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.

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.

Kodak exits opto and ends an era

It seems like the end of an era: Kodak is selling its CCD operations and its image sensor patents. It had been making CCDs since 1975, one of the early companies to make them, but waited until 1989 to sell them externally. Kodak had a number of firsts, including the first megapixel sensor, in 1986.

Then CMOS image sensors took off.CMOS sensors were conceived early on, but the lithography was too poor at the time. Omnivision and others brought it to life in the 1990s. Kodak tried several times to break into that product line, but it never worked out. Kodak teamed with Motorola in 1997 on CMOS image sensors. In 2004 it acquired National Semiconductor’s CMOS image sensor operation, for about $10 million in cash. Kodak even had deals with IBM and TSMC to manufacture the sensors, and some clever technology. But it wasn't enough.  

In our 1997 market report, we estimated that Kodak was the leading producer of image sensors outside of Japan, with $38 million in sales and under 6% market share. By the time of our 2009 market report, the image sensor market had grown 10X, but Kodak’s sales were stuck for years at about $80 million. Then in April it sold hundreds of patents and patent applications to Omnivision, for $65 million. And now it’s selling the CCD facility and its 200 employees to  Platinum Equity, a private equity firm.

In a way, kicking out the CCD business has little in common with the rest of Kodak’s problems. The operation being sold still makes high performance CCDs for high-end professional and scientific applications--some of it is really amazing stuff. And over the years a lot of companies have handed off their image sensor operations. For example, Pixel Devices International was sold to Agilent, which became Avago, who sold the image sensor operation to Micron, which spun it off as Aptina. And of course, Kodak is still huge into imaging, and that's photonics too.

It’s just the business getting older, but Kodak had been a classic example of a U.S. company deep into optoelectronics--that is, the actual making of the chips. No more.

Those lousy laser company margins

Ever really looked at the margins earned by laser companies? And then looked at margins for companies like Cisco or Google? It's enough to make you weep.

Industrial laser company margins are modest but steady. The net profit margins for the industrial laser companies aren't too bad. Since 2006, gross margins on annual sales for Coherent, IPG Photonics, Newport, and Rofin are mainly in the 40-50% range. Operating margins range from single digits to 30-some percent. The net profit margins are mostly single digits to low teens (Coherent, Newport, and Rofin), while IPG is running lately at about 23%. Trumpf, which sells much more in machine tools than it does merchant lasers, used to have about 9-10% net profit margin, but suffered in the downturn and has recovered in the last fiscal year to 6.7%.

All in all, that's decent It's the telecom component suppliers that are really hurting.

Telecom supplier margins been mostly underwater until only recently. For Finisar, JDS Uniphase, Oclaro, and Opnext, the gross margins are lower, but it's the operating margins and net profit margins that are in the tank. Like, pretty much negative values for annual revenues since 2006. There's some improvement in the last year or so, with positive operating and net profit margins.

Now I know that these numbers are fraught with "yes, buts." These companies are generating cash flow, but their official, GAAP, unadulterated income statements show losses. And a company like JDSU is in multiple businesses. I'm lumping everything together.

Meanwhile, the customers reap the benefits. Now look at the customers. Cisco has gross margins in the 60% range, and net profit margins around 15-20%. That's net. EMC's net margin is running 12% this year. Juniper is 13%. The carriers aren't doing too badly either. AT&T is consistently in the teens and Verizon is in the single digits. And get this: Google's net margin is a running a whopping 27%!

So we know who is getting the margins. It's not the components companies. Nor is it Alcatel-Lucent or Ciena, who have had consistently negative margins too. It's the router and storage companies like Cisco and EMC, and the equipment users like Google and AT&T.

The component suppliers may finally be in positive territory for good. I hope so. It's not right that the customers get margins while the components companies don't.