An American innovation in light bulbs, but will manufacturing stay in the U.S.?

By Peter Whoriskey
Washington Post Staff Writer
Thursday, September 16, 2010; 3:39 AM

IN SATELLITE BEACH, FLA. During the depths of the night, Fred Maxik is often struck by an idea for building a better light bulb. When that happens, he rolls over and scrawls a diagram or a few words on the wall beside his bed with an indelible black marker, a practice his wife tolerates because he offers to repaint their room every six months.

"I don't want to lose the thought," says the graying, pony-tailed inventor.

Now, in a coup for Maxik and the company here he founded, the object of those pre-dawn inspirations is going on sale at Home Depot, the nation's largest lighting retailer. The bulbs, assembled at a plant here with about 250 workers, are illuminated not with electrified wires but energy-efficient light-emitting diodes, or LEDs - a method many industry experts consider the future of lighting.

Lighting Science Group is, as a result, just the sort of manufacturer that many, including the Obama administration, have said they would like to keep in the United States.

But while the company's manufacturing roots lie here, they may not remain.

The connection between American innovation and manufacturing, which for generations created U.S. jobs, has been unraveling under the pressures of globalization, and the light-bulb industry may be a prime example.

Ordinary incandescents, the bulbs pioneered by Thomas Edison, are manufactured almost entirely outside the United States, with the country's last major General Electric factory set to close this month. The company will continue to make incandescents in Mexico and China.

In the near term, compact fluorescents are expected to replace the traditional bulbs that are being phased out by new U.S. energy standards. But CFLs, as they are called, are almost entirely made in China, though it was an engineer in the United States who came up with the breakthrough design.

Now, as Lighting Science rapidly expands its production of what is considered the next-generation technology, the company is being courted by China and Mexico. Aside from the enticement of lower-wage workers, those countries offer significant cash incentives for capital equipment and labor, amounting to as much as $4 million, company officials said.

The United States, by contrast, has offered financing under the stimulus program, but the process has proved too cumbersome for the small company. Lighting Science is largely owned by Pegasus Capital, a private equity group.

The incentives are "a game that the foreign governments are playing, but the U.S. isn't," chief executive Zach Gibler said. "Like any manufacturer, we have to look at our options."

As the United States seeks to counter a decades-long drop in manufacturing employment, one of its key challenges is making sure that manufacturing - especially in high-profit, high-skilled, high-wage pursuits - remains in this country.

While the outsourcing of U.S. jobs is often discussed solely in terms of the lower wage rates elsewhere, manufacturers and other companies review a range of issues before choosing a new site.

Companies "run an analysis on each location: What are the costs? How will it affect the supply chain? What are the political risks. What are the operating costs? What kind of market access does it offer?" said Phil Schneider, a principal at the consulting firm Deloitte who advises companies on siting decisions. "Sometimes it makes no sense to leave the U.S. In other cases, the market may be compelling somewhere else."

The United States holds an advantage in a number of respects, economic development officials said. A factory here is in the midst of the world's largest economy; a manufacturer can benefit from a culture of innovation, excellent universities and a well-trained work force; and the nation's infrastructure of roads, ports and airports offers easy transportation.

Moreover, the Obama administration has taken additional steps toward curtailing the outflow of jobs, offering grants and loans to clean-energy and other green technology companies; pushing for a series of tax cuts for companies to hire new workers and invest in their businesses; and advocating an initiative to allow companies to fully deduct capital investments.

"A key aspect of President Obama's economic plan is encouraging investment here in the United States," said White House spokeswoman Amy Brundage. "That's why he passed the Recovery Act that is encouraging hundreds of billions of dollars of private investment which, among other things, has helped spark a domestic battery industry here in the United States."

But to succeed among increasing international competition, the United States must appeal to companies in a variety of ways, industry experts said, and it often comes up short.

