The 1% in photonics who make 60% of revenues

Been hearing about the 1% lately? Try this one: about 1% of photonics companies make about 60% of the revenues. Wow. This is a finding we obtained in a recent study completed for SPIE on the global photonics industry.

The study counted revenues from all types of photonics suppliers, from massive $26B display module suppliers to niche suppliers of sensors and optics. The 1% value also includes intermediate products (such as materials and subcomponents), equipment used to manufacture the products (such as MOCVD machines), foundries and contract manufacturers, and what we call adjunct products—those that are dedicated to the photonic product, such as drivers, chillers, image processing chips, etc.

The display sector certainly skews the numbers, but what’s interesting is that the lopsided revenues are found in just about every sector I looked at. For example, for years I’ve found that the top 10 non-telecom laser suppliers receive about 75% of the revenues, while the other 100 or 200 receive the other 25%.

It’s not hard to see why. There are about 100 small companies making a few million dollars for every Coherent ($740M) or Hamamatsu Photonics ($1.3B). And why not? It turns out there is a place for all those niche suppliers. Coherent can’t be bothered to go after most of that business—it doesn’t offer enough opportunity. And a lot of those little suppliers are in that intermediate or adjunct market: selling odds and ends that support the bigger market.

It’s important to understand that none of this says anything about profits. One might think that it simply scales with revenues, or perhaps better than that, since large companies can enjoy some economies. But the solar cell companies are all losing money right now, so that alone blows up the numbers.

It’s been my observation that small companies are often much more profitable than the large ones, but that’s a blog for another day.

On photonics executives, complexity, and margins

Last month's Photonics West went well again. People were in a good mood, including the executives at SPIE’s forum, where I moderated. One topic was “managing complexity.” It sounds like a buzzword, until you think about it.

Take Coherent. It has to manage different kinds of lasers (excimer, CO2, solid-state, diode), selling to different end-user sectors (semiconductors, medical, university research, etc.), in different regions and through different types of sales channels. Edmund Optics is another example. It’s catalog has 26,000 optics and is available in 10 languages. Just managing that complexity is a task. While there are advantages to scale, it also can create some inefficiencies, compared to a small company with a single product and a few customers.


There can be great advantages to complexity. Clayton Christiansen, the Harvard business guru (he coined “disruptive technologies”), says that the margin in the supply chain goes to where there is the greatest complexity. Google, Apple, and Cisco all manage a lot of the complexity that is in their supply chain. Suppliers of standardized components do not. When specifications are standardized, the customers play the suppliers against each other, and the margin gets razor thin.


Low margin complexity. Sadly, the kind of complexity that our panelists (from Coherent, Edmund Optics, Hamamatsu, IDEX, Jenoptik, Newport, and Trumpf) have to manage is not the high-margin kind. That’s because the customers don’t want to pay to manage that complexity. It’s simply what the suppliers have to do as large companies. In fact, to the extent that the larger suppliers are just federations of smaller business units, a company like Coherent competes with small companies too.


So there you go: larger photonics companies have advantages with their brands and scale efficiencies, but what seemed to be on these executives’ minds was managing the complexity of it all, when they don't get to charge margins for it.


Feb 14, 2012

LED drivers--a $2 billion photonics market

With all of us opto folks going gaga over the $10+ billion LED market, stop and consider that the LED driver IC market is a sweet $2 billion, and growing at 12% compounded annually. And I'm going to say it: drivers is a photonics market too.

OK, I said it. Electronics is photonics too. I'm stretching things a bit, since the suppliers of LED driver ICs are companies like Texas Instruments, Maxim, Analog Devices, and Macroblock who don't know or care about photons. They do know a lot about hand-crafted analog circuit designs and specialty fab processes that enable circuits tolerant to high-voltages--the kind that drive long LED strings in display backlights.

But good LED design optimizes the entire circuit for efficiency, reliability, LED uniformity, and many other specs. We call the circuit--minus the LEDs themselves--the driver. It may include zero, one, or multiple ICs for the purpose.

