World markets: Growth in Asia, Europe flat

NASHUA, NH/LONDON, ENGLAND - The strength of the U.S. dollar is helping Europe and Asia regain some economic stability and growth, although not as much as hoped for in Europe. For example, in stark contrast to the last decade—which was marked by economic stagnation and periods of recession—Japan saw economic growth of about 2% in 2005. The turnaround is being attributed to an increase in consumer spending and “booming trade,” according to government reports.¹ In addition, companies in Japan are investing more and hiring more, further stimulating consumer confidence.

“In Asia, companies are focused more on the use of optoelectronics for entertainment and consumer applications, so they did not see the same ‘bubble’ as those companies focusing on the communications segment,” said Michael Lebby, executive director of the Optoelectronics Industrial Development Agency (OIDA; Washington, DC). “In Japan, OIDA predictions show that optoelectronics will become a trillion-dollar market by 2015.”

China continues to exhibit significant increases in both the production and consumption of lasers, especially laser systems for domestic industrial applications such as marking and fabric cutting. In addition, despite concerns about outsourcing and price cutting, laser companies continue to send the lower-cost segments of their manufacturing operations to Asia; witness Coherent’s decision in November to cut a third of its Auburn, CA, operations (80 jobs), where it makes power supplies, and shift the manufacturing to China and Malaysia, citing the “commoditization” of these products. However, for the time being anyway, China still appears to be a net importer, rather than an exporter, of lasers and optoelectronics.

“The industrial laser market in China is expected to continue double-digit growth, still driven by low-cost marking equipment, both solid-state and CO₂,” said David Belforte, publisher and editor-in-chief of Industrial Laser Solutions. “The market for high-power lasers is being led by an increasing demand for imported high-quality CO₂ laser cutters. China’s industry is slowly adapting to laser technology for welding, drilling, and cutting but the market today is still dominated by the international companies that have located their production facilities in China and consequently use laser processing equipment in their home plants.”

Mixed fortunes

The European economy, on the other hand, is not faring as well as expected, according to Samuel Kahan, senior economist at the Federal Reserve Bank of Chicago. The machine-tool sector, for instance, grew only 3% in 2005, according to Belforte.

“Economic activity in Europe in 2005 was a disappointment,” Kahan said. “Our other forecasts were pretty good. We anticipated solid growth in the United States of 3.5%, which looks pretty accurate. Japan is recovering from the disaster of the last decade, and our outlook (2.1% growth) was in line with that. And while China appears to be moderating a bit, they should still see 8% to 9% growth. The only surprise is that economic growth in the E.U., instead of 2%, is about half that. The hope was that the E.U. would be able to integrate its markets, but that doesn’t seem to be happening at a quick enough pace.”

Looking more closely at several European companies, 2005 was indeed a year of mixed fortunes. In the industrial laser sector one of the oldest companies in the business, Ferranti Photonics (Dundee, Scotland) went into liquidation in April, after having operated continuously since 1970 (see Optoelectronics Report, April 15, 2005). Similarly, after watching its stock price plummet in April when it failed to land a critical contract with BT, its largest customer, Marconi (London, England) agreed to a deal with Swedish telecom giant Ericsson (Stockholm, Sweden) that gives its former business rival assets representing about 75% of Marconi’s turnover. Marconi is to be renamed telent plc and will be a services provider to telecommunications operators and enterprise customers.

There are some bright spots in the European laser business, however, most notably fiber-laser specialist SPI Lasers (Southampton, England). Originally specializing in telecom applications, the company’s focus was shifted by a new management team appointed in 2002 to producing lasers for a wide variety of market sectors and applications. In October, SPI floated on the Alternative Investments Market (AIM). Chief Executive Officer David Parker anticipates rapid growth for the second half of 2005 and for 2006 as adoption of the core products expands; as if to prove the point, in November the company announced two major contracts, both to supply pulsed lasers to customers in the laser-marking market, worth a combined total of between US$1.8 million and US$4.8 million before the end of 2006 (although the contracts are non-U.S.-based).

Moving away from the telecom sector has also worked for Intense (Glasgow, Scotland), formerly Intense Photonics. The company now designs and manufactures laser modules for the printing, defense, and medical industries, and it recently raised £2.5 million (US$4.3 million) in a further round of financing that it will use to ramp up production at its Blantyre facility. The company is reportedly looking at a possible flotation in the near future.