The economic pressures manufacturers can face are intense. Lighting Science Group is racing against some of the giants in the industry - GE, Phillips, Sylvania - to create LED bulbs with pleasing light at more affordable prices.

The Lighting Science bulbs that Home Depot is selling under its EcoSmart brand shine about as brightly as a 40-watt incandescent but use a quarter of the electricity and could last a decade or more.

Each one costs $19.97, much more than a traditional bulb but far lower than rival LED bulbs - one of the reasons the company was chosen by Home Depot. Maxik and his team of engineers have made several innovations to the bulb, altering the way it is powered and cooled to maximize its brightness and minimize its energy needs and cost.

"They came out with one of the highest-performing lamps and at about half the price of anyone in the industry," said Bill Hamilton, vice president of merchandizing for Home Depot's electrical business. "It's taken the industry by storm."

The contest among the manufacturers now is to continue to whittle down prices while also developing bulbs that can match the brightness of 60-watt, 75-watt and 100-watt bulbs. LED bulbs today represent less than 1 percent of sales, but as prices come down that figure is expected to rise. "We make significant improvements every six months," Maxik said.

The swift pace of innovation is, in fact, one of the most compelling reasons to keep the factory here in this beach town, where workers are paid between $16 and $22 an hour. With the factory nearby, engineers can make alterations rapidly and learn as they do so.

"The engineers need to react quickly and to make the changes as the product is being made," Maxik said. "But it's not just a matter of speed. If your factories are on another continent, you lose know-how."

Another advantage of this location, company officials said, is that the local workforce is blessed with technical skills arising from its proximity to Cape Canaveral. About 70 percent of Lighting Science workers once worked for NASA or one of the space agency's contractors, company officials said.

Even so, the company is also moving to do more manufacturing in Asia and Mexico, particularly on product lines that are not evolving as quickly as light bulbs, such as streetlights.

It is working with contract manufacturers in China and negotiating to lease a 65,000-square-foot plant in Monterrey, Mexico.

There, the wage rate is about a quarter of what it is in the United States, Gibler said, and the Mexican government is offering cash incentives to attract the company.

The incentives on the U.S. side are, by contrast, less appealing. The United States offered a $19 million stimulus bond that enabled the company to go to a lender and borrow money at a cheaper rate. But Lighting Science did not avail itself of the loan, because private lenders required unaffordable levels of collateral.

Moreover, while the United States and local officials are offering other grants that Lighting Science Group is applying for, including one specifically for LED technology, the process requires writing proposals about future plans and comes with more strings attached - aspects that make it difficult in an industry where it is difficult to know what you might be doing in six months' time, let alone a year.

This is not an isolated case. In the growing international contest to lure manufacturing plants with incentives such as those offered to Lighting Science, the United States is often lagging, industry experts said.

In this country, the role of offering incentives is usually left to the states and municipalities, which typically have far smaller budgets than the national governments they are competing with. Moreover, while the states and municipalities can offer abatements on local taxes, they are unable to offer federal tax relief. "The U.S. doesn't usually target industries with direct incentives," said Schneider, the site consultant. "But the rest of the world does it every day."

Despite the threat from foreign incentives, however, U.S. policymakers are divided on the extent to which the federal government should counter such offers.

Critics say government attempts to foster certain technologies or industries in the United States put bureaucrats in the untenable role of "picking winners" and invite complaints of political bias. Yet the steady decline of U.S. manufacturing employment has left many worried that essential skills are leaving the United States and that the nation's vaunted expertise for engineering innovation could be withering.

"As we've decided to vacate various areas of technology - saying, 'It's cheaper to build it there, lets move it away' - we've created a vacuum" that weakens the nation's capacity for innovation, Maxik said.

"There's so much interaction between the manufacturing process and the innovation and invention process," he said. And "as you start moving the manufacturing process further and further away, you lose that connection.

"We're still very innovative. We teach innovation. We understand innovation. But some piece of that is slowly drifting away from us."

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