Cree CEO Tells Illuminating Tale of LED Bulbs, Innovation
Cree’s entry into the consumer LED light bulb market sent waves through a lighting community that knew the Durham, NC, company as a supplier, not a seller of LED lighting components. The announcement last year was also news to a smaller group intimately familiar with Cree (NASDAQ: CREE)—the company’s employees.
Companies often develop new products in stealth to keep them away from the prying eyes of competitors. But Chuck Swoboda, Cree’s CEO, says the LED bulb was a stealth project even within the company. A small team developed the bulb working from an unmarked building apart from Cree’s main operations.
“On the day of the launch, less than 200 people in the company knew about the product,” Swoboda recalls.
Swoboda was one of the high-profile technology leaders who spoke about entrepreneurship and innovation during CED’s Tech Venture Conference, which drew more than 700 people to Raleigh, NC, last week. But Swoboda was even more revealing on the eve of the conference, speaking to a much smaller audience at the University of North Carolina at Chapel Hill’s Kenan-Flagler Business School. There, Swoboda told the backstory of how Cree developed the consumer LED (light-emitting diode) bulb. He also hinted at lighting opportunities ahead.
For most of its history, Cree was not a lighting company. Cree was established in 1987 based on semiconductor technology originally developed at NC State University. Cree developed the first blue light-emitting diode. Before then, LEDs were available in red, yellow, orange, and green. Blue LEDs meant electronics companies could create electronic displays using the full spectrum of color. Today, sales of LED chips and related products are the company’s top business. Its LED products division generated $833.7 million in fiscal 2014 revenue.
Cree entered the LED lighting business in 2008, acquiring LED Lighting Fixtures (LLF) in a cash and stock deal valued at up to $103.4 million. The Morrisville, NC, startup, which sold LED lighting to builders in commercial and residential construction, was founded by Neal Hunter, Cree’s co-founder and second CEO (who had left the company in 2005). Following the acquisition, Hunter rejoined Cree as president of a newly created division, LED Lighting Solutions. Three years later, Cree’s lighting reach expanded again with a $525 million acquisition of Rudd Lighting, a Racine, WI, company whose LED lighting fixtures were used outdoors in street lights, as well as in retail spaces. Cree employs more than 1,000 in Wisconsin today.
Cree touted LED lighting’s advantages: longer life, less heat, and energy savings when compared to traditional lighting. Even as this business grew, Cree’s focus was on selling to other companies that used Cree products in the fixtures they sold. Swoboda says Cree initially had no plans to sell consumer LED bulbs of its own, a move that would have placed Cree in competition with its customers. Instead, Swoboda says Cree spent two years trying to convince lighting companies to sell them. They declined, telling Swoboda that consumers weren’t asking for LED bulbs.
If lighting companies would not sell consumer LED bulbs, Swoboda decided Cree would do it. He says Hunter and three others set up shop in secret. One Cree scientist came up with a design that looked like a standard incandescent light bulb. The team concluded the bulbs could be made for the target $9.97 retail price. Swoboda says the design and price goals were crucial for winning over consumers, who would expect a new bulb to look like the bulbs they had purchased for years, and for a reasonable price.
With the bulb ready, Cree sought a retail partner. Swoboda concedes that Cree had little market research to support the product. But Robert Tillman, the former chairman and CEO of home improvement retailer Lowe’s and a Cree board member, was impressed with the new bulbs. He told Swoboda he would stock them in Lowe’s stores if they were available. With that sliver of information, Swoboda says Cree was able to “negotiate with confidence,” convincing The Home Depot (NYSE: HD) to sell Cree’s LED bulb in its more than 2,000 stores across the country.
Established and well-financed companies such as General Electric (NYSE: GE) and German firm Osram (XETRA: OSR) now compete against Cree in the consumer LED bulb market. Swoboda concedes Cree won’t beat them by spending more or marketing more. But he says Cree can win by innovating more.
Like many executives, Swoboda believes big companies don’t really innovate. Instead, they manage risk. Cree can distinguish itself through innovation, Swoboda says, pointing to Hunter’s work on the stealth LED bulb project as an example of fostering startup spirit in an established company.
“He was able to create what we had in the early days of Cree,” Swoboda says.
Some details about the Cree LED bulb remain secret. When the company reports financial results, it does not break out LED bulb sales figures. The bulbs are lumped in with the rest of Cree’s lighting products unit. At $9.97 each, the consumer LED bulb is not expected to be a huge contributor to a lighting products business unit whose $706.4 million in fiscal 2014 sales was driven by products used to illuminate streets, retail spaces, and parking decks, among other applications.
But Swoboda says the LED bulb is the answer to the company’s branding problem. Even though Cree has grown from a startup into a company with 7,000 employees and $1.6 billion in annual revenue, Swoboda says Cree remains relatively unknown. Rather than pay for expensive marketing, Swoboda says, Cree can build awareness of the company through sales of its consumer-facing LED bulbs.
Awareness could help Cree grow in a number of different areas. Swoboda points to new opportunities, such as “smart homes.” LED lighting could become integrated into emerging smart home technologies, where managing lighting would be part of an energy-saving strategy. Here, Cree already faces potential competition. San Jose, CA-based company Xicato, among others, is developing “smart lighting” technology employing a Bluetooth wireless communications chip that could be used to adjust the light.
Swoboda says Cree could also get in the business of leasing light to customers. In this “lighting-as-a-service” model, a company owns and operates the lighting fixtures. Customers, such as businesses or cities, lease light as needed from the fixture operator. Swoboda says these capabilities come from the fact that what people think of as a light bulb now actually represents very sophisticated technology.
“It’s not a light bulb, it’s an electronic device,” he says.
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