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.

Big money for photonics in data centers

The best news that photonics people could hear came last week at OFC when Cisco announced that it was buying Lightwire for $271million in cash. Lightwire is a start-up making integrated photonics, and Cisco is interested in it for making interconnects in data centers, among other things. I try not to get intoxicated with financial ups and downs that ultimately benefit only a few investors (if that),and I'm not fond of buzzwords like "integrated photonics," but this is good news for anyone with a similar technology.


It makes sense that Cisco needs the expertise developed in Lightwire. Companies have spent millions on this; for Cisco to do it itself would take millions more and years of delays. Meanwhile, its competitors--Huawei for one--are encroaching on Cisco's market with technology of its own. Cisco can't rely on the merchant market for everything.


The data center bottleneck is particularly important. I attended four discussions on the topic, including the OIDA workshop to develop a roadmap (where I was a moderator and am writing the report). The challenge is for the industry to develop new architectures and inexpensive components that can address the many-to-many interconnects necessary in modern data centers, such as those of Google and Facebook. Traditional data centers are not a challenge: a conventional switching hierarchy can store and retrieve data, and that scales predictably. The new data centers don't scale as well.


Both Google and Facebook made the rounds at OFC, and both claim that the technology is available today, it just has to be commercialized. They say there needs to be a whole new sector of components that don't need to meet Telcordia and NEBS standards. It just has to be good enough for the controlled data center environment. Oh, and make it really really cheap, thank you.


The one problem I have will all of this is that the net margins for Google and Facebook are about 25% or so. That's net profit, not gross. The optical components suppliers' net margins are a few percent to negative. So how about giving some of that nice margin back to the components suppliers? Especially as many suppliers don't see the return on this new segment justifying the risk.


That's why Cisco's acquisition is such good news. It's a return for the start-up's investors, but it also means that Cisco is willing to fork over some real money for components.


The OIDA roadmap report on data center interconnects will be coming out sometime in the coming weeks. Look for it at the OIDA web site or here.

Good news and not-so-good news in LEDs

There was good news and some not-so-good news at our 13th SIL event in February. First the good news: it was another record year for LEDs, and for that matter, for the Strategies in Light event. As my colleague, Ella Shum, reported: sales totaled $12.5 billion in 2011, thanks to growth in all major segments except backlights.

The not-so-good news is that growth will continue through 2012 but the market will be tepid for a few years beyond that, ending in 2016 in about the same place, the way things are going. This is because LED suppliers are so successful in reducing the selling price while improving the performance. Growth in sales is countered by reduction in the LED count (per product) and falling prices, making a double whammy. This is good for increasing penetration of LEDs into lighting and other applications, but it’s hard on suppliers’ profits. In fact, it was a bloodbath, in Ella's words, due to overcapacity.

Looking at this another way, the LED business is maturing. It still has a long way to go with lighting, of course, and even backlights. But the business is now of such a size that it is starting to behave like DRAMs, to use a cliché. Penetration into new applications is not enough to guarantee LED industry growth through the coming lull. From now on, LED sales will be highly dependent on the fortunes of the end-product markets for backlights, just as DRAM sales are highly dependent on personal computer sales.

To improve margins and market share, LED suppliers will have to stay ahead in scale and performance. LED lighting, in particular, will require larger volumes and high performance devices. Suppliers that can manufacture well in volume (improving yield and tightening binning, for example) will fare well. The suppliers that cannot may be relegated to older segments that don’t require the performance that lighting does. Or they may simply get squeezed out of the market.

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

2011 is a record year for laser sales

Here's some good news as we weather the winter storms: 2011 was a record year for the laser industry, finishing over $7 billion for the first time ever. That's coming off the deep recession in 2009 and a remarkable recovery in 2010. The previous record was in 2007, just before the recession. This is just out in our new market report on the worldwide laser market.

Who would have thought? I fully admit, it surprised me, as it did my colleague David Belforte of Industrial Laser Solutions magazine. I expected the recovery to track the recovery in employment. After all, lasers go largely into capital equipment, often to make even bigger capital equipment. When you are short of cash, you cut back on capital spending and payroll, at the least.

In fact, companies did buy capital equipment. There are the usual reasons, but particularly improving productivity and competitiveness. For example, the auto industry, which was so badly hit by the recession, spent heavily on retooling. Another big factor was China, which has been spending heavily on equipment. Growth in sales of smartphones and tablet computers helped. And some segments just keep rolling along, like biomedical instruments, military, and R&D lasers.

