December 22, 2011                                                                                         bulbtiger.com   ...
December 22, 2011                                                                                         bulbtiger.com   ...
December 22, 2011                                                                                         bulbtiger.com   ...
December 22, 2011                                                                                         bulbtiger.com   ...
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Why cfl prices in india are increasing

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As China continues to restrict supply of rare earth materials, the prices are likely to only increase in short term. The first round of price increases has just beginning to surface with most manufacturers implementing their price increases in staggered manner. Economic Times has recently reported that various brands have increased prices of Compact Fluorescent Lamps (“CFLs”) by 5-15% in Nov ‘11. For example, a branded CFL bulb, which was selling at Rs 80 a few weeks ago, now costs Rs 90 in the domestic market.

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Why cfl prices in india are increasing

  1. 1. December 22, 2011 bulbtiger.com admin Going green become costlier as CFL prices soars 1. Shortage of raw materials – The China C onsumer good companies have managed to held or improved margins and reported nomi- angle nal growth during Q3, 2011 as the consump- tion demand remains strong even in a high infla- China is currently a producer of ~95% of the world’s tionary environment. However, the volume growth rare earth materials which are vital for green-energy has cooled down and could see a further slowdown products including giant wind turbines, hybrid ga- if interest rates continues to remain high. Import soline-electric cars and compact fluorescent bulbs. oriented industries have particularly suffered [...] The increase in prices of CFL is largely attributed to rising prices of rare earth elements which are used Consumer good companies have managed to held for a coating called Phosphor on the inner surface or improved margins and reported nominal growth of the fluorescent lamps that absorbs the ultraviolet during Q3, 2011 as the consumption demand re- light and converts it into fluorescent light, mostly mains strong even in a high inflationary environ- in the visible spectral region. The high cost of rare ment. However, the volume growth has cooled down earths is having a significant effect on cost of wind and could see a further slowdown if interest rates turbine and electric motor production as well in continues to remain high. Import oriented industries spite of offsetting government subsidies for green have particularly suffered in this downturn due to tech products. depreciation of the rupee and rising input costs. China, the only producer of rare earth minerals inhttp://bulbtiger.com/blog/2011/12/22/going-green-become-costlier-as-cfl-prices-soars/ Economic Times has recently reported that various the world has been cutting on its exports citing envi- brands have increased prices of Compact Fluorescent ronmental reasons. China has closed or nationalized Lamps (“CFLs”) by 5-15% in Nov ‘11. For example, a dozens of the producers of rare earth metals over branded CFL bulb, which was selling at Rs 80 a few last few months in order to limit radioactive residues weeks ago, now costs Rs 90 in the domestic market. from the rare earth industry. China is currently ex- CFL bulb price rise has not been confined to India porting about 30,000 tons a year – only one-fourth of as the prices have also soared in developed nations the world’s demand. The problem with the supply as well. The average price for fluorescent bulbs has of rare earth elements is that China sees them as risen 37 percent this year in US. General Electric, of long term strategic importance for their future facing complaints in the United States about rising economy (similar to how other commodities and prices for its CFL bulbs, highlighted that the prices raw materials are controlled around the world like of the rare earth element europium oxide has risen OPEC controls oil). by 12 times in one year. Wal-Mart has also raised prices on some brands lately. Figure 1: Global rare earth materials production trends (1950-2010) The price rise is due to combination of various fac- tors, some of which are discussed as follows: Love this PDF? Add it to your Reading List! 4 joliprint.com/mag Page 1
  2. 2. December 22, 2011 bulbtiger.com Going green become costlier as CFL prices soars • There is also a clear preference towards CFL bulbs among middle and upper class due to rising income levels, increasing electricity prices and awareness about environmen- tal concerns. CFLs are also very popular in small towns facing severe shortage of elec- tricity as they can run on battery invertors for long time. Figure 2: Annual CFL sales (million units) in India (2005-10) Source: U.S. Geological Survey (USGS) 2. Rising Demand – The Government push and increasing awareness CFL is estimated to be a Rs 2,500 crore/ US$ 500 million industry. The industry has grown at CAGR of ~35% over 2005-10. CFL is approximately 30%http://bulbtiger.com/blog/2011/12/22/going-green-become-costlier-as-cfl-prices-soars/ of total lighting market in the country pegged at Rs 8,000 crore/ US$ 1.5 billion which is still dominated Source: Elcom India by incandescent lamps. The demand for CFL lamps is expected to grow at ~20% over next 5 years after 3. Rising cost of import (raw materials, taxes, which it may slow down to 10-15% as LEDs are likely currency depreciation etc) to become preferred source of lighting by that time. In October 2010, the Chinese announced plans to not • India’s CFL market is catching up fast with only cut their production, but also to reduce exports the rest of the world. Bachat Lamp Yojana, by one-third. This has led to whopping 800% rise in announced in Jul ’07 and launched in Feb Phosphor prices from over