U. S. Bureau of Industry and Security - Defense Market Research Reports: Optoelectronics (1994)

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Optoelectronics 1994

Critical Technology Assessment of the U.S. Optoelectronics Industry

EXECUTIVE SUMMARY

The main objective of this assessment is to provide policymakers in the Congress and the Executive branch with needed information and analysis on the production and technology status, economic performance and international competitiveness of private sector firms in the optoelectronics area. The primary source of information for this report was a written survey of 107 U.S. companies (and U.S. operations of foreign companies) involved in various aspects of optoelectronics. This survey was conducted by the Department of Commerce, Bureau of Export Administration (BXA) between July 1992 and February 1993.
For the purposes of this assessment, optoelectronics was very broadly defined as all systems, equipment, or components which emit, modulate, transmit and/or sense light or are dependent on the combination of optical and electronic devices. The market applications for optoelectronics are diverse, and include consumer products, communications, transportation, information, medical and military.

Optoelectronics Technology

Just as the invention of the transistor several decades ago led to dramatic changes in many aspects of daily life, the marriage of optics with electronics promises to lead 'o similar leaps in technology, Two optoelectronics advances in particular have spawned myriad advances throughout commercial and military industry: the invention of the laser in the late 1950's and optical fiber in the 1970's.
Optical technologies combined with electronics offer smaller, faster, and smarter products and weapons that are more reliable, require less energy, and are more cost-effective than those with electronics alone. Optoelectronic technology also has the potential to unblock some of the bottlenecks that are hindering electronics, such as pin congestion on integrated circuits, tangled tracks on printed circuit boards, interference, and signal degradation.
Optoelectronic technology is of particular advantage to the U.S. military across many application areas. These include data communications and telecommunications for command and control and high bandwidth video transmission for intelligence, reconnaissance, display and electronic warfare systems. The technology also has wide use in weapon-delivery platforms, sensors, guidance systems and optical computing. The resistance of optoelectronic components to electromagnetic and nuclear radiation interference is particularly desirable for military applications, and, their lightness allow for fuel savings and greater ammunition payloads.
The largest market for optoelectronics is in industrial and business applications, which accounts for about 28 percent of total sales. In particular, producers of optoelectronic information systems, lasers, industrial equipment, and components are dependent on this market for sales.
The military market accounts for the second largest share of total optoelectronics sales, with about 23 percent. Over 60 percent of the companies in the BXA survey participated to some extent in the defense market. The other major market for optoelectronics is communications (18 percent of sales).

Optoelectronics Manufacturing

BXA's survey captured nearly $6 billion in domestic optoelectronics shipments in 1991. A control group of companies providing shipment information f~ r ail years shows the total optoelectronics shipments fell by about eight percent in i990 from 1989 levels. The drop in 1990 is also evident in the raw data figures. Since that time, however, shipments have rebounded and companies expect the upward trend to continue through 1995.
The average production capacity utilization rate was slightly over 63 percent in 1991, with a range of just 3 percent to 100 percent. About one quarter of the firms in the survey were operating at less than 50 percent of capacity that year. In contrast, the average capacity utilization rate for industrial production as a whole was about 79 percent in 1991.
Capacity utilization rates varied by optoelectronic product group, with the display and defense groups showing lower than average utilization rates (54.7 percent and 57.5 percent, respectively) Nearly one-half of the display companies and over one-third of the defense group were operating at less than half of their capacity production levels.
Thirty survey respondents reported closure of 3S domestic optoelectronics production/research operations since 1972; all but one of these was since 1980 and 24 closings were since 1990. An additional seven companies reported they expect to close down a facility or product line within the next two years. Production lines that were closed ranged from semiconductor laser diodes, to flat panel display operations, to optical guided munitions equipment.
Production lines targeted to be closed in the future include optical modulators, switches, wavelength division multiplexers, optical data communications equipment, solar cells, photo detectors, lasers, and non-active matrix and plasma displays. The most frequently cited reasons for shutting down facilities and product lines were low profitability, consolidation of operations, and declining demand for particular product. Loss of market share to imports and loss of market share to domestic competitor were also mentioned.
Twenty-six survey respondents reported they expected to expand their optoelectronics operation; between 1992 and 1996; three of the new facilities were planned to open overseas. Product lines to be added include video transmission equipment, transmitter/receiver modules, lasers, blue LEDs, fly-by-light flight control systems, projection displays, non-active and active matrix liquid crystal displays, optical cable TV distribution systems, bar code readers/scanners, optical military sensor equipment, optical munitions guidance equipment, and laser diodes.
Investment in optoelectronics production facilities has followed a generally increasing trend, with a large jump between 1991 and 1992, due primarily to major investments by one or two firms. Forecasts for the future show a continuation of the increasing trend.
The bulk of capital investment, however, is in machinery and equipment. Capital investment in machinery and equipment has been more volatile over the 1989-1992 period; forecasts for the future show a generally increasing trend. Despite the trend toward increasing capital investment, total investment in optoelectronics plant and equipment in the United States is relatively low when compared with some foreign competitors (especially Japan).
Optoelectronics employment increased about three percent per year in 1990 and 1991, and was virtually stagnant between 1991 and 1992. Those companies making estimates for future years expect their employment to remain essentially unchanged through 1994, with a modest increase anticipated for 1995. The average size of an optoelectronics establishment is about 750 employees.
About 54 percent of employees in optoelectronics facilities were classified as production workers, while scientists and engineers accounted for 16 percent of the total. Sales and technical service accounted for 14 percent of employees, with the remaining 16 percent classified as administrative.

