The 2009 laser numbers are in

The numbers are in, and the laser market dropped to $5.3 billion in 2009, a 24% decline from the record high of $7.0 billion achieved in 2008. While sales will remain sluggish in many sectors, overall revenues are already on the rise on a quarterly basis, with 11% growth expected in 2010.


Companies doing better than average were few, but the military and biomedical sectors stand out. For example, the OCT equipment market grew in 2009, as reported in our new market study.

Other than those sectors, as a rule, the larger the capital equipment, the worse that sector did in 2009. So sales of diode lasers for CD and DVD players didn’t do well, but sales of welding equipment for making cars and trucks was particularly difficult. And, companies with fiscal years that ended last September saw even sharper declines in annual sales than, say, those on a July to June schedule.

There were surprisingly few changes among the list of suppliers in 2009, including announcements from Oclaro and from Sumitomo. Most consolidation was internal to suppliers in the form of layoffs or securing market share within niches. Much more significant are the mergers and changes at the customer level, whether it is Ciena buying Nortel’s optical operation or GM’s spin-offs and plant closures.

There’s much more to the numbers. They are based on the annual Laser Focus World market survey, to be presented at the Lasers & Photonics Marketplace Seminar in San Francisco on January 25.

The capex derivative & solar--Part 2

In a previous post, I discussed how steep upward growth for a market doesn’t necessarily mean steep upward growth all along the supply chain. In fact, solar cell manufacturing is an example where sales can go wildly negative even as the power generators see upward growth. In the original post, I considered three different scenarios that made my point very nicely. But what happens when we plug in some numbers that may be more or less what we expect the solar market to be?

I’ve done that in this figure. The first thing to notice is that the cumulative generating capacity—the top curve and what the power companies think about—goes up all through the forecast.

The next thing you notice is that the new module shipments—that’s the middle curve—takes a dip in 2009. This isn’t too surprising, given the recession, tight credit, and low oil prices. The dip isn’t too big and it’s in record territory again by 2011.

But what is really interesting is the bottom curve. That’s the new factory capacity that’s needed to make the modules each year. This correlates directly to lasers sold for making cells. That curve actually goes to zero, even negative, for a couple of years. And even in the recovery it only hangs around the 2008 level through 2013. In other words, the laser sales will not rocket upwards like the module sales through 2013.

Of course, there are some problems with this simple chart. The new factory capacity (laser sales) probably don’t go negative. That would mean companies were taking equipment out of commission. While I have heard of this happening in 2009, it’s not widespread. Companies want to be ready for the recovery. And, there are always new suppliers, and old suppliers expanding and upgrading equipment. That raises sales above zero.

On the other hand, there is also inventory in the supply chain and used equipment for sale. That pushes the recovery further into the future.

To a first approximation, the chart is a good model, and a good example of what I call the "second derivative paradox." At least it’s better than looking at the other two curves and assuming something similar.

January 13, 2010

On using the downturn and dumb luck

It's become a cliche that companies can use downturns to their advantage. Now there's an analyst from Bain & Co. who actually has the data. As he says in a piece on NPR this morning, it's like companies use the curve in a car race to gain advantage against stronger competitors, while using the straightaway to hold it.

The Bain analyst, Darrell Rigby, has data to show that market share changes the most in the chaos of the downturn. It's not surprising: at best, the downturn changes the game. At worst, it brings out all the weaknesses in a company.

Since they start out with the most market share, the biggest companies have the most to lose. They have deeper pockets, but they also have inherent inefficiencies that come with any large organization. These are the inefficiencies of running a global sales network, of running operations across many end-user sectors, across multiple technologies, and so on. There's a cost to doing all that.

Companies with the next generation products may not be doing well now, but they will seize market share coming out of the recovery. This favors fiber lasers, LED lighting, and new imaging tools like OCT and optical molecular imaging.

But let's admit it: luck also plays a huge part. We deal in macro trends at Strategies Unlimited. But it's my view that, at the micro scale, a lot of business is just dumb luck. Companies are simply in the right place at the right time.

That may feel insulting to the many hard-working engineers and sales staff who nurture relationships, often over years, to bring a product to market. When things go well, it's natural to give credit to all that hard work. But looking at it from a statistical point of view, some will get the new business and some won't. Many of those who lost the business also worked hard, and even did the right things, but the business simply went elsewhere.

The solar market and the 2nd-Derivative Paradox

How could equipment sales in an exponentially-growing market be anything but upward? It happens all the time. Welcome to the 2nd-Derivative Paradox. That's my name for the trap that one can fall into when it comes to capital equipment markets. Solar is a great example. It's hard to explain the paradox, though, so bear with me.

Start with installed capacity. If you are a power generator, you think in terms of the cumulative installed generating capacity in the world. This is what the users actually use. The figure shows three scenarios how that might play out, and they all look pretty much the same in this chart. Nice, steep slopes. Note how they all start at the same point and end up at the same point.

Then look at panel shipments. But the solar panel industry isn't interested in what's already out there. It needs to ship new panels every year. The shipments amount to a 1st derivative: the new capacity that's added to the infrastructure every year. Now the differences in the scenarios show through, as shown in the second figure. But the scenarios all show steep upward growth. What's to worry about?

Now look at panel manufacturing equipment. The solar manufacturing equipment industry, and that includes lasers--isn't even interested in solar shipments, but the need for more manufacturing capacity to make the panels. You only need more equipment when you are shipping more panels than before. That amounts to a 2nd derivative of the cumulative generating capacity, and can give wildly different results. New equipment is shipped in all three scenarios, but in the "sustaining" scenario the equipment shipments are flat year after year, while in the "slowing" scenario they start out strong, but then decline. Ouch.

Other traps. Of course we would all like to live in the "growing" scenario. The trouble is, strong positive exponential growth doesn't last indefinitely, no matter what they say. And that's not even considering some ups and downs along the way, like this year. A slight shift in the solar panel shipments wreaks total havoc for equipment shipments.

Other things that juice equipment sales. The same trap exists in other industries, too. But there are other details to consider. First, there is usually some churn in suppliers. Machines also get obsolete. And there is also the early obsolescence forced by things like Moore's Law. These all have to be considered.

Watch that 2nd derivative. Don't get me wrong. I love solar. I had a summer job at TI testing solar cells back in the Jimmy Carter era. We all believe it's going to be a great thing in coming decades. But it's not enough that the cumulative generating capacity will be on a steep upward slope for years to come, because when it comes to manufacturing equipment, it's the 2nd derivative that counts.

"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.