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Optical/IP

Furukawa Looks to Cable China

TOKYO -- Ever optimistic, Furukawa Electric Co. Ltd. is flexing its fiber-optic muscles again, this time in China. After spending $2 billion snapping up Lucent Technologies Inc.’s (NYSE: LU) Optical Fiber System (OFS) business last November, the company now plans to produce 2,500km of OPGW (optical fiber ground wire) cable per year at its new Jiangsu, China-based Suzhou Furukawa Power Optic Cable Co. Ltd.

The move is curious, considering Furukawa has been dogged by questions about the timing and price of its purchase of Lucent's OFS (see Did Furukawa Buy a Lucent Lemon? and OFS Drags Down Furukawa. But Suzhou Furukawa is at least coming a lot cheaper than did OFS, with paid-up capital of ¥696 million (US$5.88 million). It could also be a lot busier than Furukawa's U.S. acquisition, which has had its workforce halved to 3,000 since the purchase, according to Furukawa spokesman Osamu Suzuki.

For its investment, Furukawa will take a 55 percent stake, joining 35 percent stakeholder China Huadian Engineering Corp. China Huadian Group (CHEC) has had its fingers in more than 65 power and substation projects since 1998, including multiple plants at the massive Three Gorges Dam project, according to the company's website.

“Huadian have the strong connections, and we expect them to have a lot of sales power too,” Suzuki says.

Meanwhile, he says, 10 percent stakeholder and long-term fiber optic technology partner Etern Group Co. Ltd. has local technical and sales savvy.

While the new company will have a staff of only 60, headed by Takeshi Yanagisawa, formerly of the company’s bare wire and cable division, Suzhou Furukawa aims to ramp to full production of 2,500km per year at the end of 2003. At full capacity, Suzuki says Suzhou Furukawa could hit revenues of ¥2.5 billion (US$21 million) per year. But while Furukawa estimates demand for its PFILUX and PFILUX CENTRUM brands of OPGW, which is strung with power lines, at 12,000km to 13,000km per year, Suzuki calls the revenue predictions “a hope, only a hope.”

Furukawa’s OPGW business is a very different animal from the company’s standard fiber labors, representing a ray of hope for its struggling businesses, says Suzuki.

OFS, currently locked in a patent dispute with Fibercore Inc. (see More Fiber Market Misery), continues to produce new types of fiber in a dead market, all of which is creating huge losses. In June, Furukawa more than doubled its projected losses through March 2003 -- from ¥49 billion (US$413 million) to ¥115 billion (US$970 million) -- after factoring in a ¥46.2 billion (US$390 million) loss from OFC. Suzuki admits OFC stands little chance of profit before 2004. Atsushi Yamaguchi, senior analyst for Japanese Equity research at JP Morgan Securities Asia Pte. Ltd., concurs.

“OFS was a big sacrifice and now they [Furukawa] are the victim. If you look at the deal in terms of an M&A it [the OFC purchase] failed financially. This and next year will be a disaster,” says Yamaguchi.

But stringing fiber along power lines may be a bit different. A joint venture formed between Furukawa and Phillips-Fitel Inc. is running at its full 5,000km-per-year capacity. Meanwhile FE Engineering & Construction Sdn. Bhd. (FEEC) is humming along, providing OPGW in India, Malaysia, and the Philippines, Suzuki says (without giving figures).

Suzhou Furukawa will be a cheap, low-cost local production base, says Suzuki. The move is designed to grab market share. While Furukawa claims a global 26 percent market share of fiber optic cable production, it’s only the fifth biggest player in OPGW, behind Korea’s LG Cable, Pirelli Telecom Cables and Systems, Fujikura Ltd. and Alcatel.

Conditions in China may not be so rosy for Furukawa, warns Yamaguchi, with the latecomers perhaps facing an uphill struggle to catch up in the market against entrenched opposition. Last October, LG Cable scored what it called a “monumental victory,” winning a $10 million OPGW contract on the Three Gorges Dam.

“Chinese are hungry for fiber, and they are buying from local suppliers. [But] Furukawa is lagging behind Fujikura and Alcatel, who have already set up facilities in China,” he says.

Yamaguchi feels that Furukawa is moving in the right direction and trying to cheapen up its product focus, which has traditionally been high-technology and high-cost. Another reason to move into China is to slash production costs, he says, inferring that shipping cable from overseas plants is too expensive.

Strong demand in China after 2003 may translate into a big payday for Furukawa three or four years down the road, says Yamaguchi.

“What Furukawa is doing is not too late, but it won’t be doing much for 2-3 years. We can’t see this move making any improvement on their bottom line for 3-4 years,” he says.

— Paul Kallender, special to Light Reading
http://www.lightreading.com
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