Opto people, like myself, tend to think that there is nothing interesting in the system apart from the quantum mechanics of electron-hole recombination and fancy MOCVD epitaxial growth.  But when product designers take the electronics for granted, system performance is notoriously terrible, and that's bad for the whole LED industry. Likewise, electronics designers tend to take the LED for granted, but LEDs are requiring surprisingly novel and sophisticated circuits.  The only way to achieve widespread LED lighting is if electronics designers innovate enough to meet cost and performance goals.  Fortunately, there are those out there who can. Look for example at companies like Exclara, iWatt, Luxera, and Lynk Labs, to name a few.

The boundary between electronics and photonics is also fuzzy for lightwave transceivers. The laser and detector in a transceiver are typically very cheap, so much of the value is in the electronics: driver and receiver, clock recovery, and so on inside the module, not to mention all the higher level routing and control elsewhere on the board.

In imaging, it is even more dramatic. The detector array is sophisticated, but the image processing electronics takes it further, correcting optical limitations and even adjusting focus after the fact. The point is not that the electronics helps the optics, but that optical science actually resides in the electronics, often on the same chip as the sensor array.

I'll get back to the LED driver market again, but for now, remember: Electronics can be photonics too.

Munich Part 2--Consolidation?

A question that comes up at every big industry event is, when is the laser industry going to consolidate? It came up in my conversations at Laser Munich last week, and it came up in the CEO Roundtable (for a full video, click here). This time, I posed the question to the CEOs: is there really an argument for consolidation, or is it just code for "let's get these lifestyle companies out of our way so my big company can keep growing."

Their answers were interesting, and were supported in many other discussions I had last week.

Stuart Schoenmann of CVI Melles Griot made the argument that consolidation across products produces economies of scale that can enable things you cannot do with smaller companies. Larger scale frees up management to make more optimal and strategic choices, whether it is where it is putting its R & D money or whether to outsource or not.

Ulrich Simon of Carl Zeiss Microimaging argued for consolidation in the vertical direction to own core technologies,: providing advantages that cannot be gained in a more stratified supply chain. Trumpf has often made that argument.IPG has gone that route, too.

David Marks of Qioptiq acknowleged that the industry needs to continue to support small companies, in part for the innovation that they bring. As much as start-ups must seem like spoilers,VCs have funded a lot of innovation that never paid them a penny in return, and the people and IP often wind up in the big companies. There is a lot less of that nowadays, but it still happens.

John Ambroseo of Coherent closed with a rousing argument that the real competition is not other laser companies, but all the other technologies out there--mechanical drills and shears, other medical treatments, other types of sensors. Without consolidation, the laser industry spends inefficiently on redundant R&D, distracting the industry from bigger opportunities.

I've always maintained that consolidation means different things to different people. To me, consolidation is only meaningful in specific market segments. It's when a few competitors have most of the market share. (Consolidation is the process. Concentration is the result.) This can happen when companies consolidate internally, by exiting product lines, but it's often hard to know this from outside. The laser industry is highly fragmented into hundreds of niches. It turns a big laser company into what I call a "confederation of business units. They do gain advantages in scale, to be sure, but it is also more complex to manage. It's hard to manage such big, sprawling companies. It's also hard to grow when you are already a big dog.

Not mentioned was that some segments seem to favor consolidation more than others. This leads into another topic that came up at Laser Munich: is it too late for a company trying to make it big in fiber lasers? I'll address that in a later post.

For other thoughts on consolidation, see:
Fragmentation depends on your point of view
Consolidation, Part 2--Is Oclaro consolidation or redistribution?
Consolidation in the laser market, Part 1--How much is there?

Tom Hausken
Strategies Unlimited
thausken@strategies-u.com
http://www.strategies-u.com/

Laser Munich Part 1--German mood lifts all

You can tell that Germany is doing well these days just from going to Laser Munich. And not just Germany. Everyone from Coherent, IPG, and JDSU are all smiles these days. In fact, everyone I met at Laser Munich this week was in a great mood.Of course, it helps that the beer starts flowing in the booths at 5:00 sharp. Even better!