just five months. Pphos- ’09, is the flagship program of Indian go- phor once represented roughly 10% to 15% of the vernment to ensure nationwide access to cost of a typical CFL, it now exceeds 50% (or more efficient lighting to all at an affordable price in some models) of the total lamps production cost. and to phase out incandescent bulbs from Glass tubes are another significant component of homes across India and replace them with CFL products, constituting ~45% of CFL component CFLs. The government plans to completely costs. In addition, Indian companies have to pay a phase out ~400 million incandescent bulbs hefty tax of ~22% on imports of rare earth material. by 2020. This would result in saving ~6,000 As rupee has depreciated by ~15% in 2011, the cost MW of electricity per annum. of import has also gone up several times. The indus- Love this PDF? Add it to your Reading List! 4 joliprint.com/mag Page 2
  3. 3. December 22, 2011 bulbtiger.com Going green become costlier as CFL prices soars try has been lobbying hard to the government to difficult due to long distances and high transport remove taxes on rare earth imports to keep prices expenses. Currently, CFL manufacturers provide a of the energy-efficient bulbs under check. product warranty varying from 6-12 months from the date of purchase. This has been a major concern Figure 3: Phosphor Price rise in 2011 (RMB/ Kg) for CFL makers in India because market malprac- tices have led to significant claims for returns. For example, in 2007-08, Havells return rate was 12.7% of its CFL sales. To rectify the situation, the company withdrew its products from certain states where malpractices were rampant. As market stabilizes in other states, it re-gains the market share lost and significantly improved its return rate to 1.9% in 2009-10. In contrast, return rate for local non- branded CFLs is still as high as ~10%. 5. Pricing strategy – high profit margins, a cash cow for manufacturers Various incentives by Indian Government to bulb Source: TCP Bulletin manufacturers and rising electricity cost has resul- ted in soaring demand for energy efficient bulbs. 4. High return rates – increase effective However, the profit mongers, retailers and manufac- cost of production and distribution turers, continue to charge super premium on these bulbs. A recent news article has discussed the profithttp://bulbtiger.com/blog/2011/12/22/going-green-become-costlier-as-cfl-prices-soars/ The CFL market in India is complex, comprising of margins CFL suppliers are charging from helpless 12 major brands and hundreds of small players. consumers in the name of saving energy. CFL bulbs About 40-50% of the market is dominated by the are generally priced so high to extract maximum unorganized sector. The industry depends on large profit from elite and environment conscious rich amounts of imports, with even branded products clientele who are willing to pay an exorbitant price. using large amounts of imported components. It is However, with a rising inequality in incomes, poor the unorganized and import-based nature of the India can barely afford a meal and Rs 10/- light bulb, industry which makes the regulatory and quality let alone a Rs 100/- CFL. It is pertinent to note that control challenge difficult but critical. To improve the production quality, the Bureau of Indian Stan- • The maximum cost of production of a dards had revised the standards for CFLs (increased standard 20 Lm CFL is only ~ Rs 40/ US$ 0.8, the power factor, an indicator of lamp efficiency, computed with the concessional duty on from 0.5 to 0.85 and fixed 6,000 hours as the mini- import. If all costs, such as banking, clea- mum life for all CFLs. ring, forwarding, inward transportation, labor, other overheads, selling, distribution, CFLs have a high failure rate in India due to high and marketing – including a profit margin fluctuations in electricity supply and lack of adhe- of 15% are included, the price of the CFL rence to product specifications, especially in the bulb will not exceed Rs. 54/ US$ 1. Please rural areas. Replacement of the bulbs is particularly note that these are conservative estimates Love this PDF? Add it to your Reading List! 4 joliprint.com/mag Page 3
  4. 4. December 22, 2011 bulbtiger.com Going green become costlier as CFL prices soars and the actual cost of production is likely to be just Rs. 20/ US$ 0.5 – considering the benefit of economies of scale. • CFL is a manufacturer’s dreams come true as they are charged almost four times the production cost. Interestingly the average discount offered to the retailers across all states is >40% on the MRP in addition to several volume linked performance incen- tives. • There is vast difference in pricing of branded and non-branded bulbs. Non- branded CFLs, primarily catering to price sensitive rural populace sell the products at ~75% discount to corresponding branded CFL. The idea is to churn CFLs in high vo- lume and give shorter warranty (6 months vs 12 months for branded) to make up for high return rates. Outlook As China continues to restrict supply of rare earth materials, the prices are likely to only increase inhttp://bulbtiger.com/blog/2011/12/22/going-green-become-costlier-as-cfl-prices-soars/ short term. The first round of price increases has just beginning to surface with most manufacturers implementing their price increases in staggered manner. The timing of the latest price increases is politically awkward for the lighting industry and for environmentalists who backed a shift to energy- efficient lighting. Going forward, the CFL industry is expected to increasingly consolidate away from the unorganized sector as the shift towards higher quality gains further momentum and the benefits of scale accrue to the larger players. Also, the price differential between branded and non-branded will further reduce due to economy of scale in produc- tion and increase in demand for newer technologies like LED. Love this PDF? Add it to your Reading List! 4 joliprint.com/mag Page 4

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