Research and Development

In 1991, the surveyed firms spent over $884 million on, optoelectronics-related R&D. R&D increased between 1989 and 1991, but then fell slightly in 1992 from 1991 levels. Predictions for 1993-1995 show an increasing trend. Although the decline is small, the lagging economy in 1991 may have left fewer funds available for R&D in 1992, coupled with the start of defense budget cuts affecting federal-funded R&D.
On average, firms spent about 11 percent of their revenues on research and development. The range was great, with one firm spending less than one percent of sales revenue on R&D, to several (start-up) firms that spent more than their revenues in certain years.
Companies themselves funded 74 percent of the total R&D. The federal government accounted for the second greatest amount of REED funds, with 23 percent of the total. Defense organizations were responsible for the vast majority of government-funded optoelectronics-related R&D among surveyed firms, accounting for nearly 90% of the total government funded R&D in 1991.
The remaining few percentage points of total R&D spending were accounted for by funding provided by customers, foreign governments, and through partnerships with other firms.
In the field of optoelectronics as in many emerging technology areas, much research and development is performed outside of private firms - at government laboratories and in academic institutions. The majority of optoelectronics research at academic institutions was funded by the federal government; the National Science Foundation was the largest single source of funds.
All surveyed universities and government labs indicated some degree of cooperation with private sector firms in the area of optoelectronics. Technology commercialization is a relatively new goal for both of these types of organizations, and increasingly, the assets and resources of federal labs - personnel and equipment -- are being made available to private sector finals.
Technology transfer to industry is achieved through personnel interchange, joint research, and joint meetings. Since these programs are relatively new, the overall success of technology commercialization programs of universities and government labs is as yet unclear.

Defense Markets and Effect of Budget Cuts

The firms in the BXA survey group reported supplying optoelectronics products to a wide range of weapons systems and other military equipment. The items supplied ranged from optoelectronics components such as photo detectors and laser diodes, to subsystems such as optical gyroscopes, to military systems such as the LANTIRN - a two-pod navigation/targeting system for night and under the weather ground attack.
About 20 percent of total optoelectronics shipments were reportedly for defense applications. A substantial minority of firms (about 20 percent) are heavily dependent on defense shipments (more than 50 percent of business). Over 10 percent of the establishments were almost exclusively defense producers.
Thirty establishments reported that defense budget cuts will likely have a significant effect on their operations. Frequently mentioned product categories that will be affected by defense budget cuts include optical sensor equipment such as FLIR and night vision, CCD's and focal plane arrays; other photo detectors; optical munitions guidance equipment; and solid state lasers.
Because of the nature of optoelectronics, many companies do not perceive that there will be major problems in converting their manufacturing or research operations to commercial production. Many supply similar or identical products to both military and non-military applications; others said that while their products were currently geared toward defense uses, they could be dual-use (e.g., fly-by-light for use in civilian aerospace applications; military sensor work converted to production automation, industrial security, or medical censors; use of FLIRs for border control, drug interdiction and law enforcement).
The biggest concern/problem cited by the respondents in converting their operations from military to commercial applications was financial.

