Is U.S. manufacturing growing or shrinking?

Here’s a little known fact: U.S. manufacturing has actually been growing as an economic output in the U.S. for at least 60 years. Here’s another: China is now the largest manufacturing nation. So there you are: U.S. manufacturing has been growing, but China is now #1.

If you don’t believe me, here are two charts, published in the New York Times (Sept. 11, 2011). The chart on the right shows overall output, growing steadily over decades with only brief setbacks. Whether the trend will continue upward, or represents the end of an era, depends on whether you’re an optimist or a pessimist.

We’re used to hearing that U.S. manufacturing is declining, but the chart on the left shows that it’s only declining as a share of overall economic output. Other sectors are simply growing more quickly. The U.S. is producing more output in information-intensive industries (such as finance) and less in labor-intensive industries (such as manufacturing). Even the manufacturing tends to be more information-intensive. The U.S. is strong in things like jet engines and pharmaceuticals, whereas for sneakers you think of Asia.

There are issues, to be sure. Most importantly, growth in output does not necessarily mean growth in jobs, and a country needs jobs for its people. Also, China’s manufacturing output is growing much faster than the U.S. Much of that was done by making the pie bigger, but some was done by taking share from other countries. The gains in share are not just in sneakers, but in things like laptop computers (Lenovo) and telecom switches (Huawei).

This is obviously a complex topic--just ask anyone at your next cocktail party or Occupy Wall Street event. And to be precise, manufacturing output did decline during the down years of recessions, when the whole economy slowed.

Just the same, it might cheer some of you as we enter the winter to know that U.S. manufacturing has been growing for nearly all of the last 60 years, and more.

What a weak dollar means to photonics

The dollar has been declining steadily again (see figure) but how much difference does it make to lasers and photonics? A lot to any salesperson who is competing in an export business. A falling dollar is like a discount in the price given to the buyer. And it can mean a lot to the value that we analysts assign to markets (such as in our new market estimate). For example, a falling dollar inflates the value in dollars of the production of Japanese blue-violet diode lasers for Blu-Ray players. But it doesn't mean a lot overall, for a lot of reasons. Why is that?


The conventional wisdom is that a falling dollar makes U.S. goods and services cheaper abroad, and foreign goods and services more expensive in the U.S. That is, it makes U.S. goods more competitive, and it deflates U.S. debt owed others as counted in foreign currency.

But many companies don't sell directly to companies abroad. A more complete downstream product may be exported by the customer's customer, but either way, the effect may be minimal--or at least obscure--to the photonics manufacturer.

Second, companies commonly import subcomponents from all over the world. A lower dollar then raises the cost to manufacture, erasing some or all of the advantages when it exports the complete product.

And, a lot of companies manufacture in the destination markets. This can help hedge against changes in currencies, among other things. In the example of Japanese blue-violet diode lasers, it changes the average prices and overall value, in dollars, that we assign to a market. But that can seem rather artificial when most of the Blu-Ray players are assembled in Asia anyway.

More often, the gains and losses from a falling dollar amount mostly to changes in market share: U.S. companies vs. non-U.S. companies, and U.S. importers vs. U.S. exporters.

For an explanation how a falling dollar is unlikely to create many new jobs in the U.S., read this article. It cites the reasons above, and notes that much of U.S. manufacturing is capital intensive, not labor-intensive. And, many manufacturers are small and not likely to ramp up hiring dramatically even if sales do improve.

Just the same, every little bit helps, especially if it means tipping a business from the red to the black or deeper into the black.

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.

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.

InterSolar, PW, and gadgets are in; big Semicon West tools are out

SEMI's still newish InterSolar show outshined it's collocated Semicon West show this week, and that may be a sign of the future. InterSolar now has 3 floors of Moscone West, has all layers of the supply chain represented, and was simply more exuberant. The building has big windows. It feels more open. The solar industry this year is down, too, and there are still fewer vendors than at Semicon, but it just seemed brighter at the InterSolar show.

In contrast, Semicon is underground at Moscone North and South. It was cheerful enough, considering the downturn and the lack of windows, but the party was at the solar show. And judging from the signup map for next year, the North and South Halls will be even emptier. In fact, Photonics West is now clearly bigger than Semicon West--at least in exhibitors and floor space, and maybe attendees too. (Rumors that Semicon will be squeezed into the South Hall turned out to be false. They are putting all the wafer processing booths in the South Hall. The North Hall will have everything else.)

To be fair, no one was expecting Semicon West to be much of a party this year. After all, SEMI just announced that tool sales will drop 50% this year to the unspeakable low of $14 billion. (It was $43 billion in 2007.) But it's notable who is showing there nowadays, or rather who isn't. Semicon is a tool show, but Applied Materials, KLA Tencor, LAM Research, ASML, and many other major toolmakers don't have conventional booths anymore. For example, Applied and KLA only had meeting rooms at Semicon, while they showed their solar tools across the street at InterSolar.

Semicon West is now really about the gadgets that the major vendors attach to their systems, the materials they use, and R&D lab equipment. This means that there are suppliers for everything from microscopes and instruments to encoders and bearings. It's a good show for this kind of product development and lab stuff, and some of the specialty tools that are used in North America.

But this year, even that was down. In lasers, Cymer, Gigaphoton, Coherent, and JDS Uniphase--each one catering to the semiconductor industry--all didn't show. The laser companies that I saw were Deep Photonics, Eolite, DPSS Lasers, Innolas, Jenoptik, Quantronix, and Rofin-Baasel. IPG and Newport showed their lasers at InterSolar.

