Friday, March 27, 2009

How we forecast 2009 even with low visibility

Now that our laser market report is out, it's helpful to explain how we can do forecasts for 2009 when the visibility is only about 3 months. I won't go into all the detail about forecasting. I want to focus on how we used quarterly data to narrow the range of forecasts.

We have a lot of information about suppliers and customers for quarters up to December, 2008. What's striking is how 2008 was generally ahead of 2007, even though the last quarter was bad for most everyone. This varies from sector to sector, but for the most part it's true.

The figure shows actual laser revenues for several selected companies through Q4 2008. It then shows what happens if all the quarters in 2009 are reset to a level near or below Q4 2008. As good as 2008 was overall, 2009 comes out well below that. Continuing the decline into Q1 2009, but no further, yields a decline of 32% for 2009 over 2008. It turns out that this supplier-side approach also matches our projections for 2009 in general from the demand side, aggregating all the different segments together.

What's useful about this approach is not that it predicts each quarter (it doesn't), but that it narrows the range of plausible projections. Of course, anything is possible in 2009, but running simple scenarios like this helps to test a hypothesis.

It also allows us to update the range of possible outcomes as the year proceeds. By Q4 2009, the error bars for 2009 will be much narrower, while the focus shifts to 2010.

It also illustrates the range of outcomes from, say, a recovery, or of a price war. Either one could move the overall 2009 revenues up or down, especially if it happens early in the year. A recovery late in the year won't affect the overall 2009 revenues as much.

This is an example how we use an analytical tool, and this one is especially useful when the market is in a period of rapid change, as it is today.

Tuesday, March 24, 2009

Consolidation in the laser market, Part 1--How much is there?

It seems like I hear about consolidation at every meeting I go to, whether in good times or bad. And I've come to the conclusion that everybody means something different when they talk about it. I thought that maybe it's time to present some facts, so here goes.

Over the last year I've been filling in a vast spreadsheet for the Laser Focus market survey and for our industrial laser forecast. It's a lot of work, but I'm able to refine it a little at a time. One of the things that I was able to find out was the amount of consolidation in the industrial laser market. (By industrial lasers we mostly include everything but diode lasers for communications and DVDs.)

What I found is that the top 10 industrial laser suppliers get about 86% of the revenues. These are companies like Coherent, TRUMPF, Rofin-Sinar, Cymer, and so on The next 10 get about 10% of the revenues. And all those dozens of little companies you see at Photonics West and Laser Munich? They make less than 4%.

(By the way, I tried as much as possible to strip out everythng but the laser revenues. And, the exact share varies a little depending on different definitions that I need to apply. But the basic ratio doesn't seem to change much.)

Many of the little companies do quite nicely, though, or at least they do in normal times. They may supply into close partners, like military contractors, or they sell other products or get some system revenues. Some operate very lean.

I make that point because I don't assume that just because they are small that they are necessarily more vulnerable. Certainly the recession will upset things. But consolidation is a lot more complicated than that. The laser market is probably too fragmented to lump together like this.

But that's for a future installment.

Our new laser forecast--get used to cycles

Our new forecast for the fiber laser and industrial laser market is now out. It should be no surprise that 2009 isn't going to be pretty. We now expect the industrial laser market to end up 32% below 2008, if sales continue to follow their current levels. This puts that market at $1.7 billion, about the level of 2004. Fiber laser suppliers will see a shallower decline of 24% to $230 million, and will experience a faster recovery than other types of lasers. But if the recession deepens or if suppliers engage in a desperate price war, 2009 sales will fall further.

In other words, the days of a nearly unbroken string of growth for both fiber lasers and industrial lasers is over. For the next several years the business will be much more cyclic, like the capital equipment market that it is. We still expect the envelope of the laser market to expand over time, but the swings of the cycles will be much more apparent.

By the way, this forecast only reports on industrial lasers that could be available to fiber lasers. It excludes most diode lasers, and also big excimer lasers for lithography. So, it's best to compare the numbers only to our previous reports.

In fact, if you have questions, send me an email ( and I'll try to explain how we came up with the numbers.

Thursday, March 19, 2009

A plea to maintain opto prices

How much will price erosion destroy opto revenues this year? That's one of the great unknowns in forecasting the market for 2009. Will suppliers behave themselves and hold prices above their costs? Or will they sell products at any price just to get cash flow for another quarter?

