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Read about the Effects of the Pandemic and Supply Chain Issues on Our Industry, Events, New Reports, and Other Noteworthy News, Opinions & Opportunities
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Optics and Photonics Profits Appear Steady
What are the effects of the pandemic and supply chain issues on prices and profits in our industry? The answer appears to be: surprisingly little, considering the global scale of the disruption. While there is talk of inflation and profit-taking in consumer products, an examination of selected optics and photonics companies suggests their profit margins are relatively consistent, or even increasing. This suggests that our industry is neither greatly squeezed by its suppliers' price increases, nor is our industry taking substantial profits from its downstream customers.
The strong demand on certain manufacturers allows them to raise prices or negotiate other favorable terms, such as longer-term contracts. Swings in prices that track industry surplus and shortage are common for some products (such as memory chips or displays), but many specialty optical products lack a "typical" price altogether.
Source: Joel Mishon, from CartoonStock
The November issue of this newsletter (here) discussed price behavior in our industry and presented the history and forecast of prices for LCD TV panels, according to DSCC (Display Supply Chain Consultants). A chart illustrated that display prices rose in 2020-2021, but began declining in late 2021 for several reasons: manufacturing was constrained elsewhere in the supply chain, the surge in demand during the pandemic may be getting satisfied and the sector was entering the usual seasonal cycle near the end of the calendar year.
The following chart shows profit margins for the display sector, according to DSCC. Margins increased during the pandemic. In fact, net profit margin—the "bottom line"—nearly doubled from about 8% to 15% for the sector, even as the gross margin (revenues less the cost of goods sold) moved only a few percent. The operating margin for the display equipment sales alone is at bottom, in green.
Source: Display Supply Chain Consultants (DSCC), with permission (13 December 2021).
The next chart shows the performance of some familiar optics and photonics companies. The gross margins range from about 30% to 50%. The gross margins vary considerably, with multiple companies showing declines in 2019 before the pandemic started but now returned near to the pre-pandemic range. The unweighted average gross margin gradually increased from 37% to 41% through the period. Excluding Lumentum, the unweighted average dipped but returned to the same level at 39%.
Source: Optica (January 2022).
The results are not greatly different for the operating margin and net profit margin. The unweighted averages for this set of companies also dipped in Q4 2019 before the pandemic began, but the operating margin grew from 9% to 15% and the net profit margin grew from 5% to 10% through the period. Excluding Lumentum, the unweighted averages dipped but returned slightly better than the pre-pandemic levels. (Coherent was excluded for calendar Q1 2020 because of its large and unique write off of goodwill for its Rofin acquisition and other impairments.)
Source: Optica (January 2022).
For this limited set of companies, it appears that supply chain constraints have not driven profits down, and in fact are slightly healthier in late 2021 than they were in 2019. That may be for reasons specific to this particular combination of companies rather than related to the pandemic, as seen in the wide variation from company to company. But it's welcome news as the pandemic enters a third year.
Supply Chain Webinar 02 February: To learn more, watch our webinar on 02 February 2022, when we will talk about supply chains, pricing, the market and an update on public policy affecting our industry. See here.
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Does the Pandemic Seem Like an Economic Expansion?
When you hear about the "supply chain problem," perhaps you think of store shelves empty of toilet paper or the Ever Given stuck in the Suez Canal. Or trucks stuck on a snowbound freeway. In our interviews with optics and photonics companies, however, they don't mention transport bottlenecks. Neither do they mention higher transport prices, or even tariffs. In fact, they describe what sounds like the familiar economic cycle when demand exceeds supply.
Source: Getty Images
The most common challenge reported by companies was the workforce shortage, either their own or of their suppliers. The workforce shortage is felt globally and up and down the supply chain. Photonics Finland says it lacks 500-700 highly trained photonics workers, in a country that trains only a handful per year. ASML currently has over 600 open positions. Zeiss has over 700 openings in its Oberkochen facility alone (here). And Photonics France claims it will need 40,000 to 50,000 new workers in photonics over the next five years (here). These are just a few examples. Even if these targets are wildly ambitious, it's clear the actual workforce will fall far short of the industry's needs.
There are short-term shortages from workers isolating at home or caring for family, and from workers leaving to make location or career changes. And many workers may be reconsidering their employment options after having a taste of Work-From-Home (WFH). One company CEO suggested that keeping their company's workers in the facility throughout the pandemic may have kept its worker turnover low compared to companies that have conducted WFH for two years and are now trying to bring them back into offices. Another implied that their company increased employee wages to show appreciation and help retain workers.
