Corporate Member News - May 2022

03 May, 2022

Read about Inflation and What it Means, Thoughts about Two Economies, New Reports, Events, and Other Noteworthy News, Opinions and Opportunities

 

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IN THIS ISSUE:


 

Update on Inflation and What it Means

It's easy to recognize that consumers are facing steep price inflation—you know it yourself when you go to the grocery store or fill up with gas—but is it happening in our industry too? Our members report price increases, but our industry is one of long-term price declines.

The chart below shows the rise in prices for three types of goods and services tracked by the U.S. government and normalized to January 2018. The Consumer Price Index (CPI) is familiar to most people, reflecting prices of common goods. The Producer Price Index (PPI) of intermediate goods dipped slightly in 2020 and then rose dramatically since early 2021. This index varies more dramatically than the consumer price index (CPI).

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Source: Optica, from U.S. Bureau of Labor Statistics (15 April 2022).

What's striking is that the producers' index of semiconductor component prices has been essentially flat over the period, with modest increases in late 2021 and early 2022. Semiconductor prices actually declined over the period if we adjust for inflation based on the CPI.

The decline in semiconductor prices is familiar to our industry, as we wrote in the March 2022 and November 2021 newsletters. Our industry expects product prices for a given performance to decline over time. This behavior is part of the tech sector DNA, so to speak, whether we’re referring to prices of laptop models or kilowatt fiber lasers.

The figure below illustrates the near constant rate of decline in prices for memory components, as measured in real USD/gigabit from 1960 (for magnetic core memory products) to 2017 (measuring DRAM products). The chart shows long, steady price erosion as the semiconductor industry gained manufacturing experience. The decline doesn’t go on forever, of course; it ultimately follows an S-curve, which is evident in the first and last decades of the chart.

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Source: AI Impacts.org, using data from John McCallum, adjusted to 2020 USD.

Also, note the dramatic short-term variations in the long-term decline. The next chart shows the spot prices for two DRAM products since May 2016. Spot prices fluctuate more than longer-term contract prices; contract prices are partly why the semiconductor price index has not varied more dramatically than shown in the earlier figure.

DRAM spot prices started rising in late 2020, then declined when the supply chain was constrained elsewhere. After briefly rising earlier this year as the logjam cleared, prices are trending down again this quarter (here). The memory chip market is complex, however, with spot and contract prices or DRAM and flash memory often going different directions. The point is that the long-term trend is downward, opposite to that of economy-wide consumer and even overall producer prices.

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Source: TrendForce data from May 2016 to March 2022.

Prices can appear to rise without vendors actually raising prices, when the mix of sales shifts to higher value products. For example, if there is a shortage of semiconductor manufacturing capacity, manufacturers may prioritize shipping high value chips for consumer products over low value chips. This, in turn, may restrict the supply chain for lower-value products, leaving consumers with fewer choices. Many will select the higher priced product—not because the price was explicitly raised, but because the other choices are temporarily unavailable. You may have encountered this yourself if a store was empty of the product you wanted, such as a toaster or mobile phone. Thus, the average price over the mix of products can go up, even if the specific product prices remain the same.

Our industry is familiar with migration to a higher-value mix of products as part of the product life cycle. Offering new, higher performance products is both expected and necessary to survive price erosion because older generation product prices and profits commonly decline until they reach a floor. The new products usually enter the market at a familiar 'price point'—often determined by expectation and market segmentation.

The figure shows how the average sales price (ASP), weighted by sales, can change over time, depending on the mix of product sales.

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Prices of specific products decline over time, but the average price
of the mix of products (dashed red line) may not. Source: Optica

Our members have told us that they continue to face shortages and rising prices of materials and components. In a commodity market, products are interchangeable and buying decisions are made entirely on price. However, our industry doesn’t trade in commodities and relationships matter. Our members report that they are reluctant to pass the costs on to their customers, and when they do, it is done carefully on a case by case basis to avoid damaging the trust they have with their customers.

For more on how pricing and inflation relates to our industry, see the March 2022 and November 2021 issues of this newsletter (here and here).

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Thoughts about Two Economies

Chinese factories helped keep the global economy running in the early months of the pandemic, but now there is concern about maintaining China's rate of economic growth. Although China's industrial production continues to grow year over year, U.S. industrial output is now growing at a faster rate. And despite talk of the "Great Resignation", the U.S. workforce is near capacity; it's about the size it was before the pandemic.

The figure below shows the Chinese and U.S. economies, with the dotted lines indicating where each economy might have been if not for the pandemic. China’s economy dipped early in 2020 and recovered quickly and is growing faster than that of the U.S., indicated by the steeper trajectory in the chart. But its growth has been slowing, and China needs faster growth to accommodate the needs of its graduating students, urban migration and expectations for a higher standard of living. By comparison, the U.S. economy hasn’t recovered its lost growth, but is matching or exceeding its historical pace.

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Source: Optica, from U.S. Bureau of Economic Analysis and National Bureau of Statistics of China.

The next chart shows the growth of China's industrial output, compared to that of the U.S. China's industrial output has been growing year over year, with the exception of the first two months of 2020. This is remarkable considering the consequences of the pandemic; it's as if the pandemic came to China and left after three months. By comparison, the U.S. output was declining before the pandemic, took longer to resume growth after the initial shock of the pandemic, but now is growing faster than China’s industrial sector. (The spikes in output in 2021 are due to base effects of measuring growth to the previous year's lows.)

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Source: Optica, from U.S. Bureau of Economic Analysis and National Bureau of Statistics of China.

