LED-ing the Navy

When Eric Hilliard joined Energy Focus in 2006, it was a company in transition. The California-based company—known as Fiberstars at the time—was looking to move from its niche as a producer of fiber optic lighting for swimming pools into the energy-efficient lighting arena. To that end, it had inked a deal with a Solon, Ohio-based lighting technology company, moved its headquarters there and adopted the moniker Energy Focus to better reflect its target market.

When those drastic moves failed—Energy Focus posted its 15th straight year of losses in 2012—James Tu stepped in as executive chairman and CEO. Tu is the founder, CEO and chief investment officer of 5 Elements Global Advisors, an investment advisory and management company focusing on investing in clean energy companies, and co-founder of Communal International, which helps clean energy companies gain access to global marketing, distribution licensing, manufacturing and financing resources.

At the time, Eric Hilliard was the company’s COO. “When [Tu] came in he did a management restructure—and I am the last executive standing,” he explains. “That’s how I became president.”

The company’s new management redoubled its efforts to develop light-emitting-diode (LED) products, focusing first on fast-tracking a relationship with the U.S. Navy that dated back to 2002. “Back then, the Navy was getting ready to invest in the next big lighting move for the ships,” explains Hilliard. “They realized that the ship lighting they had wasn’t going to cut it and that they didn’t want to make incremental improvements. They wanted the next generation.”

Energy Focus won a bid to work with the Navy’s Defense Advanced Research Projects Agency and Naval Sea Systems Command (NAVSEA) to develop LED fixtures and bulbs compliant with requirements for naval ships, explains Hilliard, who credits the company’s passionate pursuit of innovation for enabling it to compete against industry goliaths for Navy contracts. “We didn’t look at it from a financial perspective,” he says. “We held true to wanting to create the next best thing in lighting. By staying true to that focus we were able to work with the Navy in a very non-contentious way. As the specification was coming to bear, we helped support [innovation] by saying the technology can be pushed harder, you can expect more.”

Success at Sea
Eventually, that effort paid off. Today, Energy Focus is the only domestic manufacturer of LED lamps certified by the Navy to provide replacements for the existing fluorescent lighting on its warships. The LED lights are significantly more expensive than the fluorescent ones they replace, but they are expected to last 5 to 10 times longer and o er 50 percent or more in energy savings.

The company currently has a $23 million contract with the Navy to replace fluorescent tube lights with its IntelliTube LEDs and has received an additional $25 million in purchase orders. Even after those contracts are fulfilled, the Navy will only have retrofitted 10 percent of its fleet, leaving plenty of potential for future orders.

In addition to sales, Energy Focus’s work with the Navy has given the company a durable competitive edge, explains Hilliard. “Anybody can go out and try do what we do, but it took a lot of brain trust and years to develop this product and then get it to a price point that was acceptable for the Navy…. You’re not going to show up tomorrow and compete against us.”

The Navy also places a premium on safety—and is willing to pay a premium for it. That’s something that Hilliard, who served as an operations specialist in the Navy during the Persian Gulf combat action, understands from experience. “When you go to sea, as I have, a warranty really doesn’t count while you’re sitting o the coast of Afghanistan,” he says. “You need the lights to stay on, not a piece of paper guaranteeing that if they go out new ones will be sent.” Competitors, in other words, will need to do more than dangle a lower price in front of the U.S. Navy to win its business.

Going forward, however, Energy Focus will need to grow its commercial sales to sustain its double-digit growth rate. That means winning contracts with school systems, healthcare facilities, general industry—any place where replacing fluorescent lighting with LEDs has the potential to dramatically reduce energy costs. Hilliard refers to those targets as the “red ocean” market.

“That’s where there’s blood in the water, because everyone who makes tubular LED technology, from companies in Asia to here, is fighting for the building across the street,” he notes. Even there, however, Energy Focus enjoys a Navy-endowed edge. Having two government contracts under its belt gives the company a certain amount of credibility in the marketplace—plus the security of a solid revenue stream.

“Back in my blue ocean, I have the Navy, which will always produce for us,” Hilliard says. “So if you don’t win that building, you die; whereas if I don’t win that building, I’ll be here for the next one.”