There is also a long-term shortage of technical talent that constrained companies even before the pandemic, and made even worse with the "Great Resignation." This refers to workers leaving the workforce altogether, perhaps to care for family or electing to take an early retirement. This is reflected in the labor force participation rate, a measure of the workforce as a percentage of eligible adults and shown in the figure below for the period 2000-2021. While the U.S. unemployment rate is recovering well from a surge in early 2020, the labor participation declined and hasn't recovered, continuing a longer-term trend in the U.S. What appears as only a small step down in participation is nonetheless worrisome to economists. A fuller recovery needs more people to enter the U.S. workforce, although that alone won’t solve the worker shortage in optics and photonics companies.
Source: U.S. Bureau of Labor Statistics (18 January 2022).
Companies also report shortages of parts and materials, with semiconductor chips mentioned often. Like the auto manufacturers, companies like Trumpf have resorted to assembling systems absent key parts, until the parts are delivered and the assembly can be completed.
It's easy to see why electronics are in short supply. Relatively few foundries fabricate huge volumes of parts, and customers cannot easily redesign their products to use alternatives. Once the global manufacturing capacity is full, as it is today, adding new capacity is expensive and takes years to put in place, constraining supply. Workforce shortages at the foundries compounds the problem. For example, the semiconductor industry in Taiwan claims a gap of 17,000 engineers, and the gap is increasing (here). Some parts are now delayed to 2023, but experts expect that the shortages will dissipate in the next couple of years as more capacity comes online and the pandemic eases.
Optics and photonics companies also report shortages in things as specific and exotic as optical adhesives (due to a lack of a key ingredient) and as generic as steel for heat sinks. But these shortages are also probably due to a workforce shortage or constrained manufacturing capacity upstream in the supply chain, rather than transport bottlenecks.
So why all the attention to container ships waiting to unload in ports or products missing from store shelves? That is because they are visible and relatable. Bulky consumer items like washing machines and toilet paper are more likely to travel by ship and ground transport and their absence in stores is obvious. By comparison, shortfalls in the workforce and manufacturing capacity for optics and photonics are invisible to the average person.
The situation today is anything but conventional, but it does resemble a conventional economic cycle, if there is such a thing. In an expanding cycle, demand exceeds supply, pushing out lead times while companies scramble to find workers, driving wages (and costs) higher. These shortages put upward pressure on prices. In a contracting cycle, the opposite happens. If the cycle contracts too quickly, companies accumulate inventories and losses.
The pandemic-related supply chain issues also have companies scrambling to maintain the workforce and facing shortages of supplies, like an economic expansion. Profit margins seem to be holding up, while varying greatly from company to company. And despite the wide exposure in the mainstream media, shipping issues do not seem to be high on the list of concerns for optics and photonics companies.
What's unconventional this time is that the cycle wasn't triggered by a gap in supply and demand in a specific industry (such as in the Telecom Bubble). Instead, a global lockdown led to a supply shock that entangled multiple industries (e.g., chipmakers and automakers). And it continues to throw out surprises: the current lockdown in China threatens to create new supply chain disruptions.
Supply Chain Webinar 02 February: To hear more, watch our webinar on 02 February 2022, where we will talk about supply chains, pricing, the market, and an update on public policy affecting our industry. See here.
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Welcome New Optica Corporate Members
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Spotlight—Women in Industry
Anjul Loiacono, Vice President, Quantum Matter Platforms, ColdQuanta
Spotlight—Women in Industry highlights female Optica Corporate Members who share their thoughts on both personal and professional issues. This month features Anjul Loiacono, Vice President, Quantum Matter Platforms, ColdQuanta. If you would like to be featured in this section, please email industry@optica.org for more information.
- What currently excites you most about working in the optics and photonics industry?
Optics and photonics have become ubiquitous in everyday life. How can one NOT be excited to work in an industry that has such broad applications and can impact so many people in the world. And now that I have become more immersed in the quantum industry, I even further appreciate the importance optics and photonics has on the development of technologies such as quantum computing and sensing. I am excited to see and help drive the optics and photonics industry.
- What career advice would you give to your younger self?
You will not be able to control everything, and you shouldn't expect to have to change yourself to fit all environments and situations. Identify the environments in which you do your best. Think about what "feeds your soul" and do more of that. If you work better in a team, then lean into roles that are based on teamwork. If you prefer to work independently, then find projects or jobs that enable you to do just that. There is no wrong role, there are just wrong roles for you. And that’s ok.
- What is a hobby or passion of yours?
My husband would say eating and sleeping… he probably isn't wrong. When I am awake and not at the dinner table, I enjoy bike riding with my husband and son. We have 100s of miles of trails that we can reach from our front door here in Colorado, it's hard NOT to want to be on a bike. I have realized recently that mentoring "feeds my soul" and so I try to participate in opportunities where I can help others grow. And my guilty pleasure… I am a sucker for Liberty Puzzles... look them up, they are awesome.