There are several conversations around China's recent "slow" growth (which wouldn't be considered slow in most high-income countries). With COVID surging in China this year, its government's strict dynamic zero COVID policy has led to recent lockdowns in several cities, slowed consumer spending and even threatens the spring agricultural harvest (here). Temporary closures of factories have delayed revenues (e.g., here), and has exacerbated supply chain disruptions that emerged during the pandemic (e.g., here and here).

Meanwhile, trade conflicts haven’t gone away—in fact, the Ukraine conflict complicates them further. Chinese companies doing business with Russia may have to decide whether to adhere to the economic sanctions imposed against Russia in order to avoid secondary sanctions against them for doing business with Russia, or to follow closely the position of the Chinese government that is against the sanctions. For example, Huawei suspended some operations in Russia, but appears to be taking a careful "wait-and-see" strategy (here). If nothing else, rising prices of fuel and grains triggered by the war threaten to send the global economy into a recession, with enormous consequences (see our comments in the April 2022 newsletter).

China's government is seeking to minimize risks in anticipation of the convening of the 20th National Congress of the Chinese Communist Party in October, the most important political event in five years. While Xi Jinping is expected to be reelected as General Secretary of the party, there will be a great reshuffling of positions within the party, and therefore of the government.

Meanwhile, a closer view at the U.S. data of shipments, new orders, and total inventories shown in the figure below shows a positive outlook so far this year. New orders are considered a forward-looking indicator, and suggest that demand continues to grow, or at least hold steady. It is too early to tell, however, the impact that the Ukraine conflict will have on U.S. industrial orders in the coming months.

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Source: U.S. Census Bureau (24 April 2022).

There seems to be a misunderstanding that a "great resignation" is driving the workforce shortage and higher wages in the U.S. While it's true that more people of retirement age have retired than usual (a drop of about 1% of that workforce), the primary working age population is as fully employed as it was before the pandemic. The next figure shows the U.S. employment of people aged 25 and over with college degrees of bachelor level or higher—the kind of workers that our industry draws from. That category of employment has matched the pre-pandemic level of 102 million workers. The participation rate, which is the share of workers to the available population, has also matched the pre-pandemic level of 83%.

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Source: U.S. Bureau of Labor Statistics (25 April 2022).

However, the aggregated data in the chart doesn't illustrate another recent phenomenon: the Great Reshuffling. Reshuffling happens when workers change jobs but stay in the workforce; for example, to move to a new job in a new city, make a long-awaited career change, or simply find a more attractive position with a competitor. Such worker mobility is good for the economy in the long term, but can be disruptive in the short term, particularly if a valued worker leaves your company. You have probably seen it yourself among your circle of friends and colleagues, perhaps you’ve even reshuffled yourself.

The employment data shown here is based on the U.S. workforce, but behavior can vary by culture and national employment policies, particularly those that are less favorable to worker mobility. Employment law varies even within the U.S., such as with regard to non-compete agreements that restrict workers from taking jobs with competitors. What is universal worldwide, however, is the challenge optics and photonics companies face to hire workers.

The current workforce shortage isn’t due to resignations or other losses of workers overall, but tight competition for workers among tech companies in the same position, and it predates the pandemic. It drives up wages and leaves many companies without the workers they seek to grow. Nonetheless, our optics and photonics industry is in the enviable position that it promises growth and offers attractive jobs.

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Welcome New Optica Corporate Members

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Spotlight—Women in Industry

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Amy Eskilson, Inrad Optics.

Spotlight—Women in Industry highlights female Optica Corporate Members who share their thoughts on both personal and professional issues. This month features Amy Eskilson, President and CEO of Inrad Optics. Amy is also the 2022 chair of the Optica Corporate Engagement Council. 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?
    I am excited about the multiple industrial, educational and governmental efforts to address the long building optics & photonics workforce shortage. I have been talking about this problem for well over 10 years, and finally there is a focus on the problem from all sides. We are still well behind in the US, and in Europe, where technical education remains strong, companies still require more production employees. The good news is that the need for funding for programs is now understood and underway, and new programs and initiatives are starting to flourish. There are curriculums in traditional optics, as well as a recognition of the need for training in silicon photonics and quantum technologies in the not-too-distant future.
  • What career advice would you give to your younger self?
    Trust your intuition! Gather the data, but give those nagging questions in your head more weight. Ask the question several different ways, and realize sometimes the best answer might not agree with the subject matter experts.
  • What is a hobby or passion of yours?
    I hike, snowshoe, backpack and camp year-round. I love to break a trail on snowshoes after a good deep snow. There is something really exciting and challenging about figuring out how to stay warm in a tent overnight in the dead of winter in the Northeast. I actually don’t like to be cold, and there is a feeling of success in figuring out how to enjoy nature in its harshest conditions.

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Optical Communications Market--Global Wireline Broadband 3Q21 Results and More: New Report Available to Corporate Members

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Read this Market Update for exclusive information on:

  • Global wireline broadband revenue 3Q21
  • PON 3Q21 results
  • Cable access 3Q21 results
  • Service Provider Switching and Routing (SPSR) 3Q21 results
  • Omdia's IT Enterprise Insights Spotlight Service Survey results

Stay on top of the latest optics and photonics market insights, news, roadmaps and research. Read our reports today and get the information you need to make better business decisions faster. These reports are available to all employees of Optica Corporate Member companies who selected the Market Intelligence benefit category.

Other reports include:

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Invitation to Join the Optica Industry Network LinkedIn Group

Join 5,000+ 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.

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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