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What Philips' Spinoff Means for Cree in the Lighting Business

NEW YORK (TheStreet) -- Dutch electronics giant Philips NV (PHG - Get Report) is spinning off its LED production and automotive lights operations into a standalone company in a move that creates a new challenge to Cree (CREE - Get Report) and other companies in this fast-growing lighting-systems business.

That is because Philips isn't spinning out its entire LED business, just the production end. It will keep its business of creating lighting systems, a higher-margin business that will go head to head with Cree. But investors may still want to consider Cree as a pure play in LED lights and lighting systems.

For Philips, the money is in the lighting systems, not the lights themselves. There's an entirely new business growing in lighting systems, turning lights on and off automatically in reaction to movement. That requires new software and system integration common to the computer industry.

"After significantly improving the performance of Lumileds over the last few years, and establishing strong intellectual property, we now see that this business can further grow, attract more customers and increase scale as a standalone business," Philips spokesman Steve Klink said.

Cree makes both the LED bulbs and the systems as does General Electric (GE). Another major Western company in the field is Osram, which was spun off from German industrial conglomerate Siemens (SI) last year.

These Western companies face competition from China, whose government heavily subsidizes LED producers in the country. But a more aggressive stance against the Chinese subsidies could help the Western companies, including Cree, and move its stock higher.

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