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Optical components

The Asian Invasion

As the telecom downturn continues, the exodus to Asia plods on. A flurry of recent news shows that component suppliers are still moving large chunks of manufacturing overseas.

Last week, Dowslake Microsystems, a startup specializing in optical subsystems, announced the replacement of its Ottawa manufacturing facility with a new plant in China (see Dowslake Opens Production in China).

Today, Agilent Technologies Inc. (NYSE: A) announced the opening of two new R&D and manufacturing facilities in Malaysia (see Agilent Opens in Malaysia); and Oplink Communications Inc. (Nasdaq: OPLK) touted the expansion of its manufacturing efforts in China (see Oplink Goes for Outsourcing).

Clearly, it's still fashionable to cut operating costs by moving to cheaper labor and facilities in the Far East. It's also a trend that has many risks, arising from a horde of differences in currency, culture, and politics, as well as the looser constraints on intellectual property in countries like China (see US to China: Do You Copy?).

The risks aren't proving much of a hindrance when it comes to bottom-line concerns, like survival. "Cost has become critical to success in the components space... You need to have at least a 35 percent price advantage over an incumbent competitor to break into a new account. So manufacture in a low-cost area becomes very attractive, if not inevitable," writes Lawrence Gasman, president of Communications Industry Researchers Inc., in an email today.

For Dowslake Micro, cost cutting was the impetus for opening a 14,000-square-foot facility in Shanghai. Dowslake already has customers in the U.S., Japan, China, and Europe and has been shipping for revenue since the second quarter 2002, according to Dan Yang, the China-born founder of Dowslake, who sold her first amplifier company to JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) (see Dan Yang's Next Big POP?). "This year we are fighting for break-even," writes Yang in an email. Hence the move: "The reason why we moved manufacturing to China is for the lower operating cost." [Ed. note: Well, duh!]

Dowslake is moving only its manufacturing to China and will maintain its headquarters, with R&D, marketing, and finance, in Santa Clara, Calif. Yang says the number of employees will reach about 15 stateside and 30 in Shanghai when hiring is complete.

For its part, Oplink, which also makes optical subsystems, is seeking to "leverage... optical expertise and low cost manufacturing facilities in China, offering OEMs the opportunity to maintain the high-quality production of integrated optical solutions at a lower cost," according to its press statement.

Agilent says the Asian market itself is a reason it's added 550,000 square feet of new facilities in Malaysia, bringing the company's total presence there to 1.2 million square feet on 63 acres. The company's press statement says "Nearly 40 percent of Agilent's total orders and revenue originate in the Asia Pacific market."

Agilent's counting on more of the same business, as orders elsewhere continue to weaken (see Agilent Reports a Loss). A company spokeswoman says 40 percent of Agilent's manufacturing is now done in the Asia/Pacific region; 40 percent in North America; and 20 percent in Europe. These figures will change over the next year, with 50 percent of manufacturing taking place in Asia/Pacific. The company says there won't be corresponding shutdowns of capacity elsewhere, but no information's available on what the percentages will be in the West.

But has it really been worth it for component vendors to make the move East? So far, it looks as if the jury's out. Agilent's recent financials show ongoing losses. Despite its efforts, Oplink continues to show lackluster financials (see Oplink Reports Q2) and keeps struggling for its own identity in a risky market (see Oplink 'Restructures' Half Its Staff, Oplink Changes Chiefs, and Avanex and Oplink: Wedding's Off). The real condition of Dowslake, still a privately held startup, is an open question.

One key problem is that the industry's woes lie in lack of demand, not the cost of supplies. In fact, in a demand-constrained environment, lower prices merely present the second edge of the sword.

Jay Liebowitz, founder and president of consultancy Liebowitz Strategies, points out that companies that have moved the manufacture of simpler passive components to China aren't showing any growth, yet they're dropping prices at the same time: "Passives prices have fallen 85 to 90 percent. Some of that is attributable to moving to China. It hasn't stimulated greater revenues. At best, companies are finding they need to make eight or nine times more product just to stay where they are," Liebowitz says.

Gasman of CIR sees other issues. China may have cheap, reliable labor now, but the future calls for more sophisticated technology, he thinks. "Manufacture of simple components such as TFFs and fixed OADMs has been carried out in Asia for quite a few years," he writes. "I would say that the ability of Asian manufacturers to produce complex integrated optics products is unproven, although I think it is just a matter of time before their competence is established."

Ironically, as China's workforce and vendors strengthen their presence in integrated components, the companies that moved to China may see the value of their operating savings evaporate in the face of competition. Still, at least for the short term, the tradeoff seems to be helping many stay alive to face that risk.

— Mary Jander, Senior Editor, Light Reading

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mdwdm 12/5/2012 | 12:34:26 AM
re: The Asian Invasion Please don't get started on this subject.
Rocket science is really about $Billions fireworks and not about innovation. US ranks about 100th place in the world, just ahead of China and India.

-------------------------------------------
Has China and India landed men on the moon? Apparently that is the only thing Clinton didn't sell to them
netskeptic 12/5/2012 | 12:34:26 AM
re: The Asian Invasion >...social security funds...

At least this one is clear. There will be no social security as we know it. Lock box or no lock box it is unsustainable.

