Is There Price Inflation in Optics and Photonics?
There is a lot of talk lately about wage and price inflation. Economists debate whether inflation is a temporary response to workforce shortages and supply chain disruptions, or if it will trigger expectations for higher prices or even "stagflation," a term referring to stagnating growth alongside high inflation. Let's look at what it means to the optics and photonics industry.
Companies are reporting delayed shipments, longer lead times and rising prices throughout the supply chain, even as the causes are not entirely clear. Suppliers are allocating shipments to preferred customers and demanding special terms, such as locking in orders for the next three years with large penalties for cancellations. These other terms can raise the cost to suppliers in the future, illustrating the leverage that some suppliers have, as they try to pass some of their increased costs and risks on to their customers.
Short term price cycles are common in the electronics industry; for example, DRAM prices go up and down with manufacturing capacity, which itself moves with demand for consumer electronics. We can expect similar behavior in the large volume manufacturing of displays, LEDs, and photovoltaics. The figure below shows prices in U.S. dollars for LCD TV panels, by size, including a forecast to the end of 2021. Suppliers began to raise prices in mid-2020 as the pandemic drove new demand for televisions. Now there are concerns about overbooking orders as long as the supply chain remains constrained, and that pandemic-driven demand may be nearly satisfied. These concerns appear to be sending prices toward pre-pandemic levels.
LCD TV panel prices and forecast, in U.S. dollars.
Source: Display Supply Chain Consultants (DSCC), 04 October 2021, with permission.
Despite the short-term price variations, long-term declines in prices are far more characteristic of, and even necessary to, optics and photonics as well as the tech sector generally. Declining prices enabled the widespread adoption of large-screen TVs, handheld smartphones, photovoltaic panels and LED-based lighting. The figure below shows the learning curve in price per Watt of photovoltaic modules, commonly called Swanson’s Law (a rate of 22.5% along the line and 39% for the period 2006-2016). As cumulative production increases over time, the cost of manufacturing declines, leading to declining prices to customers. Photovoltaic module prices increased this year, but it’s the first time in over a decade.
Learning curve of photovoltaic module average selling prices in
peak megawatts, 1979-2016. Source: NREL (22 June 2021).
Meanwhile, product performance continues to improve dramatically, even exponentially, confusing the trajectory of prices. The figure below illustrates how this works. The price for a typical product declines as manufacturers move down the learning curve. But the manufacturer also continues to release new, improved products, such as new lasers with increased output power or new image sensors with increased pixel count. Consequently, while the prices of specific products are in continuous decline, the average price of the mix of products sold in a particular year—the ratio of total revenues over total unit sales—may be steady or even rising. This also confuses the overall performance of the industry, since it is perpetually bringing out incomparable products. That's why figures of merit like US$/Watt in high-power lasers and US$/Gbps/Watt in optical transceivers are used to measure both price and performance at the same time. But those price metrics are declining too.
Prices of specific products decline over time but the average price of the mix
of products in a particular year might not. Source: Optica.
The pressure on prices means that bringing new and improved products regularly into the market is almost a necessity to stay in business in the tech industry. Competitors often face a choice: keep filling a pipeline of new, higher margin products to maintain the average sales price, or be the lowest-cost manufacturer that wins on volume. In fact, the industry’s success at reducing prices helps expand the market but is a key reason that many manufacturers exit these markets.
If the optics and photonics industry does not contribute to inflation, does inflation matter at all?
Inflation does matter because it represents the declining purchasing power of money. While often associated with the cost of living, it also means that the nominal value assigned to currency changes over time. For example, the laser market grew at a compounded rate of about 13.6% from an estimated USD 11 million in 1963 to USD 16 billion in 2020. However, the value of the dollar in 1963 wasn’t the same as it is today. It could buy different quantities of goods and labor. The 1963 dollar was essentially a different currency; USD 11 million is equivalent to nearly USD 100 million today.
We can convert the historical dollars to constant dollars to get a true rate of organic growth of the laser market. This currency conversion considers not just the inflation of a basket of goods in the currency itself, but also compared to other currencies used in the global market. When discounting for an average global inflation rate of 3.9% compounded over the period 1963 to 2020, the laser industry grew at an average compound annual rate of 9.4%, as shown in the figure below. This value is a more accurate measure of the organic growth of our industry and is still a phenomenal rate of growth over any extended period, and particularly for nearly six decades.
Global laser sales measured in nominal U.S. dollars and adjusted to 2020 dollars.
Source: Optica, from Laser Focus World data.
To summarize, the optics and photonics industry is currently seeing price increases across many products, even as prices of other products appear to be returning to pre-pandemic levels. The price variations are short-term, however; the industry has a long history of price declines that have enabled widespread adoption of optics and photonics, and drives companies to bring out new and improved products to maintain revenues. Inflation matters to optics and photonics mainly when calculating the inflation-adjusted long-term growth of our industry.
For more on this topic, see the September installment of this newsletter (here), and the May 2018 issue of Optica's Optics and Photonics News here.