The German economy didn't fare as poorly in the financial crisis as other major countries, and it recovered better and more quickly.German unemployment is now the lowest since reunification 20 years ago. This recovery has lifted German companies, most notably Trumpf and Rofin-Sinar, but many others too.(Read about it from David Belforte, here.)Laser sales are back to 2008 levels.The good cheer came out in the CEO Roundtable: what did photonics companies do right that they fared so well in the recession?

My standard answers are:
1.China.
2.Semiconductors and electronics (think iPads and smartphones)
3.The jobless recovery--buying new laser systems instead of hiring workers.
4.Did I mention China?
5.Oh and yes, this time photonics companies reacted quickly.

These factors affect some companies more than others,but enough is happening that it gets spread around. That said, there was the usual grumbling that there are too many competitors. More on that in a later post.

The Munich venue is great, but what if it were somewhere else? Stuart Schoenmann of CVI Melles Griot kept it real in the CEO Roundtable when he gave his respects to Japan.The Japanese economy was hit with not one, but two crises: first the financial crisis and now the tsunami/nuclear crisis.The latter didn't take much production out of service, but it did upset the supply chain. Moreover, the Japanese stock market has never recovered to the peak of 1990, not even close.And that was 21 years ago.

And it's not just Japan that has been hit. I don't know about you, but every company I know was cut to the bone.More on that in a later post too.

But that's somewhere else. Here, it felt like a "normal" show. No fads. No gossip. Just a good mood and good beer.

Tom Hausken
thausken@strategies-u.com
http://www.strategies-u.com/

A big optics/vision opportunity: service robots

Looking for a new opportunity in optics and vision systems?   Check out this new  market report on vision for service robots from my colleagues at Vision Systems Design.  This is a market set to take off.  To give you an idea, with industrial robot unit sales in the tens of thousands per year, service robots could potentially sell in the millions.

Most robots today are not the futuristic kind we remember from the Jetsons or the somewhat creepy Actroid kind commercialized in Japan..  An industrial robots today is basically just factory automation with an articulating arm that makes it seem like a robot. 

A service robot is more like the more futuristic version--mobile, uncontained, and diverse--but not trying to act human, like some insecure, fawning android.  More precisely, it operates semi- or fully-autonomously to perform service functions, excluding manufacturing.  An industrial robot can be a service robot too, if it meets this definition. 

Examples of service robots include: UAVs, explosive or hazard disposal, automating cow milking, driver assistance, inspection and maintenance of hard-to-reach places, medical rehabilitation, surgery, and scientific exploration.  The UAV is the biggest market opportunity, becuase of the sophistication involved.  There are many smaller, fast growing segments.

This is a big deal for photonics because most service robots requrie machine vision of some kind.  This means the use of structured light (like what is used in the Microsoft Kinect), time-of-flight (like what is used in virtual keyboards), LIDAR, and so forth.  This has to be fused with other technologies, like GPS, radar, sonar, and inertial guidance.  For more sophisticated robots, simultaneous localization and mapping (SLAM) is critical to build maps of unknown environments or to update maps within known environments, while at the same time keeping track of the current location of the robot.

The technology is still emerging and remains to be worked out.  That means lots of hardware and software, and pretty deep stuff.  Imagine that the system doesn't necessarily need to "see" things the way we do--it just has to get the information it needs from its sensors.

For more information on the report, click here.

Mind the export regulations and help LEOMA change them

It may be a flat economy, but export regulations still matter. Rocky Mountain Instrument and BAE Systems both found out the hard way last year. And meanwhile, the trade group LEOMA is pushing the U.S. government toward more relaxed regulations.

