Image sensor market enters a more cyclic phase

It took the recession of 2009 to do it, but the image sensor market will finally take a dip after many years of steep growth. And, not only has the market contracted for the first time since we first started tracking image sensors in 1996, but a rockier period waits ahead.

Image sensors have a long history, dating back to fax machines and video cameras, but the recent steep run is largely thanks to the cameraphone. The cameraphone provided a convergence of factors that drove revenues to steep double-digit levels: a simultaneous swelling of handset sales worldwide, growing adoption of cameras in handsets, and rapid migration toward greater pixel counts in those cameras.

Now handset sales are taking a breather, dropping an expected 10% in unit sales this year. Other segments are also seeing declines, of course, and unit prices for the image sensors are relentlessly competitive.

The figure shows the long steep ride on a log scale, from our new report. The log scale makes it easy to see the change in growth rate (a chart with a linear scale is in our press release). What's remarkable, perhaps, is that the market decline this year won't be more severe than it is already.

We still expect single- and low double-digit growth in the recovery, and there are still many new opportunities for growth in unit sales beyond that. The two most notable are automotive and webcams. But, it gets more and more difficult to drive revenues up when it’s already near the $7 billion mark. Without the fortuitous convergence of rising cameraphone sales to drive the market forward, cycles will become more prominent.

By the way, it's not that the suppliers have had an easy time of it up to now. (Sound familiar, anyone?) But that will be a topic in a later blog.

What it takes to drive LED replacement bulbs

What does it take to drive a market to high growth in the middle of a recession? Being a drop-in substitute for an existing product helps. Having a feature that no other technology can do helps, too. A government mandate also helps. If all three happen at the same time? Then the odds improve that strong growth will happen. That’s what’s happening in the LED replacement bulb market, as described in our recent report.

Contrary to what you might think, the lighting market has never been completely static. There is a wide range of options for light sources, electronic drivers, and fixture designs, and they continue to evolve. But the sockets themselves are slow to change, since they involve network effects, a form of chicken-and-egg problem. That’s where the drop-in substitute comes in. LED replacement bulb are selling today as substitutes for certain high-value applications.

What high-value applications? That’s where the unique feature comes in. LED bulbs can’t compete with compact fluorescent bulbs for general ambient lighting. But for directional lighting, LED bulbs are superior for controllability, dimmability, and a choice of color temperatures.

Why not use the existing technology? The government mandate requires that all bulbs achieve a certain efficacy over a coming phase-in period. While this doesn’t ban incandescent bulbs outright, it does price ordinary incandescent bulbs above more efficient CFL and LED bulbs. A perfect convergence.




By the way, the terminology in this area can be confusing. The figure shows how the LED replacement bulbs fit into conventional fixtures to complete a luminaire. The eventual goal is to migrate to complete designs where the LEDs are integrated into the luminaire from the get go. (See our market report on LED luminaires.)

The Early Peak Effect in the photonics market

Our new market report highlights something I call the “early peak” effect that appears a lot in capital equipment sales, including many laser products. It’s what happens when you sell some lasers into a new application, and then sales drop off when the customers have installed all the lasers they need. It’s so typical of the micro materials processing market that I have come to include it in some forecasts.

Here are the phases:
· Rollout of lasers for a new application
· The early peak in sales
· Saturation of the installed base
· Early wearout and upgrades
· A second “baby boomlet” as replacements for wearouts peak

If you don’t account for the early peak effect, you can overestimate laser sales by assuming that sales continue at peak levels, year after year. The news of new applications have surprisingly wide reach and long tails, feeding the perception that sales are higher than they really are, especially if the application is really cool, like stent cutting.

What keeps the market going is that there are new applications launched on a regular basis that smoothes out the overall growth in the market. But, sales any particular company can be very choppy. And, the mix of products grows more diverse with every new application in the market.

A laser salesperson will recognize the early peak effect, but it gets lost when you look at overall market numbers. It’s not hard to explain to the old-timers in the business, but it doesn’t have a ready label, as far as I know. I couldn’t come up with a better name for it, so for now it’s the “early peak effect.” If you want to call it the “Hausken effect,” that’s fine with me, too.

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.

Breaking down the "micro" laser market

We just published our special market report on the so-called micro materials processing market. Once the market bounces off the bottom, the growth in the recovery will be good, but the interesting part of the story will be in changes in market share as the technology marches forward.

I should first explain what the micro materials processing market is. These are lasers used for lower power welding, cutting, drilling, microfabrication, additive processes, heat treatment, and lithography. We don't count kilowatt lasers at all, nor do we count marking and decorative engraving. The lasers are used to make semiconductors, solar cells, medical devices, jewelry, electronics, consumer products, and a wide range of various industrial parts.

The market will take a 40% hit this year, which is dreadful, but this is not big news any more, and the recovery will bring the market to $460 million by 2013. There is talk that the semiconductor tool business is already turning around, after falling since 2007. Other markets, like solar cells, has a ways to go yet, and automotive may be slower to come back.

We found the market share leaders to be Coherent, Rofin-Sinar, and GSI Group, with over 50% of the market. It's not hard to see why. Coherent is strong in CO2 lasers, excimer lasers, and DPSSLs. Rofin is strong in multiple categories too (don't forget that Rofin includes other brands: Lee Laser, etc.) And we counted all of Excel Technology's laser production in GSI's 2008 share, so that includes significant lamp-pumped solid-state lasers and CO2 lasers. There are a lot of players and product segments, so any company that is strong in multiple segments will have greater share. (Of course, many companies are also diversified across other laser applications apart from the micro category, but that isn't counted here.)

By the way, lamp-pumped lasers may be on the decline, but the sales still amount to something, especially considering that they often involve higher powers, and therefore higher prices. By comparison, a lot of CO2 marking lasers sell for under $2,000, so it takes a lot of them to amount to much.

The thing that is striking is that the technology, as mature as it is, isn't staying still, especially in the micro category. Innovations like pulse shaping fiber lasers, higher power green lasers, and picosecond lasers, to name a few, promise to upset the market share at least a little while the market comes back.

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.

LED replacement lamps: new regulations and 100+% growth

Most people are not aware that new energy regulations in Europe and the U.S. will progressively ban incandescent lamps from the market, creating a huge market opportunity for LED replacement lamps just as they improve in performance and price. Our new market report anticipates growth rates in this product of over 100% per year for the next several years, thanks to the new regulations, continuing declines in prices, and the unique features that only LEDs provide. That’s great news for LED makers, who see the lighting market as the ultimate application for LEDs.

It’s not quite so simple as that, however. For one thing, LED replacement lamps are too expensive today for widespread use, so they are relegated today to special applications, such as hard-to-reach places. Manufacturers have yet to realize economies of scale. In the meantime, compact fluorescent lamps (CFLs) are more prominent. Also, customers have to be educated to think in terms of cost of ownership, rather than the initial price. Even the government regulations aren’t set in stone, given the big change that it entails.


What's so great about LEDs? LED lamps are directional and can be adapted to fit different lamp profiles not possible with other light sources. They come in all possible shades of white, last for a long time, can be dimmed and controlled easily. And unlike CFLs, LED lamps contain no mercury.


The LED is in many ways the ideal lighting technology, but actually developing that market is still surprisingly challenging. That's why the new energy regulations will prove so pivotal for the LED business.

Oh, and in case you missed the hint earlier, we do have a new market report on this topic.