Wednesday, April 29, 2009

Consolidation, Part 2--Is Oclaro consolidation or redistribution?

So Bookham and Avanex finally merged, forming Oclaro. This is a sign that the industry is consolidating, right? Reducing the number of suppliers by one, yes. But it may just amount to moving market share around, and not necessarily to fewer players.

Bookham and Avanex don't have greatly overlapping product lines. And the new management claims it will continue manufacturing parts the way it has been. That is, it will keep the Bookham fabs and its Shenzhen facility but will also keep using Fabrinet as Avanex did.

The company points out that now they have a wider range of products to compete against bigger competitors, like JDS Uniphase and Finisar. I've never fully believed the one-stop-shop argument though. Of course, Cisco and any other customer would like to reduce its list of suppliers. But the customers also want suppliers to be competitive, and they want the best products they can find, provided that the supplier is qualified. Grouping products into one company doesn't necessarily make Oclaro more competitive in those products.

There will certainly be some synergies gained from consolidating various functions, such as procurement and corporate overhead. The figure shows Oclaro's vision of the gains it can make in gross margin from the merger. One of the bigger synergies would be the use of the Bookham fabs to supply chips for Avanex products. This is a change in market share, shifting sales from the former suppliers (such as JDS Uniphase) to Oclaro, possibly improving Oclaro's factory utilization. It might also steal some margin from contract manufacturers.

Source: Oclaro

That may turn out real good for Oclaro, although it doesn't necessarily constitute consolidation if it just spreads market share more evenly among some of the bigger players. Without knowing how it plays out product by product, it could actually increase competition and reduce consolidation in some segments.

Oclaro's CEO Alain Couder notes that the company also gets to spread Bookham's credit line over a new balance sheet that is low in debt and with a nice chunk of cash. That's never a bad thing, for Oclaro. And despite claims to the contrary, the management may make more moves once the excitement has died down. Anything that tips the scales dramatically in Oclaro's favor would essentially increase consolidation, even if the number of suppliers is nominally the same.

This may turn out real good for Oclaro. But I wouldn't call it industry-scale consolidation. Not yet.

Tuesday, April 21, 2009

Some thawing in the opto end markets?

There are signs that some markets for optoelectronic products are thawing a little bit. Foundries in Taiwan have hired back workers. Large-area flat panel display production in Taiwan was up in March over the previous month. Sales of flat panel TVs and video recorders were up in Japan. Memory chip prices are up and Samsung, for one, expects improving demand for memory chips this quarter. Hon Hai, a major contract manufacturer, is hiring in Taiwan, China, and the Czech Republic, with expansion plans in Mexico, Turkey, Russia, and elsewhere. Even equipment supplier EV Group announced that it will add a shift to accommodate demand for through-silicon via (TSV) and nanolithography tools. Compound semiconductor supplier Triquint has also announced a bounce as inventory burns off.

At the least, this is an indication that inventories are now worked out of the supply chain. But, it's interesting that a lot of the news comes from one place: Taiwan.

Dominique Numakura of DKN Research Group notes several reasons for Taiwan's thaw in his recent newsletter. First, it's based on two successful products that are emerging now, just as the recession hurts sales for just about everything else. Those products are the netbook computer and the smart phone. Another reason is that spillover of demand from mainland China's stimulus package has driven up demand for large screen TVs supplied from Taiwan. Numakura also suggests that Taiwan has a more urgent and proactive approach to the downturn, more aggressively seeking out opportunities than Japanese and American counterparts that take a more reactionary approach.

It helps to note too that the semiconductor downturn dates all the way to 2007 already, so improvement is well overdue.

Any thawing will be good news for anyone making optoelectronic chips for common appliances: things like image sensors, displays, LEDs, etc.

There is still plenty of bad news coming out every day. For example, iSuppli doesn't buy the hype about a memory chip recovery, arguing that the supply will still exceed the growth in demand. And for the most part, the demand for fab tools and other manufacturing equipment remains frozen solid. But the chip demand has to improve before anything else can.

