Optical components

Could Components Rebound in 2003?

The optical components market has finally hit bottom and is set to grow by 30 percent next year, according to a new report from Strategies Unlimited.

Is it boom time all over again? Hardly. As the report's author Tom Hausken points out, thirty percent of a small number is still a small number. "We're bouncing off the bottom here," he says.

He continues: "The market will by no means return to the heyday of 2000 anytime soon. Even with 30 percent growth, we project component vendors' revenues in 2003 at $2.1 billion -- far below the $9.1 billion peak we saw in 2000." That forecast is similar to 1998 figures.

Although it's not detailed in the report, which confines itself to the 2003/2004 time frame, Hausken has also studied the long-range forecast. He predicts that shipments will jump in 2004 and then slow down, as the market finds a plateau. The market size in 2005/2006 will approach 2001 levels.

"The good news is it gets us up to a decent market size," he says. "The not-so-good news is the slowdown, because we see that the long-term growth of the industry has a limit."

Hausken says the bursting of the optical bubble has made it difficult to make and interpret forecasts like this one. The problem stems from excess inventory -- in 2000, the shipments of components overshot the mark, so shipments had to undershoot over the next few years in order to restore the balance. However, as he points out, when talking about inventory, "it makes a big difference if the product is at the customer's warehouse, or the supplier's. In one case it's counted as a shipment, in the other, it was booked as revenue a long time ago."

In more normal times, these two things -- products shipped and products deployed -- would be pretty much the same. However, in order to get an accurate picture of the market today, they have to be separated -- and that's what Hausken has done in his latest report. "I don't think that's been done before," he contends.

Unfortunately, this upturn in the market fortunes doesn't mean that component vendors are out of the woods yet. There may be more market to go around, but there are still too many vendors fighting for pieces of it. "It may be a more promising market, and it will have a significant impact for a few companies," says Hausken. "But many companies will still not make it."

Hausken didn't wish to share detailed financial information of the vendors in the report, but he did furnish us with a league table showing the top twelve components vendors in 2002 in order of market share:

Table 1: Components Vendors: Market Share 2002
Top Twelve Components Vendors 2002
1 JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU)
2 Agere Systems (NYSE: AGR/A)
3 Corning Inc. (NYSE: GLW)
4 Alcatel Optronics (Nasdaq: ALAO; Paris: CGO.PA)
5 Furukawa Electric Co. Ltd.
6 Wuhan Telecommunication Devices Co. Ltd.
7 Luminent Inc.
8 Agilent Technologies Inc. (NYSE: A)
9 Nortel Networks Corp. (NYSE/Toronto: NT)
10 OpNext Inc.
11 Shenzhen Photon Technology Co. Ltd.
12 Oplink Communications Inc. (Nasdaq: OPLK)

JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) heads the league, despite the fact that its revenues have fallen to roughly one quarter of its first-quarter 2000 level. That's because most of the other key players, such as Agere Systems (NYSE: AGR/A) -- since sold to TriQuint Semiconductor Inc. (Nasdaq: TQNT) -- and Corning Inc. (NYSE: GLW), have seen their revenues fall similarly.

What may come as a surprise to some is the inclusion of two Chinese companies -- Wuhan Telecommunication Devices Co. Ltd. and Shenzhen Photon Technology Co. Ltd. -- in the top twelve. These companies are making progress, particularly in passive components, because the workforce is skilled, yet labor costs are low (see US to China: Do You Copy?). And as the market becomes smaller, the share they contribute is more significant.

In Hausken's view, vendors like Agilent Technologies Inc. (NYSE: A), Finisar Corp. (Nasdaq: FNSR), and Optical Communication Products Inc. (OCPI) (Nasdaq: OCPI) are most likely to do well. These companies are focusing on specific product areas that haven't been so badly hit by the downturn, such as enterprise transceivers. Finisar, for example, has managed to double its revenues today (in its third quarter 2002) compared to where it was in its first quarter of 2000, he notes.

— Pauline Rigby, Senior Editor, Light Reading
optigirl 12/4/2012 | 9:13:19 PM
re: Could Components Rebound in 2003? I am reminded of an old financial industry saying that if you throw a cat off of a high enough building when it finally hits bottom it can't help but bounce a bit. :-)))

Actually, this story makes a whole lot of sense to me. SU has a good name in my book and I take this bunch a whole lot more seriously than some of the other companies out there.

Xiang_Qi 12/4/2012 | 9:13:18 PM
re: Could Components Rebound in 2003? Chinese supplier numbers should not surprise you now that OEM arrangements are revealed: WTD=Corning, SZ Photon=Agere/TriQuint.

pfarmer 12/4/2012 | 9:13:17 PM
re: Could Components Rebound in 2003? China will provide us with some very interesting stories for years to come.

To North American, Japanese, and European optical players at the component, subsystem, and system levels, China is a "good news" story -- a "bright spot" in an otherwise dreary market. Capital expenditures may remain in the doldrums in Europe and North America, but Chinese optical networks are still growing at healthy rates.

The flip side of the coin is that, by our estimates, over 40% of the components used in Chinese optical networks are manufactured in China. At the systems level, 46% of the optical networking equipment used by Chinese network providers is home-grown.

In other words, Chinese component and systems makers are cutting their teeth in their home market. They're getting very, very good, and their sights are set for North American and European markets.

So even as rebound takes place in North America and Europe, the level of competition will be fierce.

Pete Farmer
Strategies Unlimited
dljvjbsl 12/4/2012 | 9:13:12 PM
re: Could Components Rebound in 2003? ORGEON SUFFERING FROM TELECOM MELTDOWN
During the technology boom of the 1990s, 33 companies laid more than 140,000 miles of fiber optic cable along Interstate 5 in Orgeon, thereby connecting the high-tech areas of Silicon Valley and Seattle.

Today, 14 of those companies have filed for bankruptcy, and 95 percent of the fiber cable lies unused. John Walker of Portland State
University compares the situation to the gold rush. It makes no sense, he said, for all of those companies to lay separate fiber. The existing fiber represents an investment of around $1 billion and, if the remaining 95 percent were put into service, would require many billions
of dollars to equip it for use. Adding irony to the situation is the fact that many Oregonians cannot access the long-haul fiber because
local connections are unavailable or too expensive.

USA Today, 9 December 2002
xaarman 12/4/2012 | 9:12:02 PM
re: Could Components Rebound in 2003? Where's Bookham? Don't they make optical bits?
Pauline Rigby 12/4/2012 | 9:12:01 PM
re: Could Components Rebound in 2003? Bookham revenues were tiny prior to its purchases of Marconi and Nortel, so it wouldn't make the top twelve by itself.

Note that now the purchase of Nortel's components business is completed, Nortel = Bookham.

[email protected]

rs50terra 12/4/2012 | 9:11:25 PM
re: Could Components Rebound in 2003? This should not be very surprising. They start with manufacturing, move on to engineering and end up being mighty competitors.
When the Chinese telecom market started to develop, they bought Class 5 switches from Alcatel, Nortel and others. Today, practically all the market is controlled by Chinese vendors.
I think people should keep this story in mind when they forecast large sales in the Chinese market to replace the slowing down markets in the US and Europe.
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