Critical Technology Assessment of the U.S. Optoelectronics Industry
The purpose of this critical technology assessment is to provide policy makers in Congress and the Executive branch with information and analysis on the current technology status, economic performance and global competitiveness of firms in the optoelectronics sector. The majority of information for this report was obtained from a written survey of 368 U.S. companies involved in various optoelectronic activities. The survey was conducted by the Department of Commerce, Bureau of Export Administration (BXA) between October 1997 and April 1998.
This study is a follow up to BXAs previous February, 1994 Critical Technology Assessment of the U.S. Optoelectronics Industry. Similar questions were asked in both industry surveys, enabling BXA to obtain data showing long term changes in the industry.
Optoelectronics, for the purposes of this assessment, was broadly defined as systems, equipment, and/or devices which emit, modulate, transmit, and/or sense light or are dependent on the combination of optical and electronic devices. In the current technology-driven markets, optoelectronics are fairly ubiquitous; numerous products appear in communication, computer, business equipment, industrial, medical, transportation, military and consumer categories.
Many consider optoelectronics as todays enabling technology, especially considering this decades explosive growth in information exchange and the plethora of data that quickly threatens to overwhelm available storage technologies. Electronics, once the future of every new improvement, is starting to take a back seat as the photonics part of optoelectronic technology surges steadily forward, revealing its vast potential.
One opto-technology driver is the Internet, which has spawned many new trends, including increased use of electronic banking and on-line shopping. The escalating volume in phone and Internet traffic has pushed telecommunications networks into the realm that only optical fiber, with its much wider bandwidth, can satisfy. For audio and video, with increasing public demand for enhanced storage capability and increasingly graphics-laden products, again the solution is optical technology, with the prevalent media items like compact discs and the newer DVDs.
Great strides are being made in a number of areas. For example, refinements in manufacturing and design have made flat panel displays better and cheaper. Once used only in military and high-cost business equipment, high resolution displays are now turning up on a number of consumer goods, like personal digital assistants, cell phones and pagers. There is a new market in digital cameras, and lightweight, consumer-friendly video cameras are becoming the norm for many vacationers. In medicine, various types of lasers are being used in new applications in corneal reshaping, dentistry, dermatology, urology and cardiology. Even the ubiquitous light bulb is a target for change, with manufacturers of new high brightness light emitting diodes, which use less power and last longer, trying to steal that market.
The largest end market for optoelectronic products by far was in the computer and business equipment sector, with nearly 46 percent of the sales ($4.65 billion in 1996). The second largest sector was communications, with 20 percent of the total sales. The military market came in third at nearly 15 percent of sales, down from its position as the second largest category as determined in BXAs 1994 optoelectronics industry survey. These figures tend to confirm the expanding market seen in communications and the declining budgets devoted toward military spending. While three-quarters of the companies in the 1994 survey participated in the defense market, now only one-third of the current respondents manufacture products for the defense sector.
Device sales showed generally positive growth trends, with the respondents predicting annual overall growth of around 10 percent. The U.S. was the largest market by far, at 71 percent, with an expected growth of 9 percent between 1996 and 1997. While exports accounted for only 29 percent of the sales, their growth rate is faster than the domestic market, with the best growth region expected in China. The expectations for equipment sales were mixed, with a dip in sales for 1996 anticipated at 0.3 percent followed by a 4.8 percent sales increase for 1997. The U.S. was again the prominent market, accounting for 54 percent of annual sales. Domestic sales were expected to dip slightly then increase by 5 percent in 1997. For international sales, China was once again the leader in expected growth. While the Japanese market is expected to drop dramatically with the current financial crisis, one bright spot is the other Pacific Rim nations, where sales in 1998 are expected to grow by 27 percent for devices and 20 percent for equipment. Note that this data has not been adjusted for the current 1998 Asian financial crisis.
The average facility production capacity utilization for components was 70 percent of capability. This lower average utilization value than is often expected of major companies can most likely be attributed to the larger percent of smaller companies in the data group, which often run at lower capacities. Of all components, edge laser production utilization was the highest, at 82 percent, and solar cell production ran the lowest, at 20 percent. For equipment, the overall capacity utilization values are higher, with many companies maintaining a production capacity utilization of nearly 80 percent. Optical I/O equipment ranked the highest, at a near maximum production capacity of 98 percent, and the lowest product line production value was in image processing, at nearly 58 percent.
Employment in the optoelectronics sector was expected to grow by at least three percent, which matched the 1994 BXA surveys growth trends in 1990 and 1991. Many of the respondents indicated that the decrease in the U.S. labor force growth, currently 1.3 percent a year versus 2.5 percent a decade ago, has put extreme pressure on employers who need a steady supply of trained workers in this highly technical field. The shortage of skilled labor is a constant problem, and companies find themselves having to pay large amounts of money to attract engineering staff.
In 1996, technical staff constituted 10.5 percent of the respondents work force, compared to 1992 figures where they were 17.3 percent of the total. Interestingly, the percentage of manufacturing employees has also dropped, from 56.1 percent in 1992 to only 28.8 percent in 1996 (per Census data, the percentage of manufacturing employees for many industry sectors generally runs about 50 percent). The real increase has been in the marketing/sales/administration/other category, which grew from 26.5 percent in 1992 to 60.8 percent in the 1996 data. This could be explained by the participation of resellers/distributors in the recent survey; they were not included in the earlier survey.
