Ed Morrison · Cleveland’s misguided LED strategy

May 16th, 2010

Gary Murphy, an economist and former colleague at Case Western Reserve University, wrote me last week about the City of Cleveland’s proposed deal with a Chinese manufacturer of LED lighting products.

Under the proposed agreement, the city will agree to designate the Chinese company as a sole source for LED lighting products purchased by the city for period of 10 years. In exchange, the Chinese company agrees to “work diligently” to expand within the City of Cleveland.

You can read more about the details here:

  • City of Cleveland’s talks with Chinese LED lighting company continuing
  • East Cleveland-based GE Lighting upset over Cleveland’s turn to Chinese manufacture for streetlights

    • Gary wanted to know whether I thought this strategy by the city was a useful first step in building a cluster. I don’t think so, and here are the reasons why.

    1. The LED market for municipal lighting solutions is at a very early stage in its development. New companies and technologies are emerging quickly. It makes no sense to lock in with one producer for a period of 10 years. Tying Cleveland’s procurement to a single supplier this early in the market development will foreclose Cleveland from taking advantage of potential advances made by other companies.

    2. The sole source contract makes little sense. LED lighting is a complex matter that requires careful evaluation. It is not a commodity product. Tying an agreement to price levels that are “at or below pricing for all other LED comparable products” will be difficult to determine. This provision is likely to be unworkable.

    3. We have no clear statement of Cleveland’s LED needs. It seems impossible for the City to make the declaration that Sunpu is the only potential supplier to meet these needs, when the City does not really know what they are.

    4. We have no independent verification how Sunpu’s products will perform. It is not possible to verify that they meet minimum performance standards, since these standards are only now evolving.

    5. The proposed agreement outlines a pathway to Sunpu’s increasing investment in Cleveland, but this language belongs in a Memorandum of Understanding not in a special ordinance. The ordinance locks in the City to a sole supplier without requiring much in return. This proposed agreement requires the city of Cleveland to purchase all of its LED supplies from Sunpu, but it only requires Sunpu to “worked diligently” toward expanding its facilities in Cleveland.

    6. Sunpu will not likely be successful in the US market without an aggressive commitment to marketing, distribution and customer support. We have no understanding of the extent to which Sunpu will make these investments. Without heavy investments in an unfamiliar market, Sunpu will fail.

    7. We have no clear understanding of who is getting paid to put together this deal. The joint venture projects in China do not just appear. They are most often brokered by middlemen: consultants and lawyers who make a fee off the deal. At a minimum, the City Council should insist on full disclosure of all of the agents who have been involved in delivering the City of Cleveland to the doorstep of Sunpu.

    8. Clusters do not develop overnight. They are complex innovation “ecosystems” — open networks of innovation — that evolve over time. They require strong, stable relationships that emerge through relatively small projects that are leveraged into larger and larger investments. Chinese ventures also work best when they start out slowly and the partners can learn from each other. So, for example, Gillette learned its Chinese strategies by starting with a small venture in Shenyang, far from the population centers of Shangahi and Beijing. If Cleveland wants to do business with the Chinese, start with small steps and build steadily toward more aggressive investments.

    The Chinese have a useful saying for joint ventures that move too quickly: Partners end up sleeping in the same bed dreaming different dreams.

    9. This deal risks alienating General Electric, not a small bit of collateral damage. The facility at Nela Park is hanging by a thread. The job losses that would come from a close down of Nela Park are not part of any calculation so far. They should be. At the very least, the mayor of East Cleveland should be promoting General Electric’s interests. How can we use this opportunity to tie Nela Park more closely to East Cleveland and — by extension — the Weatherhead School. When I was at CWRU, I held discussions with GE managers at Nela Park. They were open to new partnerships. That approach, it seems to me, offers more to the region than the Sunpu deal as currently structured.

    10. The initial Sunpu jobs will be in low skill assembly (within 18 months). Higher skilled manufacturing jobs will not appear for three years. Higher skilled R&D will not appear for five years. Meanwhile, we have a doorway into GE’s lighting business operating in Nela Park (which we risk losing if this deal goes forward).

    Cleveland should step back from its headlong rush with Sunpu. Work on developing this relationship at a more responsible pace.

    Instead, Cleveland should join the Municipal Solid-State Street Lighting Consortium put together by the Department of Energy to explore the adoption of LED technology in cities. A number of cities are taking the lead, including Raleigh, Lansing, Anchorage, and some cities in California.

    To learn more about the consortium go to this page. Take a couple of minutes and view the video on this page.

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    2 Responses to “Cleveland’s misguided LED strategy”

    1. John Polk Says:
      May 17th, 2010 at 4:16 pm

      Given the speed with which the technology is evolving, it seems unlikely that the Mayor’s deal can make long-term sense for the City. A lighting industry expert tells me that much of the real innovation in this space is being led by…GE.

      Not sure who’s advising the Mayor on this issue. And given that Nela Park’s CEO is on the Board of the Greater Cleveland Partnership, it doesn’t seem likely that GCP was consulted on this “economic development” issue. Someone has sold the Mayor a bill of goods.

      But then, the rule between GCP and area elected officials for more than a decade has been, “Do what we want you to when we want you to, and the rest of the time you can do whatever you want.”

      This is merely the latest “economic development” decision which makes no apparent sense, not the largest one, nor the most egregious one. It’s a classic case of disregarding the assets the community has in pursuit of “the next big thing.” When will our erstwhile leaders wise up?…

    2. Ed Morrison Says:
      May 19th, 2010 at 8:53 am

      If you do a little poking around in the China LED market, you find that Sunpu is not one of the leading companies. As I recall, GE never heard of them. A 2009 Chinese market research report on the Chinese LED market does not list Sunpu among the top 28 companies. A more informal survey, published in an industry trade magazine, does not list Sunpu among the top companies. (In the US, Cree, based in North Carolina, is the top producer of LED lighting products and fixtures.)

      I’m not sure who did the due diligence on this one. This deal, my guess, came together from an intermediary (often in the shadows) who delivered the City of Cleveland to the doorstep of Sunpu. Some digging is in order.

      Start with this one: Who was in the room when the MOU was signed in China this spring?