Financial Performance

Aggregated sales by the surveyed optoelectronics firms have consistently risen over the 1989-1992 period, and are forecast by the survey respondents to continue to increase. Sales in 1992, however, were only about five percent higher than the previous year, a smaller increase than the more than 12 percent increase in each of the two previous years.
Pretax profitability was relatively stable over the 1989-1992 period at about two percent of sales. For comparison, the average profitability for all durable manufacturing was slightly over one percent in 1991 and about three percent for the first three quarters of 1992. About one third of the companies lost money (negative profitability) in any given year 1989-1992. Firms in the laser, display, and components categories had lower than average profitabilities.

Sourcing

Survey respondents listed specific examples of essential components for which they are dependent on sole/single sources of supply, often foreign. One material - glass - was by far the most frequently mentioned item. Other components mentioned include diode lasers, photo multipliers, optical fiber, electronic circuits, high reliability LED'S, photo diodes, and optical switches. In most cases, firms indicated that the loss of supplies of these items would halt production until another source could be qualified, often at greatly increased costs.
The companies in the survey relied on a wide range of imported machinery and equipment, parts, subcomponents and raw materials to produce their optoelectronic products. In the machinery and equipment category, test and measurement equipment was the most frequently mentioned imported item, the primary source of supply for which was Japan. The reason for importing given was that no U.S. source was available, as well as price.

Competitiveness

U.S. firms believe that they have a technological advantage, particularly over their competitors in the Pacific Rim. U.S. firms also believe their have a slight technological edge over European firms, but ranked their Japanese competitors at or near parity for most technology-oriented competitive factors.
Japanese firms were rated most competitive in the area of displays, and above average competitiveness in the areas of communications and optical information systems. Japanese firms were ranked below average in industrial equipment, lasers, and particularly in the defense category.
Firms in the Pacific Rim were universally rated technologically weaker by the U.S. firms across all product groups. However, they were rated the strongest competitors in the optical information category, which includes such well commercialized items as fax machines, copiers, and printers.
European firms were also consistently rated less technologically competitive by the U.S. survey respondents. They were, however, rated as near equals to U.S. firms in the laser category and are also fairly strong in communications.
South Korea was named as the country with the greatest potential to become a major competitor in the future, particularly in the areas of displays and communications. Also mentioned frequently in this regard was China for communications, industrial equipment, and component categories.
U.S. firms believe they have a substantial lead over their Pacific Rim competitors with regard to product and service performance competitive factors (e.g., price, quality, delivery and customer satisfaction). They also believe they have a slight lead over their Japanese and European rivals on these factors. Surprisingly, price does not appear to be a significant advantage or disadvantage for any particular region.
U.S. firms considered the overall business environment in the United States their biggest disadvantage compared to their competitors in all other regions. This category includes such factors as access to and cost of capital, the legal and regulatory environment, the cost and quality of labor, and the support of government. With the exception of labor, U.S. firms uniformly rate themselves at a competitive disadvantage vis-a-vis competitors, particularly in Japan.
Lack of access to low cost capital was perhaps the single most frequently cited obstacle to U.S. competitiveness in optoelectronics. Similarly, government policies that discourage investment and R&D were also frequently mentioned, as was the lack of a coherent U.S. government "industrial policy."
Other obstacles to U.S. competitiveness were external, including inability to penetrate foreign markets due to trade barriers, and alleged dumping by foreign firms in the U.S. market. Some obstacles in this category are the flip side of those in the U.S. business environment, such as the close relationship between foreign governments and their industry, the ability of foreign competitors to finance high levels of R&D, lower labor and other production costs abroad, and better educated workforces overseas.
Responders were mostly optimistic about their competitive prospect. Over 60 percent of survey respondents expected the competitiveness of their optoelectronic products to improve somewhat or greatly over the next five years. About one fifth of the respondents anticipated no change in the competitiveness status. On the other hand, about 20 percent of firms expected their competitiveness to decline greatly or somewhat in the near term.