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You're Invited: Special Executive Event at OFC on 07 March
Keynote Keri Gilder, CEO, Colt Technologies
In our industry it's critical to stay innovative and ahead of market trends. Join us on 07 March at Executive Forum, an in-person event that will be held at the Hilton San Diego Bayfront in San Diego, California. Connect with C-level leaders from the entire ecosystem of optical networking and communications as they discuss technology advancements and business opportunities. Executive Forum will be held in conjunction with OFC, the world's largest event for optical networking and communications professionals.
Registration includes a keynote presentation, four panel discussions and a business fireside chat. Register now to attend:
- Featured Keynote Presentation: The Modern Telco, Keri Gilder, CEO, Colt
- Business Fireside Chat Panel: Just in Time or Just in Case: Building a Resilient Supply Chain in a Post-COVID World
- Panel 1: Subsea Cable
- Panel 2: Fixed Access Solutions to Incorporate Business Perspective: Focus on Funding, Can Tech Keep Up With Investments?
- Panel 3: Near-Packaged, Co-Packaged, and Pluggable Optics: What’s Their Future in the Data Center?
- Panel 4: Operationalizing Coherent DWDM Optics in Increasingly Diverse Deployment Environments
- Networking Events: Breakfast, Lunch and Evening Reception
View the program, meet the speakers and register now. One low registration rate provides full access to the program and networking events. Discounts are available for each colleague you register, and Optica Corporate Members who have selected our Networking & Events benefit category can bring a colleague for free!
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Save the Date: Virtual Optica Quantum Roadmap Workshop—Focus on Sensing
Mark your calendar for 17 March and attend our virtual workshop to revisit the Optica report Quantum Photonics Roadmap: Every Photon Counts. The roadmap was published in 2020 as a starting point to identify the technical targets and challenges for the optical components needed for new quantum applications in computing, communications and sensing. We will revisit and refine the roadmap in a series of events, starting with this workshop addressing quantum communications. Questions we will be asking include: How far have we come in two years? What needs to be revised in the roadmap? Where can we dig deeper and provide more detail on future specifications?
We will be looking for panelists to present their perspectives on paths that the technology may take. We will also plan time when attendees can join the discussion. Look forward to an interactive workshop to maintain the roadmap on quantum photonics.
For more questions about the workshop, please contact us at: Industry@optica.org
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New Digital Programming Available Live and On-Demand
What are your optics and photonics interests? Our digital library has something for everyone. Optica management and Optica Corporate Members have produced a series of webinars and virtual Technology Showcases that are available live and on demand. Our curated playlists feature global thought leaders, optics and photonics pioneers and industry icons, offering actionable advice, information and inspiration.
Upcoming live February events include:
Browse our growing list of upcoming events and view on-demand recordings as they become available.
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Engineering Excellence Award Call for Nominations
Gain recognition for your engineering team! We are currently accepting nominations for the 2022 Paul F. Forman Team Engineering Excellence Award, which recognizes team technical achievements in optical engineering. Nominations are due 10 April 2022. Promotion of the winning team includes special recognition in Optics and Photonics News, a dedicated press release, social media posts, recognition during Frontier’s in Optics (FiO), Optica’s annual meeting, and more.
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Invitation to Join the Optica Industry Network LinkedIn Group
Join 4,800+ of your colleagues in our Optica Industry Network LinkedIn Group. This one-of-a-kind Forum for Industry lets you participate in discussions about cutting-edge issues. Extend your professional network. Exchange information about problems, ideas and solutions. Collaborate with experts in your field. Now is the perfect time to build a relationship with fellow optics and photonics professionals!
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Questions or Suggestions about Optica Corporate Member Benefits?
We are committed to ensuring the value of your Optica corporate membership, so please email Optica corporate membership if you have any suggestions for new programs or comments on your membership.
Forward this message to your colleagues.
Not yet a member? Learn more about the benefits of membership.
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Optica Corporate Engagement Council
Thank you to the volunteers who oversee the programs and services available to the Industry Community.
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Amy Eskilson
Inrad Optics, Chair
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Simin Cai
Go!Foton, Past Chair
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Aleksandra Boskovic
Corning Inc.
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Cedric F. Lam
Google
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Anjul Loiacono
ColdQuanta
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Rick Plympton
Optimax Systems, Inc.
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Thomas Rettich
TRUMPF
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Natarajan ‘Subu” Subrahmanyan
AO Asset Management
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Debbie Wilson
Lumentum
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OPTICA
Global Headquarters
2010 Massachusetts Ave. NW
Washington, DC 20036
USA
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+1 202.416.1907
optica.org
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