Read about Capital Spending and Photonics, Online Educational Resources, Reconsidering Smart Cities, Special Events, New Reports and Other Noteworthy News, Opinions & Opportunities
In this Issue:
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Why Capital Spending is So Important to Photonics
The segment of the optics and photonics industry most impacted by the current economic crisis will be the vendors of machine tools to make heavy equipment. When car sales decline as much as 50%, there is less demand to buy new tools to make the cars. Likewise for tools to make aircraft, when planes are being taken out of service as travelers stay home. However, the impact varies even within the machine tool sector, depending on the type of end user.
Deere & Company provides a useful example. The company makes heavy equipment for agriculture, construction and forestry. In the quarter ending 3 May, Deere saw sales fall 18% from the previous year, as the crisis swept the globe. Deere expects its sales of agricultural equipment to decline 10-15% for the year ending 31 October. Note that while the pandemic has severely impacted farmers and the overall food supply chain, the demand for food continues.
Deere expects a more dramatic decline of 30-40% in sales of construction and forestry equipment. This is due to the uncertainty surrounding the depth of an oncoming global recession, which would reduce demand for construction and construction materials. Deere’s own spending on new capital equipment—to make its own products—dropped 10% in the last quarter, to US$ 441 million.
The semiconductor industry provides a more promising example. The chart below shows the WSTS estimates of annual semiconductor manufacturer revenues, compared with IC Insights estimates of annual capital spending by those companies over the same period. Note that the relative variation in the capital spending on manufacturing equipment is greater than for sales of the semiconductor end product.
Source: WSTS and IC Insights (2020).
Included in the capital expenditures, called capex, are microlithography and inspection tools. Sales of these tools mimic the mathematical derivative of the semiconductor sales, and varies much more in economic cycles than the chip sales, which in turn varies more than the installed base of chips.
However, a forecast on 16 April from IC Insights projected nearly US$ 100 billion in capital spending in the industry this year, a decline of only 3%, despite the crisis. Even if the forecast turns out to be optimistic, it illustrates that the sector doesn't come to a complete halt, that the industry must continue investing in new equipment to stay competitive.
The Apple iPhone provides another example. Each new iPhone today includes a display, image sensors and an LED lamp—all optics and photonics end-products. The chart below shows the cumulative shipments over many years of iPhone production (in blue, left axis). The installed base of iPhones in current use is much less than this, but would have a similar shape, and would represent the revenues generated to the wireless service providers. The green line indicates sales of new iPhones (right axis), oscillating with the introduction of new models. Think of this as the first derivative of the installed base of iPhones in current use. (See also the October 2018 issue of OSA's Optics & Photonics News and the June 2018 issue of the OIDA newsletter).
Source: OIDA (2020), from Apple financial data.
The red line in the next chart illustrates the step-wise levels of new manufacturing capacity that might be required to produce these iPhone volumes, represented in terms of iPhone volumes. This new capacity might require laser-based cutting and welding tools, and machine vision for automated manufacturing lines—that is, optics and photonics to make the phones. The columns at bottom illustrate the additions in manufacturing capacity that might be required to ramp volumes. Note that once the sales reach a saturation level, further investment in manufacturing capacity may not be necessary.
Source: OIDA (2020), from Apple financial data.
This is meant to be illustrative; we are not suggesting that these are the actual steps in capacity that Apple’s suppliers implemented, as Apple's manufacturers continue investing in new manufacturing lines. For example, customers continue to invest in new product lines and take advantage of attractive discounts and financing to make investments they were planning to make eventually. But it illustrates how such capacity can be viewed as the second derivative of the installed base and the first derivative of new sales, and how it is more "clumpy" and cyclic than those end-product shipments.
This second derivative effect shows up in many places in the optics and photonics industry, even if we cannot quantify it. What this means for optics and photonics is that sales into the “second derivative” market—equipment that is used to make other end products—tends to have deeper cycles in recessions than the end-products themselves, and of the overall economy.
Zooming Through the Pandemic
The pandemic has changed how we live and work, and we hope that you are finding the balance what works for you and your company. Online events are now the norm, at least for the time being. We understand if you feel like the subject of the cartoon, confused and zoomed-out. But we want to be sure to point out some excellent resources we have to help the carry on through this crisis.
