By Paul Chesser
Entrepreneurs in industries tied to the energy efficiency gambit, justified by the climate change House of Cards, all have the same false bravado: They are “game changers” and “market leaders” (for products nobody wants); all their squandered revenues are “investments;” their technological breakthroughs are always “just around the corner;” and it just takes one more round of mandates/grants/loans/tax breaks to achieve viability in the free market.
It’s true of renewable energy and electric vehicles, and as Cree Inc. CEO Chuck Swoboda revealed recently, it’s true of the alternative light bulb industry, too. In a shareholder meeting at the company’s Durham, NC, headquarters, he boasted about his marketing acumen that he says will persuade the public to embrace Cree’s light-emitting diode (LED) technology and abandon the traditional light bulb – which consumers will soon have no choice about.
The meeting featured some new Cree television commercials, with one titled “Eulogy,” in which a spokesman buries an incandescent in a field. “We are changing generations of belief about lighting,” Swoboda said.
In reality the changes in how we light our homes and businesses are not because of brilliant advertising. It’s because the U.S. government – like other countries – implemented a gradual ban on incandescent light bulbs. Last year 100-watt bulbs were made illegal. This year it was 75-watters. Next year restrictions on 60-watt bulbs take effect.
Unsurprisingly, Swoboda didn’t address the fact that government policy is largely behind the market growth for his products. Yet despite that huge advantage, he said the company would need to dedicate greater resources in the future to promote LEDs.
So what’s the big deal? Why the need for all the money and effort to convince consumers they need Cree’s LED-style lamps – which are supposed to be big energy savers – instead of the old-fashioned incandescents, especially when the government is giving him a big push?
Well, have you seen the price of light bulbs lately? Home Depot will sell you a six-pack of General Electric, “Double Life” 40-watt soft whites online for $3.97. That works out to 66 cents per bulb – probably pretty tough to beat, but if you can make a difference on energy savings, the market will listen.
Unfortunately the problem with Cree’s LED competitor to that bulb is while it consumes only six watts of energy, it costs $9.97 at Home Depot – per bulb. That means 15 of the GE soft white incandescents could be bought for the same price as the single Cree LED. Or put another way, Cree wants you to believe its newfangled bulb will last longer than if you replaced a bulb in the same fixture 15 times, and/or that the energy savings will make up the difference.
Two years ago, as the prohibition on 100-watt bulbs loomed, a Rasmussen poll found that 67 percent of respondents disapproved of the ban. Seventy-two percent said light-bulb choices are none of the government’s business. And whether new bulb technologies would have a positive or negative impact on the environment –the justification for the incandescent ban in the first place – was split down the middle in the poll.
Now you know why Swoboda is trying to make the case to investors that he needs “a lot more” persuasive marketing to get public buy-in.
In a genuine free market, the Cree LED would draw extremely limited interest from consumers, but U.S. government lighting regulations just reflect energy policy in a screw-in socket. One of the lines in the popular viral video “If I Wanted America to Fail,” the narrator says, “I’d make cheap energy expensive, so that expensive energy would seem cheap.” Also, about 30 states mandate the purchase of a minimum percentage of expensive renewable energy such as wind and solar, to replace more efficient and affordable sources such as coal and natural gas.
In the case of light bulbs, many state laws (some in conjunction with renewable mandate laws) have established energy efficiency programs with electric utilities. The initiatives allow the heavily regulated power providers to collect additional fees (yes, call it a tax) on electric bills to reduce the price, or provide rebates, for compact fluorescents, halogens or LEDs. The government also subsidizes the alternative lights. Some utilities, such as Duke Energy, even give away the alternative bulbs.
In its quarterly disclosures to the Securities and Exchange Commission, Cree acknowledges its dependence on government mandates and subsidies for the success of their products, and warns about the possibility of political winds blowing against them.
“If governments, their agencies or utilities reduce their demand for our products or discontinue or curtail their funding,” Cree reported, “our business may suffer.”
When Cree announced its quarterly earnings, Morningstar analyst Peter Wahlstrom noted that while the company’s revenues and net income have grown, gross margins for its lights sank by nearly 5 percent. The company’s stock price was down 16 percent the day after its quarterly report was released.
“Yes there’s a lot of revenue growth to be had,” Wahlstrom told the Durham Herald-Sun, “and Cree is angling to promote its bulbs and to be the market leader and to get some brand recognition in its market place, but it is apparently spending pretty heavily to do so.”
But it’s a phony market built on an unsustainable foundation of mandates and subsidies, and like renewable energy and electric vehicles, the weak demand for these costly products will overcome the temporary tent-poles of support the government has erected. It’s got to come down some time.
Paul Chesser is an associate fellow for the National Legal and Policy Center. This article is reprinted with permission by the Georgia Public Policy Foundation. The Georgia Public Policy Foundation is an independent think tank that proposes market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (December 13, 2013). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.