Company investment in facilities and new equipment has maintained its upward growth trend, shown in the 1994 survey, with a much stronger growth in new plant purchases and expansions over new equipment. New plant expenditures increased by 44 percent from 1996 to 1997, then again by 83 percent for the 1997-1998 time frame. With regard to equipment, purchases for the 1996-1997 period were expected to grow by 10 percent, and again by 5 percent for the following year. With an array of new products becoming marketable, this was expected, as manufacturers will need to expand facilities and update production lines to build the new products.
In 1996, the surveyed firms spent over $1.9 billion on optoelectronics-related R&D. The data shows a continuing slight upward growth trend in research investment, similar to the trends in the 1994 BXA Survey. However, whereas the earlier report noted internal funding in 1991 as 74 percent of the total, in 1996, internal funding accounted for 90 percent of the available investment. Government spending, which was 23 percent of the total in 1991, has shrunk to 10 percent. This is most likely attributable to cutbacks in defense spending.
Interestingly, while the Department of Defense agencies were still responsible for about 66 percent of the 1996 government funding, in 1991 they accounted for nearly 90 percent. Thus, there has been a stronger shift toward funding from various non-defense government organizations, such as the National Aeronautics and Space Administration, the National Institutes of Health, and the National Science Foundation. With more emphasis on dual-use technologies, we expect an increasing percentage of R&D funding opportunities to come from the non-defense government sector.
Average R&D spending by the surveyed companies as a percentage of total sales was 8.1 percent, a decrease from the 1994 assessment average of 11 percent. This decrease can probably be attributed in large part to the across-the-board cutbacks in military spending, which funded many research projects. However, this is still significantly higher than the average investment in R&D for all industries, which was a mere 2.9 percent in 1995.
Overall, companies responding to the BXA survey were optimistic about their future competitiveness. Of the 401 responses (368 company surveys, some with multiple divisions) to the competitive outlook query, about one-third of the companies reported that their outlook will improve greatly. An additional forty-five percent expected their outlook to improve somewhat. About twenty percent of the respondents indicated that their competitiveness was anticipated to stay the same; only 25 firms (6.2 percent) believe that their business will decline somewhat or greatly in the near future. Overall, many manufacturers believe that they are standing strong in their market sectors. While individual companies may wax and wane, the U.S. optoelectronic industry appears to be quite optimistic that it is maintaining its technological leadership and will continue to do so in the years ahead.
Regarding business obstacles hindering their competitiveness, delays in product development was the item of most concern to the survey respondents. The second highest concern was high labor costs, followed by a lack of low cost capital. Foreign government support of foreign firms ranked fourth, and the lack of investment/R&D credit came in fifth. Of the top ten concerns, four centered around financial issues, and two focused on the poor quality of the workforce and the current educational system.
Some 63.3 percent of the companies surveyed rely on at least one foreign-made component or piece of equipment to manufacture their end product. Clearly, if there is no available domestic product, companies must source offshore, and both lack of a domestic source and inadequate domestic source came up as leading reasons for importing. Lower cost was the second leading reason, driving home the need for improved manufacturing efficiency in order to remain competitive. Better quality, ranked number four, was also a strong area of concern.
The diverse group of survey respondents listed dependencies on a wide variety of foreign sources for materials, components and equipment used in the manufacturing process. Some trends are apparent from a review of these data. Numerous survey respondents indicated dependency on foreign sources of optical grade glass because there was "no known domestic source." Sources of such glass were identified in Germany, Japan, and the United Kingdom. Another frequently mentioned dependency was ceramic packages/ferrules/substrates (most often from Japan). EG&G in Canada was often mentioned as a sole source for various photo diodes. Interestingly, several survey respondents indicated a dependency on "nonlinear crystals" from China (no known domestic source).
Of the firms responding, 43.2 percent indicated that they need foreign sources to maintain their current levels of quality and/or price. And, 54 percent said that they will continue to be dependent on foreign sources, as use of domestic suppliers will not allow them to remain competitive. When asked if they had a contingency plan if their particular foreign supplies were cut off, 18.2 percent of the responses were negative, indicating that they would have to end production of a particular product and in some cases the company would be forced to go out of business.
Some 208 of the 368 companies surveyed, or 56.5 percent, have been or will be affected by budget cuts of one kind or another. Defense budget cuts were noted by 133 of the companies surveyed. Of these, 46 of the firms were directly affected by defense budget cuts that seriously impacted their R&D funding, while 87 of the companies experienced budget decreases through canceled or reduced defense contracts. Understandably, the effect of these budget cuts varied from company to company. Recognizing the continual countdown in defense budgets, some companies have wisely diversified their markets to survive the decrease in the government business. Others have had to cut staff, close production lines, and initiate cost-cutting measures.
Non-defense budget cuts have affected or will affect 75 of the companies surveyed. Fifteen of these companies have already been affected and the remaining 60 stated that they could be distinctly affected by budget cuts. The government organizations that were mentioned the most were NASA, NIH and NSF.