As a result, companies improved productivity, earnings are up, and even dividends have been good. What they didn't do as much was to hire workers back. Everyone is working harder. But even so, manufacturing has improved more than, say, service industries.

I'm expecting that 2012 will be flat with 2011. The global economy is cooling. The laser industry is soft too, but the fundamentals are good. I'm expecting that things will turn around in a quarter or two, and 2012 will end up being a wash.

Longer term, the industry is on track to exceed $9 billion by 2015, and that's only around 7% compounded annual growth from this year. But it's remarkable enough for a market of its type. And anyway, it's still a record!

By the way, the numbers are reviewed in the January issues of Laser Focus World and Industrial Laser Solutions, and in more detail in the Laser Focus Marketplace Seminar at Photonics West. But the gritty detail (units, prices, revenues by type and segment)--more than you could ever want--is in the market report.

Is the U.S. wired Internet infrastructure weak? Revisited.

It’s time to weigh in on a pet peeve of mine. The topic is the state of high-speed Internet in the U.S., in a December 4 essay in the New York Times. My peeve is that once again the U.S. wireline infrastructure is portrayed as somehow way behind, whereas a reasonable analysis presents a very different picture. For a large country, the U.S. actually has a very strong and affordable infrastructure.

It’s the author has a point. There is a digital divide in the U.S. and in the world. It’s increasingly important to treat broadband access as a necessary service for all citizens. National averages overlook that large groups people are left out.

The problem is how the point gets twisted along the way. The way the author explains it is like fingernails on a blackboard to me. I've complained in this blog before (here and here) and I can't let this one go too.

For example, the U.S. is portrayed as 12^th in the OECD economies. That's per capita. Iceland is number 5. It has 110,000 people. You get the idea. The OECD aggregates across the whole U.S., while smaller countries will almost certainly show up in the wings of the distribution. We should compare tiny Iceland with, say, a successful regional provider in the U.S., not the entire U.S. In fact, larger countries like Germany and France are passing us up. That is important. Let's say it.

The author points out that even Portugal and Russia are upgrading to optical fiber. That’s because their infrastructures were so bad in the first place. The U.S. is rewiring with fiber, but it’s a big country, DSL is working pretty well, and someone has to pay for upgrading to fiber. A too-rapid deployment would recreate something on the scale of the Telecom Bubble of the late 1990s. We know how that turned out.

Broadband is also portrayed as a monopoly, yet residential users can choose from the wireline provider, cable provider, and even wireless providers. Competition is good, but we’ve come a long way.

The author says the providers should sell access to their networks to competitors, to reduce prices. But the problem is that everyone wants the high-end customers. There’s a reason that underserved neighborhoods are underserved. There’s less profit there.

Having worked in telecom policy in Washington, it is an ongoing process to improve broadband access to underserved groups. It’s messy, because there is the FCC and Congress, 50 state regulators, municipal governments, and the courts. And it’s “inside baseball”; pretty boring stuff if you’re not a lawyer.

The author is right, we should be striving for broader broadband access.I guess it’s just something about how she said it.

The Top 10 laser suppliers: some tight races but a good year for all

Now that 2011 is coming to a close we can estimate who are the leading laser suppliers for the year. Once again it looks like Trumpf and Coherent are neck and neck for Number 1, with over $800 million each. Rofin and Cymer are in a close race for 3rd and 4th places, with nearly $600 million each.  IPG will roll in 5th, but this year with over $450 million in fiber laser sales. IPG's 2011 revenues would have put it at #1 as recently as 2009.

These players are familiar names. Cymer dropped out of the short list in the recession, but is back again. The order changes depending on the exposure of companies to different sectors. Trumpf and Rofin are highly exposed to heavy manufacturing, while Coherent is more diversified. Cymer is basically a one-product company.

I can't really know how the year will end up, of course. But three quarters are finished, and so far it looks like the fourth quarter is behaving as expected. Only the floods in Thailand have created surprises, but that's confined to telecom components, hard drive manufacturers, and the like.

I also can't really know what Trumpf is up to. And a lot of revenues for a company like Rofin-Sinar are really system sales, revenues that would not be counted if it were a company like Trumpf or Newport.

And then there are the telecom transceiver manufacturers. Finisar, JDS Uniphase, Oclaro, and others are all very strong in that segment, and Finisar is closing in on $800 million itself. With the companies above, and a couple others, that rounds out a list of the top 10.

It's also interesting that the Top 10 make up over 50% of all laser sales worldwide.

But I don't want to give too much away. There will be more on 2011 and 2012 at January's Laser Focus World Marketplace Seminar and our upcoming market report.