osram, does a buyer have to guarantee jobs?

No. We ourselves couldn’t guarantee them recent years. Basically, we downsized the business in an orderly manner. But I see definite prospects. The market is shrinking more slowly than we had expected. And we have an excellent marketing staff. That is of great value to a buyer if it can sell its own products throughout the world.

How high a value? What sort of purchase price are you hoping for?

A figure in the three-digit millions. When I began 12 months ago, the business was still valued by analysts at zero, plus or minus €200 million.

 

153 Osram-01

 

There are high hopes for the automotive branch. But that is also affected by falling prices and cheaper chips.

That’s why it’s crucial that we transform ourselves from a deliverer of components to a producer of complete light modules. For example, we are the first to provide a complete laser module for a mass-produced vehicle. We have an absolute technological lead. This is where the future lies.

Why?

What matters most is controlling the light and the sensory mechanism. This will play an important role not only in autonomous driving but also in the utilization of laser light. These are highly complex systems.

Do you really have the expertise here?

Yes, we do, as you can see with the products I’ve mentioned. Above all, we’re already quite good in electronics control. But I can imagine acquiring small specialists.

How much money do you intend to spend?

There is no specific sum. Smaller acquisitions. But at the moment, we are not engaged in any negotiations.

The third area, the lamps, are traditionally a problem child at Osram.

The business is not yet worry-free, but we’re making progress. The market is good and large. The competition shows that it is possible to make a great deal of money there. The problems we have there are self inflicted.

What kind of problems are those?

There was no effective post-merger integration after acquisitions. Unsuitable marketing approaches were chosen. And we weren’t particularly good at productivity. We have to improve product costs and marketing.

When will you earn real money there again?

In two years at the earliest.

Don’t you sometimes worry that your strategy will fail and that you will be the one to turn off the lights at Osram?

No, the lights won’t go out at Osram. If you don’t move, you don’t rub people the wrong way. But standstill is the death of innovation and of the future.

 

Axel Höpner is the head of Handelsblatt’s Munich office, focusing in particular on Allianz and Siemens. To contact the author: hoepner@handelsblatt.com.

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