Tuesday, April 7, 2009

A disruptive application for widebandgap electronics

It's not often that I call a new development "disruptive," but there is one application of widebandgap semiconductors that has that potential. Here, I'm referring to the definition of disruptive as a technology that offers lower performance initially, but fills a market niche that the conventional technology is not filling. The market for the disruptive technology eventually exceeds the conventional one, sometimes completely displacing it.

The application I have in mind is for SiC or GaN devices for power management devices in hybrid and electric vehicles. Their use in these vehicles is not news, but it's easy to overlook the transformation that this technology can help bring to the auto industry.

Widebandgap devices can run hotter, switch faster, and are more efficient that equivalent devices based on silicon. They are more expensive too, but efficiency is very important in the power circuits in hybrid vehicles, and anyway, the price is coming down as volume increases. SiC devices are currently the market favorite, but GaN may be able to play here too.

What is really exciting is how the electric vehicle can truly transform our definition of a car. Once you eliminate the engine, transmission, and drive train, you can do many things very differently. (See, for example, this interview in Tech-On! with Yukitsugu Hirota, from the R&D Center of Calsonic Kansei.

It reminds me of the history of the electric motor, in the 1800s. The first thing that innovators did was to replace water wheels with large motors, driving everything off of a single, long shaft. This is what they knew how to do, since they were used to water wheels, not motors. Then they began to break up the workload into smaller pieces, each driven by its own motor. This process took time--about 30 years, in fact.

It's not difficult to see the same thing happening to the auto industry. Internal combustion engines won't go away, and electric golf carts are nothing new. But the auto industry will transform over the next few decades to a different type of vehicle, and it will need devices based on SiC and GaN.

What the new US military spending proposal means for the laser industry

U.S. Secretary of Defense Robert Gates announced a proposal for sweeping changes to U.S. military spending, including cancelation of the second airborne laser, and moving the existing program to an R&D effort. What does this mean for the laser industry?

The short answer is that it is way too soon to tell. The high-profile airborne laser program has been a dream for decades, but it has been too ambitious for its own good. In December 2007, a U.S. Defense Science Advisory Board task force recommended that military agencies look for smaller, more practical applications for laser weapon projects, rather than for giant, megawatt-class applications that take a longer time to prove in. This favors solid-state and fiber lasers for tactical operations over chemical lasers and other exotic technologies.

There are dozens of military programs that involve lasers, even high-power lasers. Some are futuristic, like the airborne laser, and some have been in use for years, such as rangefinders.

Moreover, Gate's dramatic changes to the budget have to be approved by Congress, and that won't be easy. Members will fight hard to save jobs in their home districts.

By the way, it's interesting to see the trend in U.S. military spending. The figure shows spending by fiscal year, including supplemental funding. Military spending by the U.S. and other countries is likely near a peak, with tighter spending as early as this year.

Figure source: U.S. Congressional Research Service and Defense News research, as reported in Defense News, October 13, 2008.

Wednesday, April 1, 2009

The fear factor in a capital equipment market

I hear a lot of talk about fear these days. "It's just fear that's driving the market." "If people could get over their fear..." I don't find such talk very helpful, and here's why.

We work in an industry that is mostly driven by capital equipment purchases. Big purchases have to be financed. You can think of it this way: the customers borrow money to buy the equipment, and pay it off with the revenues they will get in the future. Even if they use cash to buy the equipment, they could have used the cash for something else (like generating interest itself), so they have to cover that opportunity cost.

In times like these, the customers are no dummies--their confidence in the future has dropped enough that they delay buying new capital equipment. Think about it: are you looking for a new car right now? Or are you thinking of a used car, or maybe keeping the one you have a little longer? Is that fear?

No, fear is too strong a word. It connotes panic. From my discussions with customers, at the financial level, they aren't in a panic. They aren't reacting out of emotion. They have a reasoned, albeit cautious, approach. But all these microdecisions add up, and that hurts suppliers.

What will bring back the confidence to buy new capital equipment? Inexpensive and available credit helps. Rising demand in the end-user markets helps, such as that stimulated by government spending. New product innovation helps, by motivating industrial customers to replace inefficient equipment with new equipment. Finally, understanding how the customer thinks--and the customers' customers--helps.

Fear does indeed drive speculative markets like the stock market. Fear and greed. But not capital equipment purchases.