Is Optical Outsourcing 'Out'?

While most of the optical industry has been outsourcing, a handful of suppliers have taken the innovation edge by 'insourcing'

Sterling Perrin, Senior Principal Analyst, Heavy Reading

June 4, 2008

2 Min Read
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

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About the Author(s)

Sterling Perrin

Senior Principal Analyst, Heavy Reading

Sterling has more than 20 years of experience in telecommunications as an industry analyst and journalist. His coverage area at Heavy Reading is optical networking, including packet-optical transport and 5G transport.

Sterling joined Heavy Reading after five years at IDC, where he served as lead optical networks analyst, responsible for the firm’s optical networking subscription research and custom consulting activities. In addition to chairing and moderating many Light Reading events, Sterling is a NGON & DCI World Advisory Board member and past member of OFC’s N5 Market Watch Committee. Sterling is a highly sought-after source among the business and trade press.

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