Tickers in this Article: CREE, LEDS, VECO, AIXG, RBCN, CS, PJC, GE, PHG
As energy usage across the world continues to rise at a rapid pace, a variety of governments have been seeking solutions to a coming crisis. Aside from finding or creating new sources of supply, energy efficiency measures have become the topic du jour, as governments look towards doing more with less. Energy efficient lighting could be one answer to the problem; recently, a major superpower has committed to making it a priority, within its borders.

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Following Europe's and U.S.'s Lead
China is now the latest nation to join the energy efficient lighting bandwagon, with the Asian superpower recently announcing that it will begin phasing out the bulbs within five years. The National Development and Reform Commission reports that China will ban imports and sales of 100-watt or higher incandescent light bulbs, beginning Oct., 2012. 60-watt bulbs will become banned by 2014 and 15-watt bulbs will be gone in 2016. This follows on the heels of the United States, which is banning incandescent light bulbs beginning in 2012, and the 27-nation European Union, which agreed in 2008, to phase out the bulbs.

In China, lighting accounts for about 12% of the nation's total electricity consumption and the nation used more than 1.1 billion incandescent bulbs, in 2010. The central planning agency estimates that China will save 48 billion kilowatt hours of power per year and reduce overall carbon dioxide emissions by 48 million tons annually, once the bulb phase-out is complete. With the breakneck speed of infrastructure investment within the nation, many Chinese citizens are now getting electricity for the first time. The potential market for whatever replaces the old bulbs, is huge.

Analysts predict that semiconductors called light emitting diodes (LEDs) will be the answer to help decrease energy usage. While LEDs make up only about 1% of the $60 billion lighting market today, analysts estimate that by 2020 they will make up almost 80%. This growth is being driven by falling costs and energy efficiency rates. An LED, which consumes 13 watts of power, produces the same amount of light as a 100 watt incandescent bulb. In addition, more economical manufacturing plants have driven down costs per LED bulb. Analysts at Credit Suisse Group (NYSE: CS) predict a $10 price drop in LED bulbs by the end of 2013. These lower prices, coupled with the various incandescent bans, will drive a new level of demand for LEDs. (For additional reading, check out: How Technology Can Save You Money.)

How to Bet on Surging Shares
With the China news hitting the press-wires, it was only natural that shares of LED firms spiked. For example, small cap firm SemiLEDs (NASDAQ: LEDS) surged more than 30%, with the news. For investors, the recent pop in many firms' shares prices makes navigating the sector a little more difficult. Luckily, there are ways to profit from the future growth of LED lighting. (To know more about small cap stock, read: What Is A Small Cap Stock?)

Industry standard-bearer, Cree (NASDAQ: CREE) still represents a great play on the growth of LEDs in China. The company received more than 36% of its sales from China and Hong Kong in 2010. Analysts at Piper Jaffrey Cos (NYSE: PJC) estimate Cree's market share in China at 80%, with domestic Chinese LED producers more than three years behind, in terms of technology. For investors looking for value plays in the sector, conglomerates General Electric (NYSE: GE) and Koninklijke Philips(NYSE: PHG) offer exposure to LEDs, while being balanced by other more stable businesses.

Falling prices and the reduction of subsidies have helped push LED equipment orders downward. Aixtron (NASDAQ: AIXG) recently reported a 77% drop in its order rate. However, Credit Suisse estimates that this bust cycle will last about four quarters and equipment orders will see an upturn in mid-2012. Aixtron, along with Veeco Instruments (NASDAQ: VECO) and sapphire substrate producer Rubicon Technology (NASDAQ: RBCN), could be good buys, ahead of the order cycle.

The Bottom Line
China's recent decision to phase-out incandescent lighting is a huge win for the LED and energy efficient lighting industry. For investors, this ruling helps underscore the profit potential in the sector. The previous firms, along with LED producer Acuity Brands (NYSE: AYI) make ideal choices to play that growth.

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At the time of writing Aaron Levitt did not own shares in any of the companies mentioned in this article.

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