First, what happened to RMI--Rocky Mountain Instrument? In 2008 it had over $15 million in revenues and 150 employees (here's a photo for proof). But it was raided in 2007 for ITAR violations, filed for bankruptcy in 2009, and in June of last year, the Colorado-based company was slapped with a $1 million criminal fine. It pleaded guilty to selling ITAR-controlled prisms and data to such places as China, Russia, Turkey, and South Korea without a State Department license.

At the time of the raid, RMI waved off the accusations. Something about a disgruntled employee and that the investigation didn't involve RMI Lasers but rather a supplier. But RMI pleaded guilty in a plea deal in June. It's said that RMI cooperated throughout the investigation, and its web site is now very explicit about export regulations.

RMI certainly isn't alone. A recent violation by none other than BAE Systems led to a $400 million criminal fine. And in fact an article in Military and Aerospace Electronics points out some common mistakes that can get companies into some nasty trouble, such as:

* Misclassifying or changing classifications in the ITAR list
* Improper access to IT files for ITAR products
* Lack of licensing for non-citizens working on ITAR products
* Monitoring only hardware, while not complying on services as well

Entirely apart from this, the trade group LEOMA is working to steer the Commerce Department toward more reasonable restrictions. The administration wants to "build higher fences around fewer items" using a tiered system. The thing is, its proposed tiers include a lot of lasers that are already made and sold outside of the U.S. LEOMA wants to be sure that U.S. companies don't face unnecessary barriers to doing business for run-of-the-mill commercial applications.

It's tedious but important stuff. LEOMA is asking for support in its effort. Please contact Breck Hitz at breck@leoma.com to contribute.

Warm weather and a good mood at Photonics West

The mood at Photonics West reminded me of a team when it’s winning its games. The mood was good and no one wanted to spend too much time second guessing what they are doing. Whatever they are doing, it’s working.

This is no surprise, really, given that photonics markets were all up in 2010 over 2009 (see the annual Laser Focus market article--more on the other markets in future posts). Just showing up is an accomplishment, two years after the recession hit.

This is in sharp contrast to this time 2009, when it still wasn’t clear how deep and how long the recession would go. While the recession itself wasn’t the fault of the photonics industry, the stock market was nervous. Company executives had to go over and over their businesses and make corrections. All the while hoping for a few big wins.

If you listen carefully, there were whispers that not everyone is better off than last year. Especially among the smaller, private companies, and among venture financed companies that might be running out of time for a successful exit. And while some said that credit and investment has thawed, others said that the money is going elsewhere. It depends who you are.

But that's for another day. The event broke its record with over 19,000 attendees, split approximately evenly among conference attendees, show attendees, and exhibitors. Even the weather was unseasonably warm.

No one is second guessing the move to San Francisco anymore either. SPIE is happy with the San Francisco location and has no plans to return to San Jose.

The Un-Trends in Photonics Markets

In the last post I ruminated on the best market trends of the decade in photonics. This time we examine that trends that weren't: the Un-Trends.

The decline of optical storage. Remember laser disks that were as big as vinyl records? Remember when CDs were displacing magnetic tapes? Remember CDs? The business of optical storage has been hit by a triple whammy: falling sales as downloads increase and falling prices due to commoditization. The iPad is the next big thing and--surprise!--there's no DVD player there. Not now, not ever. The future for optical storage is now in mass storage. And there's a chance that lasers will be needed to take magnetic storage a little further. Stay tuned.

The long winter of telecom components. The telecom components business never really recovered from the boom of the late 90s. Or shall we say it's back to the business it always was. Components. There are some successes, and stock prices are back to "normal," but overall it's nothing to brag about. Companies struggled through the decade to fill their fabs, move production to China, and just stay open. It's better now, but somehow it feels like there wasn't closure.

