Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
The litmus test for speciality optical fibers
The litmus test for speciality optical fibers
Keywords: Fibre optics
It's getting to that time of year again, when we in the speciality optical fibre market keenly anticipate the event that will provide a brief glimpse of the year ahead; OFC 2004 (Optical Fibre Communication Conference and Exposition). It was at OFC 2000 in Baltimore, at the height of the Telecoms boom, that we experienced one of largest number of attendees – almost 40,000; since then however the industry has certainly taken a battering from Telecom's "Nuclear Winter". While this has knocked confidence and visitor numbers to OFC, the exhibition is still seen as the benchmark for forecasting what will, and more recently, what will not happen in the year ahead.
The analysts got it wrong
At present the speciality fibre market is at a very interesting stage due, in part, to guesstimates forecast by industry analysts during the boom, which set expectations high for many within and outside the industry. The precise reasons for this profound error, we may never know. But it seems likely that double counting, projections of consistent and continual growth rates, together with a basic lack of understanding of the market all played their part in analysts predicting, incorrectly, that the industry was set to be worth around $1.4 bn by 2007, driven by compound annual growth rates of 40 per cent or more. As any speciality or niche marketer will tell you, business volumes are typically dominated by a relatively small number of relatively large customers and with quantities often too small to make true second-sourcing viable, the net result is that companies chase the same business – that's why domination of a niche isn't just a "good thing", its essential. So if you size your market simply by adding up the forecasts of the main players, without cross-checking against the market, you will get a serious over-estimate, every time.
Venture capitalists turn their attention to the market
The analyst prophecies and the promise of a virtually virgin market with such a high net worth captured the attention of venture capitalists who, with the intention of making a quick buck, injected money into any businesses looking to enter the industry. Most of these start ups did not seem to plan or expect to produce anything and looked forward to being acquired by much larger firms for their technology as the market continued to "Sky Rocket". When this did not happen, many of these companies were left with surplus stock and a pressing need to generate immediate cash flow – once cost and price part company in this way, damage to the market is an inevitable result.
Despite their lack of experience in the volume manufacture of special fibres (1,000 km per annum is "huge" in speciality terms), these companies have naturally targeted the largest of current opportunities in fibre optic gyro and acoustic (hydroplane) segments with the result that market prices have been driven down. A natural result of market conditions and the effect of supply outstripping demand I hear you cry; but no, this is not quite so. Ultimately, while volume is important for the success of vendors (it is possible to sell fibres at several hundred dollars per meter and lose money every time – believe me!) and as anyone working in aerospace and defence will tell you, fibre performance and longevity are key requirements for speciality fibres. Fibres developed in haste will not have been subjected to extensive testing to ensure reliability and lifetime performance. Without genuine experience of volume manufacture, to high specifications and, more importantly, tight tolerances, the future price promises made by the new entrants become little more than empty "guesstimates".
As these new companies continue to flood the market with surplus inventory, the danger is that speciality optical fibres will become commodities – thought of as little more than minor variants of the telecommunications fibre that now sell for two or three cents per metre. Without exception, and irrespective of current conditions, all major consumers of speciality fibres need a secure and consistent supply of Quality product, above all else. Unfortunately if speciality fibre prices slide to commodity levels, I fear that many of these companies will not survive long enough to fulfil these fundamental needs. Furthermore, these new entrants into the industry will have set the market's expectations of reduced costs and low performance fibres for years to come. I believe the legacy of this approach will outlive many of its creators and detrimentally affect the rest of the market in the process.
Experience has shown that the longer a company has been in operation and the greater its understanding of the technologies of its target markets, the greater the consistency and the higher the quality of the product. In the current environment however, the market does not have a great deal of supplier loyalty and as prices are driven lower, some purchasers are sourcing products with cost as the only specification. Quality and performance, it would appear, is now of secondary importance – a worrying trend I'm sure you'll agree.
Within the industry we all know that it takes at least 10 years to take a technology from first concept to commercial success. And even 20 years is not unknown. Even the EDFA, the rise of which is generally considered to have been meteoric, took 7 years to achieve its first, real commercial implementation and another seven to become a fully-engineered, volume product. In 20 years, the fibre gyro has achieved a market penetration of less than 10 per cent. A direct result of misleading analyst predictions and a handful of industry "pundits" caused some of the new businesses to enter the industry believing that the whole process could be completed in less than 3 years.