Thanks,

Netskeptic
brahmos 12/5/2012 | 12:34:25 AM
re: The Asian Invasion it will take a few decades for indian & chinese top univs to catchup in size & research quality to american univs. they have a lot of work to do in
retaining bright graduate students, funding, industry linkage. so bleeding-edge discoveries are sure to continue here (assuming mr.ashcroft doesnt just ban all foreign born phd aspirants as a security risk)

but it appears to me, a small number of high quality manpower doing work in USA and rest of the work done abroad is the 'emerging' economic model.

this is sad for the US workforce because not everyone can be in top 5% of their field.

US has a lower level of Govt benefits compared to
Canada or western europe. for sure there will be
reduction in benefits and public services.

maybe the days of people being assured of a good
life for just being citizens of a first-world nation are drawing to a close...
Xiang_Qi 12/5/2012 | 12:34:24 AM
re: The Asian Invasion Regarding DowsLake's technology choices,

EDFA: two years ago, it was unique to add microprocessor based solution in small package; today, there are at least a dozen companies.

OPM/OCM: tunable filter is too slow for future applications.

DGE: too expensive for Metro.

In general, electronics is not differentiatable. You have to have vertical integration of components to compete on today's market price.

By critical mass, I'm talking about people. 15+/- is too small to deliver now; but maybe just right for staying alive until upturn.

//XQ


Laser_King 12/5/2012 | 12:34:15 AM
re: The Asian Invasion Jeez, give me a break. It is all about money. Companies go to Asia because costs are less. People come to the US because the schools, facilities, and opportunities for education are better than Asia (It's where the money is!). As for innovation, when was the last time a standards meeting was held in Asia? I go to many and they are NEVER held in Asia. The meetings always take place in Europe and North America. Can we drop all of the ethnic bias and nationalistic pride?
st0 12/5/2012 | 12:34:14 AM
re: The Asian Invasion Laser King,
here are few web site for you:
http://www.itu.int/newsarchive...

http://www.itu.int/newsarchive...

http://www.itu.int/newsarchive...

http://www.standardsasia.net/p...

I believe you have to be in Asia to attend Asia standard committee meetings... or become a member and get invited for meetings.

As for why the MFG moved to Asia, read the ITU press release.

-st
zli2g 12/5/2012 | 12:34:07 AM
re: The Asian Invasion allidia wrote:
Has China and India landed men on the moon? Apparently that is the only thing Clinton didn't sell to them.
--------------------------------------------
I just read an interview of the chief of China's
Divine Ship manned space program. According to him, China will send a man to space on Divine Ship #5 later this year. China had sent Divine Ship 4 times to earth orbit without a man and the Ship returned safely in the last 3 years. For more, search Divine Ship on any search engine.

Also, according to the chief, China plans to send a ship to land on moon by 2010.

You are right that Clinton did not sell space technology to China. According to the chief, US denied/delayed visa to the chief and his colleagues so that they couldn't attend scientific/trade conferences held in US.
----------

Author: allidia Number: 9
Subject: USA's competitive advantage Date: 2/25/2003 9:41:51 AM


will be when Zettabit moves to China and tries to develop a new technology. Since we now have a courageous President in the USA they won't be able to swap campaign contributions for trade secrets anymore and Zettabit will undertand that the Chinese threat today will have the same result as the Japanese threat in the 80's. It's all about cheap labor. Has China and India landed men on the moon? Apparently that is the only thing Clinton didn't sell to them.
brahmos 12/5/2012 | 12:34:06 AM
re: The Asian Invasion highly off-topic but both india & china plan
unmanned moon probes before 2010. I dont think
they will waste $$ on manned mission. both
have existing launchers to loft such a vehicle.

USA gained some moon rocks from the repeated missions, the russians sent lunokhod and did some studies there cheaply. not sure if the manned thing was worth it. Even in heavy launchers russia has a better record and has launched more satellites, so it cant be said they fell behind due to abandoning the manned moonshot concept.
lightbeer 12/5/2012 | 12:34:01 AM
re: The Asian Invasion Hey off the topic is sometimes very interesting and gives interesting insights to where technology is going. As far as space goes it is in essence another level in societal achievement. What it says is that a society has reached a certain amount of wealth and technilogical prowess to undertake such efforts. It is natural for both India and China to try to demonstrate to the rest of the world that they have reached this point. What is not clear to me is have both reached this level considering that both countries have huge populations that lack the very basics of a modern society.

BTW, the Chinese manned spacecraft which will be used to put a man into space this year is heavily borrowed (carbon copy) from the Russian Soyuz (Source: Aviation Week)
skeptic 12/5/2012 | 12:33:54 AM
re: The Asian Invasion >...social security funds...

At least this one is clear. There will be no social security as we know it. Lock box or no lock box it is unsustainable.
----------------
This one isn't clear at all. Its going to be
almost impossible to fix the costs in social
security given the composition of the electorate.

As their final "gift" to america, the baby
boomers will loot the economy, raise taxes
to whatever level is necessary to support
their social security and put all non-boomers
in some sort of new program where you pay
more in and get nothing out.

I can almost guarentee that as soon as the bulk
of the boomers qualify for social security, the
"gate" is going to drop and everyone else is
going to find themselves on the outside looking
in.

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