EU divided?

Turning to mainland Europe, in addition to strong showings by Rofin-Sinar and Trumpf, bottom-line improvement was reported by German optics specialist Linos (Göttingen) through cost cutting, which included reducing its German locations from five to three and expanding its production plant in Poland. In addition, Linos recently started construction on a new £5.3 million (US$6.2 million) facility in Regen, supported by funding from The Lower Bavarian government. Another German company, Jenoptik Laser (Jena) acquired 51% of fellow German firm Photonic Sense (Eisenach) and a 51% stake in Sinar (Schaffhausen, Switzerland), providing Jenoptik with what it describes as “the optimum platform for our digital camera backs.” And Jenoptik Laserdiode and Kantum Electronics of Japan founded a joint venture called Jenoptik Laserdiode Japan Co. (Tokyo), with the German firm holding a 33% stake in the high-power laser-diode venture.

The consolidation bug also hit Thales Group (Neuilly-sur-Seine, France), linking its subdivisions Thales Laser SA (Orsay) and DIS (Device hardening, Instrumentation and Safety; Colombes). Thales Laser separated from the company’s High Tech Optics business unit to join DIS, hoping to strengthen its position in the high-end laser markets. Optical-switch specialists Continuum Photonics (Billerica, MA) and Polatis (Cambridge, England) also merged, creating a new company called Polatis Inc. And Leica Microsystems (Wetzlar, Germany) was acquired by Danaher (Washington, D.C.), for 450 million Euros, which then sold off Leica’s semiconductor equipment division.

Another bright spot in Europe is the display sector, which was particularly active in 2005, especially in partnering with Asian firms. Japanese electronics giant Sharp Corporation (Osaka) and German TV specialist Loewe AG (Kronach) expanded their collaboration to meet the rapid growth of the European LCD TV market. Sharp increased its stake in Loewe, making it the largest investor with 29% of the shares. In The Netherlands, Philips transferred manufacturing of its monitors, entry-level flat screen TV products, and existing OEM monitor business to PV Technology Ltd. (Hong Kong). In addition, Philips is merging its mobile display system business unit with Toppoly, which has production facilities in Taiwan and China for advanced mobile display technologies such as low-temperature polysilicon and active-matrix OLEDs, to create a joint venture called TPO.

Similarly, Cambridge Display Technology (Cambridge, England) and Sumitomo Chemical (Osaka, Japan) have formed a joint venture, Sumation KK (Tokyo), to develop and supply advanced polymer OLED materials and formulated inks for use in display and lighting applications. Materials will be produced on behalf of Sumation by Sumitomo Chemical at its plant in Osaka, and the new company will carry out R&D in Japan and the UK. However, while CDT reported third quarter revenues of $6.6 million (three times the level of the preceding year’s third quarter) and gross profit of $2.9 million for the quarter (double the previous year’s third quarter), the year-to-date net loss was still $24 million.

It is interesting to note that the difference in fortunes between UK companies and those from mainland Europe has caused speculation in Scotland especially, where the past few years have seen the demise of several companies. There seems to be a growing feeling that manufacturing companies in other countries, especially Germany and France, get better support from their governments. One senior executive, who did not want to be named, claimed that the UK is pretty much alone in trying to apply the strict European guidelines governing state aid for industry. And there is some evidence to show that, with regard to state support, there is a wide variety of practice across Europe. In April the European Commission released the latest scoreboard of state aid across the EU. In 2003 the total amount of state aid granted by the then 15 Member States was estimated at 53 billion Euros (US$63 billion; 0.57% of the EU gross domestic product), with about 32 billion Euros (US$38 billion) earmarked for manufacturing and services. Germany has been consistently the most generous in terms of state aid, with 16 billion Euros (US$19 billion) in 2003 (0.8% GDP), down from 18 billion Euros (US$21 billion) the year before. France gave 9 billion Euros (US$11 billion; 0.6% GDP) and Italy 7 billion Euros (US$8 billion; 0.5% GDP). By comparison, the UK gave 4 billion Euros (US$5 billion; 0.3% GDP). In terms of GDP, Finland provides the most to its industry, with 2 billion Euros (US$2.4 billion; 1.4% GDP).

EU Competition Commissioner Neelie Kroes commented that she was “disappointed that the overall level of aid relative to GDP has not fallen in line with the commitments undertaken by the Member States themselves at the Stockholm European Council in 2001.”