The Asian Invasion
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