First, check out OIDA's upcoming and recorded webinars, including its special series on managing a business through the crisis and a full list of related resources here. The 7 May webinar on Insights from the Investment Community noted that the optics and photonics sector, or at least in the optical communications vertical market, is in a better position today than in the Telecom Bubble and 2008 recessions. But, venture investors will be unforgiving in the current climate, even if a startup’s setbacks are not its own fault.
And there is much more! Check out the OSA We Are On webpage for more high quality webinars on career development from the OSA Foundation and the OSA Career Lab. SubOptic, a partner with the OSA Foundation's Subsea School, offers webinar content on pandemic-related issues around the undersea fiber network business. See here for more information. We also feature many upcoming programs on technology, including the 5G Summit on 20-21 October.
For more on our webinars, go to OIDA Events and Programs and OSA We Are On.
Reconsidering the Smart City
We said in the April 2020 OIDA newsletter that economic crises tend to accelerate outcomes. But which ones? Well, one is the demise of Toronto's Quayside project, led by Sidewalk Labs. It seemed already doomed, even without the pandemic, but a crisis has a way of reordering priorities. On 7 May, Sidewalk Labs announced the end of the project (here).
The Quayside project was ambitious and utopian, one of the smartest of Smart Cities. Sidewalk Labs and Toronto began in October 2017 with the planning for a sustainable and affordable community in Toronto's waterfront area, applying the best innovations in technology and urban design. Sidewalk Labs is a subsidiary of Alphabet, the parent of Google, and Sidewalk enjoyed the resources and attention that Alphabet can throw at such an initiative.
View of the Toronto waterfront area. Source: Urban Hub.
The grand technology project attracted a lot of media attention, but suffered from hubris. Big Tech has a reputation for favoring shiny new technology that offers incremental benefits at best, over understanding a complex landscape of stakeholders and their real needs. Cities have hard problems that are messy to manage. They are evolving, open systems—unlike the data centers that Alphabet manages.
The closure of the project says something about the idea of Smart Cities. OIDA explored the topic as a possible theme for our community, but concluded that it was not a single thing, but whatever you want it to mean. To GE's startup subsidiary Current it is intelligent lighting. To the driverless car makers it is smart traffic management. To Verizon it is 5G wireless technology and the Internet of Things. In other words, it's everything and nothing. In fact, Verizon and AT&T were reported backing away from Smart City initiatives earlier this year (here). Take note: they are technology providers that know about working with municipalities.
OIDA spoke to Sidewalk Labs at CES 2018, and it appeared then the Toronto Quayside Smart City was essentially a real estate development project managed by Google's Big Data algorithms. The optics and photonics technology itself was not interesting or important to the project.
Artist conception of the Toronto Quayside Smart City. Source: Urban Hub.
It didn't help that the public is becoming increasingly wary of Big Tech's ability to manage technology, especially if it involves so-called surveillance capitalism—profiting from the control of personal information. And with a distressed Toronto real estate market and millions of people newly unemployed in Canada, there's likely little appetite for expensive, utopian projects.
The closure of the Toronto project doesn't discredit the many technologies that have been proposed for Smart Cities. We expect that many Smart City projects will go forward, including many that involve optics and photonics. But they are better understood as part of specific trends, such as 5G wireless networks, intelligent transportation systems, or efficient lighting technology. The catch-all "Smart City" concept has not been useful with regard to the things that optics and photonics can do.
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The COVID-19 pandemic has disrupted the global economy, but the effects on the optical communications sector are complicated. There is more residential demand for videoconferencing and movie streaming, and cloud services, but providers may lose significant revenue from small businesses. Spending on capital equipment tends to fare worse in recessions, yet the communications industry will likely do better than many. Lisa Huff will discuss how the current pandemic is likely to affect the revenue forecast for the optical communications industry, and address your questions. Lisa Huff is Senior Principal Analyst in optical components for the market research firm Omdia.
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OIDA (OSA Industry Development Associates) Council
Thank you to the volunteers who oversee the programs and services available to the Industry Community.
- Simin Cai,
- Claudio Mazzali,
Corning Research &
Development Corp, Past Chair
- John Dexheimer,
LightWave Advisors, Inc.
- Turan Erdogan,
- Amy Eskilson,
- Christoph S. Harder,
- Anjul Loiacono,
- Rick Plympton,
Optimax Systems, Inc.
- Debbie Wilson,
Lumentum Operations Inc.