The elusive photonic integrated circuit. Twenty years ago it was called the OEIC, the optoelectronic integrated circuit. That was Bell Labs. In the 90s, Japanese companies pushed PLCs, photonic lightwave circuits. Now there are photonic integrated circuits (PICs) and the likes of Infinera and Luxtera. And of course there's the mother-of-all-quests: Intel's search for the silicon laser. (A 2006 article asks: lasers integrated into CMOS by 2010?) It's all nice work, and we're happy for Infinera--it's done a remarkable job. But the classical idea of the uber-circuit that will integrate smoothly with silicon--it's soooo 20th century. Get over it. What works is very piecemeal: some hybrid pick-and-place here, monolithic integration of a modulator there, and even then the economics can be questionable. The problem is that these approaches work best when you have high volumes, but high volume products are already commoditized in Asian factories. The real successes are much less dramatic. Think optical mouse, not 100G.

Optical computing is dead, long live optics in computing! I mean here the type of optical computing where the processor is all-optical. I worked on a project about this in the 1990s, with Japan, and there's still a little funding in it. The closest thing to it nowadays may be the all-optical telecom switch. (The name "switch" doesn't do it justice. They are pretty complex.) The optical processor is a nice idea ("it travels at the speed of light!") but it turns out that electronics is really really good, and really really cheap. Oh, and it's way easy to program. Now if you are talking about "optics in computing", that's another thing. There are optics everywhere inside a computer: the display, the mouse, the camera, the DVD player, maybe even a fiber cable someday (one can hope).

The death of CRTs, photographic film, and fax machines. The triumph of flat displays means the death of CRTs. What a great technology. Tubes are still preferred in various niches in electronics (take apart your microwave oven if you don't believe me). But I'm glad to see them go. Ever tried to carry a big CRT? (You can still buy one. Check Amazon.) Photographic film is still around too, although the last Kodachrome processor closed after Kodak stopped supporting the chemicals needed to develop it (see photos from the last roll here). It's hard to miss film, especially in the dentist's office or the hospital x-ray lab. And fax machines will still be around for faxing legal and medical documents, and for receiving wacky advertisements (does that ever sell anything?).

There's more, but isn't 5 enough?

The Decade's 5 Best Market Trends in Photonics

Well, it'over: the decade-that-could-not-be-named (2001-2010). Time for a list of the Decade's 5 Best Market Trends in Photonics:

The triumph of flat displays. Remember the see-through iMacs? Don't CRTs look soooo 20th century now? And how about the touch screens for smart phones? They don't just make a nicer phone. They transform how we live. This is #1 because of the sheer size of the display industry, and its impact on everything else.

Cellphone cameras relaunch the image sensor market. The first cameraphone showed up in 2000, in Japan. There are now over 1 billion mobile phone handsets shipped every year, and most have cameras. That volume drives lots of other applications. And the quality! Again, transformative, and billions in new photonics revenue.

The Green Revolution: LEDs and solar. High-brightness LEDs are all about taking an old technology and improving the brightness to do some new things--a marketing VP's dream. This decade saw LEDs in mobile phones and TV backlights, but the talk now is about LED lighting taking over the world. And how about that solar market! Many investors have lost money in solar companies, but they keep coming. Somehow, we all want to be part of it. (I was too, back that was back in the 1970s.)

Molecular imaging and all other thing biophotonic. The average person on the street doesn't know it, but photonics is making a huge impact in biomedicine, from diagnostics to therapy. Optical molecular imaging is my favorite because of the promise it brings in finally solving some difficult and costly medical challenges. But there is also mid-IR spectroscopy, ultrafast surgery, OCT, and many more.

IPG and the fiber laser. Several companies had fiber laser products in the 1990s, but IPG Photonics gets credit for making it a big name in materials processing today, and the 5th largest maker of non-diode lasers. Ha! No one is laughing now. The fiber laser is one of the laser types you would design if you could pick only one, and if you had the materials you have today. The diode laser is the other.

There you have it. Next time if I get to it, the Decade's 5 Un-Trends in Photonics.

How the jobless recovery helps lasers

Several laser segments have recovered surprisingly well in this recession. This is after my warnings over the last two years that capital equipment markets take it especially hard in a recession. So what gives? Who needs new capital equipment when factories are running at lower capacity?

