Asian Market Slump Impacts Photonics Industry, Part II
In part two of this feature, we focus on the effects of the Asian economic crisis on the optical communications market. Part One focuses on the semiconductor industry.
By: Kristin Lewotsky
The multibillion-dollar market for fiber optic components is one of the strongest segments of the photonics industry. With many of the suppliers located in Japan and Korea, and given the wave of telecommunications expansion in China, the potential for the market to be affected is strong.
The fiscal situation in Japan is grim, says John Day, of Strategies Unlimited. "The Japanese economy is in the tank," he says flatly. "Their banks have $2 trillion in bad debt. [Asian] countries predicated economies on debt, borrowed more than could pay, and repayment has become a burden. It sucks money out of economy, throws into a tailspin."
According to Day, the crumbling economy has threatened Asian telecommunications projects in the planning or development stages. "The people hurt most are Japanese suppliers," says Day, noting that telecom equipment sales in Japan are flat, not rising. "Elsewhere, sales are rising, so if you ask the European community about the impact, it will be different."
Other analysts don't necessarily agree that Asian network projects are suffering at present. "You still see some deployments going on," says Matt Steinberg of ryan hankin kent (South San Francisco, CA). "Thus far there is a lot of IMF [International Monetary Fund] money there to build infrastructure. The question is how long will that last?" Devaluation of the Chinese yuan, now a widespread concern, may make prices of components from North American suppliers prohibitively expensive.
Japanese price drops
Indeed, in the face of a declining domestic market, Day notes that the Japanese are looking more and more to the North American market. The softening yen has led to a 15 to 20% decline in the price of Japanese diode lasers in the last year, driven purely by the exchange rate. This increased competitiveness could put more price pressure on other suppliers in this market.
Kevin Slocum, an analyst from Soundview Financial Group, disagrees. "I'm not seeing Japanese price drops have an effect on the telecom market." On the other hand, he admits that with diversified companies, tracking the direct effects of the Asian market on results is non-trivial. "It's hard to strip out businesses and get to core growth."
Slocum does acknowledge that projects in Asia have been affected, but doesn't necessarily consider the scope of the problem to be significant. "For example, Harmonic Lightwaves have seen projects they're involved with dragged out, which has definitely had an effect on their business." Having said that, however, he points out that the company's relative size means that their ability to swing other company's financials is limited.
Positive outlook
In the burgeoning DWDM arena, Slocum doesn't see the Asian slump as having a strong impact. "Lucent doesn't feel that there are too many projects in China that they've lost out on," he observes. "On the other hand, Ciena used to talk about China and now they don't any more." He suggests that cost is the root cause of the turnabout. "The difference may be based on price margin between Lucent (roughly 40%) and Ciena (roughly 50%)." He also notes that Corning has been strongly hit.
"But I'm just not seeing that much visible evidence among the companies I cover in the communications area. The US market has been strong and is offsetting [Asia]." Slocum is not dismissing the issue, however. "The [Asian] situation is becoming greater in proportion, not lesser." In the current clime, companies practicing economic isolationism may be safer. "I'm more concerned about companies dependent on global opportunities."
Slocum winds up on a positive note. "In general the overall tone for optical communications has remained pretty healthy," says Slocum. "I feel pretty good about market on telecom side."
Steinberg agrees, though he is somewhat more conservative. "There may be a slowdown but I wouldn't say a slump. This is core infrastructure that people are building," he observes. "I don't believe that there will be a downturn.
As to the recent spate of layoffs, he remains undaunted. "When you're ramping up for 25% [market] growth and you're only going to see 15% growth, people are going to use layoffs to correct."
Other markets
The diverse nature of the photonics industry limits analyst coverage to a few specific applications area. Minimal information was available for spheres outside of the semiconductor and telecommunications industries. However, other photonics markets are likely to feel some effect from Asia's economic woes.
Suppliers of research and development or manufacturing systems are witnessing some slowing. "The exchange rate between Asia and North America has had such a swing that there is virtually no money for R&D equipment coming out of Korea or southeast Asia," says Day. "Companies in those sectors will have to tighten their belts."
While the photonics industry will not remain untouched by the Asian storm, the overall picture appears reasonably optimistic. Fiber optics analysts, in particular, are largely undaunted. In the semiconductor equipment market, experts forecast a difficult 1998, but expect recovery to begin toward the end of 1999.
"There are some effects which need to still play out," says Risto Puhakka of VLSI. He holds out hope for Japanese recovery, however. "If their economy gets stronger, it will have a positive impact." All eyes remain on Asia, but the photonics industry will survive.