SEMICON is still the biggest fab tool show of the year for North America, and a very important one. One instrument vendor told me that even in a year like this they expected to get some sales from leads at SEMICON. New tool development still goes on. But it's a shadow of its glory days, about 15 to 20 years ago. The SEMICON shows in Asia are much weightier on the big tool side. And that makes sense, since as much as 75% of the world market for semi tools is in Asia, according to SEMI.

And, the industry has grown so big that there are other, more specialized shows to choose from. Like, for examplek, the lithography people like the SPIE Advanced Lithography meeting held in San Jose. There are meetings like this for every sort of nuance you can think of.

Photonics West is also a gadget show aimed at product developers and lab workers, like Semicon, but it spans more industries, particularly healthier ones, like biomedical and security. And it has a cross-cutting technical conference too. (And don't forget the Laser Focus World Marketplace Seminar, collocated with Photonics West every year!)

I think it's a sign of the times. Solar is in. Photonic gadgets are in. Semi tool gadgets are still in. But the days of the big tool show in North America may be over.

How photonics can learn from Two Buck Chuck

Recent news about the crash of the Australian wine business fulfills a prophecy I heard years ago, and highlights parallels to the photonics business. How so? For starters, both carry a certain prestige, but deep down, wine is really about agriculture and photonics is really about manufacturing. Let me explain.

One of my favorite characters in the wine industry is Fred Franzia, famous for his Charles Shaw wine, better known as Two Buck Chuck. He's the guy that Napa Valley loves to hate, and he loves that they do. He boldly claimed several years ago that the Australian wine business would one day crash because they were planting too many grapes and financing with debt. At some point the world market would go through one of its inevitable cycles, prices would fall, and they wouldn’t be able to meet their fixed costs.

Sound familiar? A recent article cites some other familiar factors: relatively high labor costs, an unfavorable exchange rate, and over-association with a single, lower-end brand.

All of this has been said at one time or another about photonics companies. Especially the part about overplanting. Who in photonics doesn't dream of starting a company developing high end cool stuff, ramp quickly, and make a ridiculously prosperous exit. It's happened enough to prove that it can. However, the reality is that it usually takes years to build up the business, and a lot of it is about as glamorous as pulling weeds.

In the wine industry, you don’t start by selling high end wines to collectors. You start by selling bulk grapes. Maybe you can begin making your own wine, or at least contract it out. Then maybe you do some bottling and run a small tasting room on the side. Eventually you may be able to get out of the low-end grapes altogether, except to sell off overstock. That’s if a downturn doesn’t force you to sell out to a large corporation.

I hate to say it, but the photonics business could learn a lot from Fred Franzia. I hate to say it because Franzia is on a crusade to take away the pretense in wine, while many people are obvioulsy willing to pay top dollar for pretense. And in photonics, too, not only is there is a place for suppliers of low volume, specialty products, but I'm hope that everyone can enjoy the highest margins possible.

You can learn everything you need to know from Fred Franzia in this colorful interview in 2007.

CLEO 2009--The year of mid-IR

To name one thing that stands out at an industry event may do an injustice to the many others, but mid-infrared is my pick for CLEO 2009. This is a product category that really seems to be gaining traction. From a market perspective, it has a lot going for it: many new and exciting potential applications, and many new technology solutions. Of course, application development takes time, but there are both near-term and long-term apps. A nice place to be these days.

There was a session in the PhAST Market Forum on mid-IR environmental monitoring. There was a plenary presentation by Federico Capasso, now a professor at Harvard, on quantum cascade lasers. Daylight Solutions, Hamamatsu, Alpes Lasers, Maxion Technologies , and AdTech Optics are some of the companies that make quantum cascade lasers or products built around them. There were also companies showing 2 micron fiber lasers, such as Advalue Photonics, IPG Photonics, and Photonics Industries. And there are usual established players that make OPOs and the pumps to drive them, companies that feature coatings, and so on. Some of the companies have even been hiring through the downturn. MIRTHE, the NSF Center on Mid-Infrared Technologies for Health and the Environment headquartered at Princeton, had a booth at CLEO showing off some applications.

Of course, there were also lots of other great new products and conference presentations. Laser Focus World magazine does a great job covering those topics, I'll leave that to them.

The turnout at CLEO wasn't too bad, considering we are going through the biggest economic downturn in decades. Sure, companies cut back in booth size and attendees, but CLEO attendance was only in the lower end of the range of recent years, not drastically different.

CLEO really addresses scientific and R&D applications--you see lots of ultrafast lasers and fancy instrumentation. The markets for those applications are as close to flat as any today. Which is to say, really good.

Military photonics up, machine vision down

The military and security market is one of the few that's faring reasonably well these days. Compare that to machine vision, which is being hit hard with all the other capital equipment markets right now.

Here are two companies that are pretty good proxies for the sales in those two markets: FLIR and Cognex. Both are heavily focused on imaging, but for different markets. The figure shows their revenues since 2006. I didn't adjust for some some minor acquisitions that each of them made, but it doesn't seem to matter much.

FLIR's sales are hardly off it's steady upward climb. Its internal sales are much more complicated. Its government sales and commercial vision sales were up, year over year, for military and security applications. Thermography was down due to falling demand and exchange rates.

Compare that to Cognex, which specializes in machine vision and automation. One would hope that machine vision is one of those markets that may still defy the recession somewhat, particularly from customers looking to improve costs during hard times. But alas, machine vision equipment is capital equipment too, and customers are trying hard to keep capital spending low for now.

If the rest of the year were flat for each company, FLIR's year would end up 1% over 2008 and Cognex's year will be 30% under 2008. That's right in line with our view of their respective markets. The military sector is still going strong, but is at or near a long-term peak. We expect the manufacturing sector to be down about 30% in 2009, but sales will be better in 2010.

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.

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.

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.

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 (thausken@strategies-u.com) and I'll try to explain how we came up with the numbers.

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.