Is Optical Outsourcing 'Out'?

Last week, Fujitsu Network Communications Inc. vice president of product and strategic planning Rod Naphan gave a presentation at the Lehman Brothers Worldwide Wireless and Wireline Conference. The presentation was a pretty high-level snapshot of Fujitsu in North America, but Naphan made one point that was very interesting: "Fujitsu is the only major optical networking vendor to manufacture equipment in North America."

The advantages to owning manufacturing, he said, include faster response to customer orders (often within 24 hours), the ability to drive cost efficiencies and improvements across manufacturing (as opposed to being at the mercy of someone else), and differentiation through an integrated supply chain. Fujitsu not only does its own manufacturing, but also does a lot of its own component and semiconductor development. Another Japanese supplier, NEC Corp. (Tokyo: 6701), has a similar model. Photonic integrated circuit innovator and DWDM supplier Infinera Corp. (Nasdaq: INFN) is a third.

These optical companies stand out in pursuit of "insourcing" strategies while most of the optical industry has pursued outsourcing over the past six years. When the telecom bubble burst, the optical components divisions of major suppliers, including Alcatel and Nortel Networks Ltd. , were the first to be jettisoned. Across the industry, vendors moved to save money by offshoring manufacturing wherever possible.

While the outsourcing trend has clearly saved equipment suppliers some money, the question is: How much of an innovation edge has been sacrificed in the process? Optical networking is fundamentally a hardware industry, so how much differentiation does an industry have when all of their components come from the same suppliers and all of their systems are manufactured by the same houses?

We may be at the early stages of backlash against the outsourcing model. Certainly, success of the insourcers is giving the industry reason to reconsider strategies. Fujitsu can count its innovative Flashwave 9500 and (unconfirmed) win at Verizon Communications Inc. (NYSE: VZ). Infinera has risen from 0 percent market share to the No. 4 worldwide supplier of long-haul DWDM systems in just four years. NEC, for its part, is promising the most aggressive timetable of any vendor for rollout of 100-Gbit/s transport (in 2009). As optical networking moves from pure cost-cutting mode to innovation mode, it's certainly a possibility that optical suppliers will start doing more in-house.

— Sterling Perrin, Senior Analyst, Heavy Reading

cw.774 12/5/2012 | 3:39:21 PM
re: Is Optical Outsourcing 'Out'? If you're looking for trends, here's an old one: Both FNC and NEC are Japanese companies, so it's heavily cultural to not outsrouce a thing. Can you point out some non-JPN companies?
Sterling Perrin 12/5/2012 | 3:39:20 PM
re: Is Optical Outsourcing 'Out'? Well, Infinera is one.

rahat.hussain 12/5/2012 | 3:39:16 PM
re: Is Optical Outsourcing 'Out'? Well, does INFN have a choice?

Sterling Perrin 12/5/2012 | 3:39:13 PM
re: Is Optical Outsourcing 'Out'? Odo,
I think Infinera had a choice when it was founded to build a "conventional" DWDM systems company or to build its own technology. I think we can all agree that, had Infinera gone the conventional supply chain route in LH DWDM, they would never have gotten off the ground.

I think you are arguing that Infinera has no supply chain to turn to for its PIC technology, which is one of the points I was trying to make. The in-house hardware technology created the differentiation that was required to succeed.

Also, I think we can add the Chinese vendors - in additon to the Japanese - to the insource group.

candle 12/5/2012 | 3:39:13 PM
re: Is Optical Outsourcing 'Out'? what about Optium? a components not a systems vendor, but they keep it closer to home
dapcan 12/5/2012 | 3:39:12 PM
re: Is Optical Outsourcing 'Out'? I want to ask a question.

Is this discussion separating contract manufacturing from outsourcing?

There are a number of companies that use contract manufacturing (the company specifies the what and how ) and a number of companies that outsource (the company only specifies the what).

There is a significatn difference between the two methods, if I am not mistaken.

cw.774 12/5/2012 | 3:39:12 PM
re: Is Optical Outsourcing 'Out'? flat out wrong on optium, guy

Their design capability is strong, but it is all electronics, meaning PCB's using optics to 40G. All manufacturing, electronics and oe is outsourced/bought. Low to high levels of integration and test capability in US.

Again, depends on whwre you slice it though.

As I see it(following my strict classification I guess), the technology barrier is way high if infinera is our only NA in-sourced competitor ... and the big 'whoever is doing 100G components'
bollocks187 12/5/2012 | 3:39:08 PM
re: Is Optical Outsourcing 'Out'?
FuJi, insource.

Japanese do not like outsourcing it is a pride and national issue - you can lose face to outsource to Chinese companies.
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