Enter the jobless recovery. Plant managers are talking about buying more efficient tools that operate more efficiently. In good times, this means buying a new tool to do more with the same staff. In recessions, this means buying a new tool to do more with less. Lasers play a role because they are used in big machine tools like sheet metal cutters.

Companies have cash. They are using it to buy back stock, buy capital equipment, and increase their reserves. What they're not doing is hiring workers.

There's a lot more to it than just the jobless recovery. There's the turnaround of the electronics industry after a two year slide. There's China. There are segments that are less sensitive to recessions. And so on.

But the jobless recovery explains why so much of the laser market is recovering as well as it is.

Paying for the solar market

I don’t usually venture into solar energy discussions, even though it is also an opto technology. For one thing, it depends a lot on policy decisions and I've been there, done that once before. And there's already plenty written elsewhere. But it's worth pointing out Vinod Khosla’s recent posting on the requirements of investing in solar.

Khosla’s piece is long with detail, but he basically says that startups have to “be competitive with silicon cells at thin film costs or be competitive with III-V cells (well over 20 percent) at silicon costs. Then you have a 50/50 chance of making it. But a billion dollars of capital and billion dollars of debt will be hard to pay off.” A lot of is just basic market sense, and that's exactly the point.
Khosla echoes more or less what we have seen in solar for years. Strategies Unlimited followed the solar industry for decades while it had steady 25+% compound annual growth. (Don’t believe me? Check out the figure below.) Now that solar is finally in the public imagination, overinvestment has become a increasing concern.



Source: Strategies Unlimited and Paula Mints (Navigant Consulting).

I wrote already about the market for lasers needed for making thin-film cells (first here and the sequel here). My point then was that the cycle is amplified because it’s the “second derivative."

I worked on solar cells myself, back in 1978 at Texas Instruments. It's great to see it finally make the big time, and if oil prices go up, it will be even bigger. I'm hoping so. A lot of smart people are working on it. Great things are still to come.

Meanwhile, if you're following solar, read Khosla's piece, and read the comments, too. It makes interesting reading.

Fragmentation depends on your point of view

A recent poster on the Photonics LinkedIn group was impressed by the stratification and fragmentation in the HB-LED business. The self-described newcomer can be excused for being naïve, but there are some things I think are worth repeating here. Most importantly, whether fragmentation is good or bad depends on where you sit.

A lot of people like to compare photonics with some industry X just before the industry took off. The most common example is silicon electronics in some early stage. Who wouldn’t want to repeat that ride?

But that’s a poor analogy. Photonics components are more like airplane parts than CMOS. Most photonics parts are highly specialized, and the suppliers can often make a nice profit because of the complexity or service they provide. That's good for a lot of companies, including small and medium size companies. For them, fragmentation is good. It means niche opportunities for them.

However, it turns out that a lot of photonics parts require an expensive clean room—a fab. Anyone who has an expensive capital investment, like a fab, wants to get volume through it to pay for the lights, and that favors consolidation. These suppliers want everyone else to get out of the business and leave it to them. Who wouldn’t? So, many of these companies look to minimize differences in products, even if it means standardizing the parts a little and giving up some of the profit margin. For them, fragmentation is bad because it limits their volume, and therefore their profitability.

If you are a customer or an end-user, there is occasionally a segment where consolidation is needed to lower the price to the customer, and move the market forward. But these opportunities are rare. When they appear, the customers usually have a way of forcing standardization onto the suppliers, not the other way around. Solid-state lighting might be an example where consolidation might help the end-user. (Or not, since it's not the only factor in its adoption.)

But watch out what you wish for. What's good for the customer, or for one supplier, may not be good for everyone. Whether the consolidation is good or bad depends on whether you survive the shake-out or not.

In summary:
* Photonics markets are notoriously fragmented.
* They always will be.
* That’s good for some companies.
* That’s bad for some companies.
* Consolidating suppliers can sometimes help grow the industry, but watch out what you wish for.