Manufacture of components move to the Far East
Despite the nuclear winter that has beset the Telecoms industry in recent years I do believe that there are some developments in the fibre market, as we see parts of the industry maturing. Where telecoms components manufacturing is concerned there is certainly some growth in China. In recent years the manufacture of these components has been moving towards areas with low labour costs and away from Europe and USA. During a visit to China in 2002, I saw 13 EDFA manufacturers in South and Central China with hardly any business however, following a recent visit in October '03, I met at least five manufacturers who won new business or were on the verge of being awarded new contracts. These suppliers were historically producing components for use in the US, Europe and to fuel the Japanese datacomms boom. More recently an increasing fraction of production appears to be for indigenous use.
Defence post 9/11
The other significant market for speciality optical fibres is for applications in the Defence and Homeland Security industries. Buyers within this industry tend to be conservative and prefer to purchase from established companies, unlike the now "fickle" Telecoms market. This is mainly due to product development and service lifecycles that may easily exceed 20 years and a requirement for continuous supply that looks unfavourably on newcomers. I remember when Telecoms was a similarly challenging proposition some 10-15 years back – until the "old boys" network was challenged and successfully broken by the likes of Ciena!
Most start ups have a very old fashioned view of the defence market believing, wrongly, that it is still living in the Regan era when unlimited budgets were at the disposal of the Department of Defence for the likes of the "Star Wars" programme. During the Cold War, the United States faced one large consolidated enemy and the weapons of choice were long range Intercontinental Ballistic Missiles as opposed to the precision guided weapons systems we have now. Post 9/11, with the emphasis now on homeland security and a more intangible enemy than during the cold war, budgets are a great deal more focused.
The current defence philosophy is to minimise casualties amongst civilians whilst keep soldiers out of harm's way. Therefore the need for highly accurate "smarter" munitions has never been greater. It is thought that in the first Gulf War only around 20 per cent of the missiles were "guided", however during the recent conflict in Iraq almost all the missiles were smart munitions. Therefore fibre optic gyroscopes are ideally suited for this due to their compact size, reliability and G-insensitivity. Within the next 5 to 10 years, it is likely that much of the low-end, non military (i.e. that which demands neither sub 10 degree per hour precision nor G-insensitivity) market is satisfied with the MEMS-based (Micro Electro- Mechanical Systems) coriolis gyro. The "Holy Grail" for FOG may then be to offer a viable and reduced-cost alternative to the ring-laser based guidance systems seen in the tactical market segment within airborne and seaborne applications. The reward for the gallant knight who finds the Grail would be a 20 fold increase in orders – even within a static market.
OFC 2004 and beyond
To sum up, the telecoms industry is active in certain niches areas, but the movement seems to be generally downwards at the current time. In Defence, the focus for both fibre and components used in tactical deployments must remain on quality and performance ahead of cost and volume if a device is to meet its operational requirements. New entrants into the industry may cause the commoditisation of speciality single mode fibres and volume production and cost may take precedent over fitness for purpose and performance, but this model is destined to fail in the long-term. It will, I have no doubt, be the demise of those who created it.
Most of the "seasoned" players in the speciality fibre market fail to understand why Venture Capitalists can behave like children showing interest in Ice Cream – only wanting the flavour of the month! It is vital that analysts make forecasts that are not only accurate but also realistic if the speciality fibre market is to start to lift out of the downward curve. We have seen this mistake made before when in 2000 analysts first predicted that the market was worth $200 m it may have actually been worth $100 m maximum. When multiplying percentages to make predictions for compound growth, it is easy to lose touch with reality. Needless to say, accurate forecasts about the market have to be made to enable companies make the correct strategic decisions faster at what is a crucial time. Analysts need to keep a closer eye on the market and consult industry insiders. For some companies this could be a matter of life or death.
Obviously, visitor numbers at OFC 04 will be further from the numbers we experienced in Baltimore in 2000, but I am confident that the vast number of the visitors to this year's OFC will actually be there to drive important projects and make purchasers with "real" budgets. At previous shows, whilst we have had record number of visitors most of them had more time to spend than budgets, with the freebies being the most popular on-stand attraction. I am confident that at this year's event we may actually get to spend more time with the genuine business prospects, which I am sure, will be welcomed by all.
Sincerely,Dr Chris EmslieManaging Director, Fibercore LimitedE-mail: Chris.Emslie@sciatl.com