It's bad enough that the demand for components is sharply down as a result of the recession. Cutting prices only makes it worse. It's not like a company can brag about having market share if they lose money on every product going out the door. And in most of the opto market, high prices aren't holding back--the worldwide recession is to blame for that.

This is what has happened for years to several companies in telecom components. Some were selling below their cost. Consistently. And it spoiled the market for everybody.

I have to admit that I would be the first to argue that, in the end, the market forces ultimately prevail. That is, if there are enough competitors and the situation is desperate enough, suppliers will cut and run to get any business at all. Asking suppliers to remain calm and rational is not likely to make a difference.

And if fact, since last fall I've heard of discounts of as deep as 30% and 50% on standard prices. And then there's the used equipment market. What's a supplier to do when it is competing against its own products on the gray (used equipment) market?

Just the same, I hope that suppliers can look longer term and stick to a sustainable business strategy. It's going to be a long, cold recession and companies will be better off if they huddle together for warmth than if they wander off alone.

Tuesday, March 17, 2009

Why forecasting matters in a hurricane

Someone asked the other day, what good is market analysis now, especially if you couldn't foresee the global recession before it hit?

It's a bit like asking, "What's the point of weather forecasting when the hurricane is already here?"

For those who won't last the hurricane intact, it may not matter. But for those who think they will survive, they want to know how bad things are, how to prioritize, where the bargains may be, and where the new opportunities will be afterward.

Companies are making hard decisions, and they come to us to get another opinion , as an extension to their market development, for financial due diligence, or for the "satellite view" of the landscape.

Even in better times, conditions can change rapidly. There are new demands from customers, new technology solutions, and new competitors. Running a business is a perpetual challenge.

That never changes.

Thursday, March 12, 2009

Why LEDs are doing better than industrial lasers

The difference between the high-brightness LED and the industrial laser markets couldn't be wider right now. My colleague, Bob Steele, forecasts that LED revenues will decline 5% in 2009. I'm forecasting that industrial laser sales will drop by over 30%. And that's if 2009 follows the current trend. Some sectors will be worse.

Why so different?

It turns out that a lot of LEDs are sold into consumer products like mobile phones, displays, that sort of thing. Sales are down, but these products aren't out of reach for people who still have jobs.
Industrial lasers, on the other hand, are expensive capital items that are usually used to make something else. When factories are idle, or closing, you aren't likely to need much new capital equipment. It is a good time to upgrade, but the recession leaves most companies short of spare cash, so capital spending gets cut. And we don't count consumer applications like lasers for laser pointers and DVDs in this category.

Think about it: you are still buying groceries, and maybe even replacing some of your electronic appliances. But a lot fewer people are buying new cars these days.

Biomed systems good, fab tools not so good

In my search for anything resembling a good market out there, look what I found. The figure shows the revenues for three biomedical equipment vendors over the last three years. I picked them because they are fairly representative for that business. Most opto customers show declines at lesat in the last quarter, and many declined over most of the year. But not these. Combined, they had about 15% growth in 2008.

Contrast that with the revenues of, say, semiconductor tool vendors like KLA or ESI, or laser manufacturer Cymer. Cymer makes million dollar excimer lasers for litho tools. If you take out service revenues, their system sales have fallen 44% between 2006 and 2008.

Cymer's lost some share to Gigaphoton, but the real problem is that the chip makers just aren't buying new litho tools these days.

When a 5% decline in the market looks great

You know the times are tough when a market is forecast to decline 5% and people are in a good mood. That's how it seemed at our SIL event this year. SIL is our Strategies in Light conference and expo for high-brightnesss LEDs. Even in the midst of the biggest recession in decades we broke our previous record and had over 2,000 total attendees.

My colleague Bob Steele forecast that the HB-LED market will drop 5% in 2009, mainly due to falling sales in end-use applications in mobile phones (a first for that business), automobiles, and LED video screen. Actually, it will drop more like 10% if you take out the emerging application of back lights for LCD TVs. That's a promising application, but restricted to some vertically-integrated players, so it's very hard to break into.

Of course, as with any forecast right now, this one is looking ahead based on what we know now. Actual results may vary. We'll keep you posted.

It's our 10th year doing SIL, and this year it had 6 workshops and 2 conference tracks: one on HB-LEDs and one on solid-state lighting. Another fellow analyst Vrinda Bhandarkar ran the new lighting track, bringing in the people who do lighting fixture designs, kind of taking things to a new level for our event.

Wednesday, March 11, 2009

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