"There will be growth in the spring"

Our family recently watched the film classic "Being There" with Peter Sellers. It's the source of the phrase, "There will be growth in the spring." The character's proclamation arose from a misunderstanding, but was quickly seized on by politicians, the media, and a public weary of recession.

Modest growth, but better than none. Well, we've updated some numbers and in this recession, it really does look like there will be growth in the spring. Actually, it's happening right now in many segments, just modestly. In fact, the issue isn't whether there will be growth, but how much. We're talking growth around 10% for the most part, which is pretty modest on a quarterly basis. Stronger growth in sectors like semiconductor fab tools and telecom network equipment.

Forecasting is harder than it looks. You might think that predicting growth in 2010 is about as simple-minded as the character's observations in the film. Far from it. I cringe at so-called futurists who paint dramatic pictures of the future, without giving some near-term due dates or without working through some fairly obvious contradictions. Likewise for cheerleaders who think that the recession can be just wished away. (See one of my blog entries in April about this form of Coueism, here.)

Quarterly trends help. Our forecast is based on quarterly trends among key suppliers and customers in leading product sectors. With visibility within the supply chain barely better than at the beginning of this recession, every segment must be evaluated carefully with respect to what's possible. A strong comeback in telecom systems next year? Quite possible. A strong comeback in heavy manufacturing? Not likely at all. Modest growth? Possibly. (See for example comments from Fabtech from my colleague, David Belforte.)

Some context. To add some context, it now looks as if the stock market bottomed in March 2009, the GDP bottomed this fall, net employment will start increasing in 2010, and outstanding home foreclosures will start declining in 2011. You can't point to one thing and say "that's when the economy turned around." It's more complicated than that.

We will leak out more details as it firms up. Stay tuned. And remember, "there will be growth in the spring."

Who's ahead in photonics stocks

In the last post, I noted that some photonics stocks have done nicely in 2009 following the crash one year ago. My very cursory examinations suggests that a few companies in the LED space are doing very nicely indeed. Other are making good progress toward their 2007 and 2008 levels, even if there is a way to go.

Why it matters. A rising stock market is a sign that investors think that earnings (that is, profits) will rise over coming years. It also makes all those pesky owners happy so that layoffs will stop and staff can breathe easier. And sometimes the employee is one of those owners (or has an option to become one). So, a rising stock price is usually good news, provided you remember that it is a secondary market, something of a beauty contest. Not being a Wall Street financial analyst type, I generally stay away from following stock prices, but sometimes it's illuminating.

High fliers. One of the stars right now is Cree, the LED supplier. Its stock price has tripled from its low, and is well above its 2008 peak. Aixtron is even better, at about 6X above its low, and double its 2008 peak. Cymer has doubled to recover to its 2007 level. I think it's safe to say these stocks are ahead of the overall market average, although it depends on where you start counting.

Holding their own. Others are holding their own against the NASDAQ average. Omnivision is up about 3-4X from its low, more or less in its earlier territory. Coherent has approximately doubled, getting closer to its usual territory. FLIR hasn't reached its all-time peak, but it's back to some of its 2008 level. IPG is getting there.

In the dog house. Some companies seem to be in a long U-shaped recession, well below the overall stock market. Rofin is deep into manufacturing, where the stock market doesn't expect good earnings for a while. Telecom system vendors like Alcatel-Lucent, Ciena, and Infinera are also well below the NASDAQ average for the period. Especially Infinera.

What about P/E ratios? High prices are nice, but what about the P/E ratio? That would say something about the kind of stock bargains that are out there. Here the news isn't so good. High-flying Cree is at 94 today. Cymer is near 300, Rofin at 75. But this is hardly fair, since these companies actually have positive earnings even now, and while many others don't. More down-to-earth, by the way, is FLIR, at a P/E ratio of 20.

I couldn't post the Yahoo graphs into this blog, but you can run the charts yourself here.

