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Optical components

Components Crunch Hits Vendors

Telecom equipment vendors have been struggling to source the components they've needed to fulfill their orders in the past few months, according to a number of executives that have talked to Light Reading.

The vendors, who all requested anonymity, operate in different market segments, yet all say the same thing: It's been harder to get the components they have needed in the required timescales, and that's caused them some headaches. None, though, said they had lost any business as a result, though some suggested that others had.

The reasons for the components crunch, it would seem, are many and varied. A number of issues seem to have behaved like London buses –- there were none in sight for months and now they've all turned up at the same time.

So what has been causing the equipment vendors sleepless nights?

Memory Matters
A senior executive at one access equipment vendor says he has had to knock some heads together to ensure he gets what he needs on time, but adds that some supply problems have been caused by the gaming world.

He says there has been "a general shortage of memory due to the huge pull in demand from Microsoft Corp. (Nasdaq: MSFT)'s Xbox 360," which launched late in 2005 but has still to hit the shops in markets such as India, "and Sony Corp. (NYSE: SNE)'s impending Playstation 3," which is due to launch in November this year in time for the Christmas consumer splurge.

The demand from Microsoft and Sony has also caused a shortage of the "raw material used for chip packaging," claims the executive.

He adds that these, and other, factors affecting the components industry have hit some of the more aggressive and fast-growing equipment companies the hardest.

Increasing Demand
One optical equipment firm says sheer weight of demand has caused some problems. Carriers have been investing in their networks, resulting in higher run rates, sales, and revenues for the components companies and the equipment firms.

According to Infonetics Research Inc. , sales of optical equipment were up 10 percent year over year in the first quarter of 2006. The same company predicts the annual value of the market will increase by 14 percent between 2005 and 2009 to $12.3 billion.

Another analyst firm, Communications Industry Researchers Inc. , estimates the market for optical components for telecom gear will grow from $1.5 billion in 2006 to $6.6 billion in 2011.

There has been a notable impact on the component supply chain in the past few months, according to one executive, who cites speculative reports that some major vendors have had problems fulfilling contracts. "Some big vendors have had trouble sourcing optical components, such as lasers, and that's affected their ability to win business."

An executive from the optical vendor says growth in demand for its systems has caused a squeeze in its supply chain. "We have had issues with component supplies... we have been getting longer lead times on some components. I hadn't heard that memory was such an issue but I know that some optical components have been."

He suggests that an increase in demand for pluggable optics -– hot-swappable modules that can be replaced without having to replace the line card -– as opposed to fixed optics for short-reach systems could be an issue as the components vendors adapt to meet a "big swing" in demand.

The source says his company has had to put additional operational processes in place to mitigate the impact -– "it is a pain but we are managing it," he adds.

Components vendor JDSU (Nasdaq: JDSU; Toronto: JDU) confirms the trend. A spokesman for the company says JDSU is "seeing a shift from fixed [SFF - small form factor] to pluggable SFP/XFP [small form factor pluggable] transceivers." It also believes there will be a shift from fixed wavelength transceivers to tunable wavelength transceivers.

Migration Blip
Another problem affecting component supply has been the shift of production by some companies to Asian facilities, according to another optical equipment vendor executive.

"That caused a blip in the supply chain and that blip has lasted longer than expected. Some companies have had trouble getting their Asian production facilities to work as well as they had hoped for," says the executive, hinting that Bookham Inc. (Nasdaq: BKHM; London: BHM) and Avanex Corp. (Nasdaq: AVNX) have had some difficulties. (See Bookham Ships More Jobs to China, Bookham, Avanex Shore Up, and Avanex Trudges Along.)

Both Bookham and Avanex declined to respond to questions regarding components supply issues, while JDSU said it could talk only about market trends and increasing demand, but not customer lead times, ahead of its next quarterly results.

— Ray Le Maistre, International News Editor, Light Reading

DZED 12/5/2012 | 3:45:08 AM
re: Components Crunch Hits Vendors The components vendors have been talking up demand forever and now they can't meet a 10% rise?

As for China, Bookhams revenues are up slightly but gross margin is falling. Whats the deal there?

SolitonWave 12/5/2012 | 3:45:06 AM
re: Components Crunch Hits Vendors Most Optical System vendors have long abandoned any activity on components (even the critical ones) to cut on costs... Now they are complaining about component vendors not delivering on time.
Time to rethink the supply chain and regain some control over the process.... or miss the market upturn...
deauxfaux 12/5/2012 | 3:45:06 AM
re: Components Crunch Hits Vendors My bet is a "stronger" mix of MSA parts. BKHM only seems to produce decent margins on the old HPOCs stuff.

This is a very SERIOUS problem
icenine 12/5/2012 | 3:45:02 AM
re: Components Crunch Hits Vendors how much research to the systems houses want done by their suppliers? As much as possible, but w/o commitments.

Then what? Commoditize w/ MSAs, and make no long term production commits.

Then the OEMs want to ramp and can't? Maybe now pricing should be on an auction basis. How bad does someone want parts? Believe in supply and demand? Could be interesting...
chips 12/5/2012 | 3:44:59 AM
re: Components Crunch Hits Vendors Nobody should be surprised that there might be optical component crunch. So many suppliers have gotten out of the business that it is only natural that lead times will stretch. It is kindergarten Economics, folks.

Little or no recent R&D is not the only issue. The big boys have been living off the stale stock left behind in the warehouses for so long that some kinds of devices haven't been made from scratch for ages. There is still enough black magic in how they are made that without a trickle flow's worth of demand to keep a process exercised, going back to an old recipe won't necessarily work the first time.

Longer lead times? Fewer choices of suppliers? Get used to it.
howdidigeintothis 12/5/2012 | 3:44:56 AM
re: Components Crunch Hits Vendors It's interesting (and somewhat comical) that after years of demanding lower prices, not being willing to make committments to component vendors, and hammering them on their balance sheets, now system vendors are concerned about capacity and leadtimes.

To compete for the system house business at the prices they were willing to pay, component vendors fixed costs needed to be restructured. Lousy financials drove component vendors to close underused capacity, to outsourcing manufacturing to Asia, and extend lead times since they couldn't buy/build parts on spec and risk E&O charges.

Most system houses got just what they asked for, cheaper products. It just took them a year or so to realize what the it really meant for them in the long run.

A business model is a business model and ultimately it works or it doesn't. They are part of the model at the top line.


ruready 12/5/2012 | 3:44:52 AM
re: Components Crunch Hits Vendors Surprise, surprise, surprise.

I agree with the comments in this thread. Just wait to see the response when the can't get silicon. Lead times are pushing out, but are the OEMs listening. NO!

Maybe now they'll listen. I doubt it.
ruready 12/5/2012 | 3:44:51 AM
re: Components Crunch Hits Vendors Had a customer that wanted a custom part - developed on the vendors nickel. Even better, they were going to have two companies develop to their spec and compete for the business.

Pass on something like this. But, there were two who will now compete......
oemarket_com 12/5/2012 | 3:44:49 AM
re: Components Crunch Hits Vendors In the recent five or six years, there has been heavy consolidation on the system developer side. Right now, there are only a few big system companies left and they have much stronger market power on their component suppliers. If they use their pricing power too much, they will find that it will turn back to hurt themselves, just as this article described.
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