The photonics market, one year later

Do you believe the stock market, GDP, or unemployment figures? Are we in a recovery, or still in recession? V-shaped, W-shaped, or U-shaped? As we do our annual survey and forecast for Laser Focus World magazine and the upcoming Marketplace Seminar, a lot of this gets mixed up. There will be more to come later, but here are some early thoughts.

Many public photonics companies have seen great stock returns. The stock market looks at future earnings--that is, profits--regardless of jobs or where the jobs are. A rising market says that investors think the future is good, and it's good for employee stock options and so forth. Some photonics stocks have shot way up, well beyond the average. LED companies in particular. Even those that haven't are seeing a bounce off the bottom, suggesting that it won't get worse. Stay tuned to this blog for more on this.

Small photonics companies span the spectrum. The stock market doesn't say anything about small businesses, but there are far more small, private photonics companies than public ones. I love these companies because many are much more profitable than their more visible brethren. For example, think of suppliers for military contracts, medical systems, and so forth. But, small businesses have very little wiggle room in a recession like this. California public radio explained it well in a piece today, using the example of a maker of tortilla-making equipment that sells for up to $3 million. It has gone from 55 employees to 9, and still has problems getting credit a year into the crisis.

Large capital equipment to make large capital equipment is hit hardest. The radio piece highlights a point I've been making, that the recession will be especially long for companies that make large capital equipment, and especially large capital equipment that makes large capital equipment. So for example, the market for welding systems for making cars is likely to be slow for another year or two, while the LED market will jump ahead next year.

Use economic indicators with caution. Use economic indicators with caution. One tool for forecasting is to look at economic indicators. Of course, they are complicated, but they can be very useful. But you do need to understand some of the limitations of the indicators, though. For example, Joe Webb points out in his blog article for the print industry how leading indicators often get it wrong. The blog piece is appropriately titled, "Beware the Cheerleaders."

Even as we all bask in the news that the economy grew last quarter, economists are working to correct errors that likely overstate the value of GDP growth. When goods and services are moved offshore, the total value may be counted in the current accounts, but it may not be allocated correctly to specific industries. It's as if you compare two companies that manufacture in China: one outsources it while the other operates it itself. The productivity of the former would look better than the latter if you don't count the outsourced labor.

A similar issue arises when you look at the trade deficit but not the entire current accounts, or for that matter, capital accounts. So what if iPhones are made in China? China adds only a few percent of the value, Japan adds much more, but the U.S. captures as much as 50% of the retail value. Yet, it looks as if it is imported from China so the other contributions are lost in our trade statistics. It should wash out in China's numbers, but not all of it will wash out in the U.S. numbers. But that is part of a very large topic, better saved for another time.

Consolidation--Part 3: Image sensors as a case study

I can't think of a photonics market where someone doesn't frequently say, consolidation is a-comin'. The image sensor market is no exception. So when we finished our new image sensor report, I wanted to see how it looked over the 13 or so years that we've tracked that market. And you know what? The more things change, the more they stay the same.

At the high level, there hasn't been one iota of consolidation in all those years, despite the fact that the image sensor business has grown about 10X in that time. The first chart shows a simple way of measuring the consolidation. It shows that the top 5 suppliers have had about the same overall share over many years.

I should note here that the membership in the Top 5 has changed during that time. That is, the market share is not static. It's just that there is no sign of a move toward consolidation at that level.

Individual segments, on the other hand, are often highly consolidated. For example, the sales of image sensors for security cameras, for optical mice, and for certain scientific and professional applications are held by just a few players in each case. In fact, this is typical of photonic products, where the overall category is really a hodge podge of subsegments, and few, if any, suppliers can ever achieve significant market share overall.

The next chart shows how the number of suppliers has changed over the years. Far from consolidating, the number of suppliers has increased since the commercial success of CMOS image sensors in this decade. In fact, just as one supplier is acquired or exits the market, another pops up.

So, when referring to consolidation, be sure to mention whether you are referring to a narrow segment, or the overall market. Consolidation in narrow segments is common, while consolidation in the overall product group is unusual.