By Tom Hausken
Where can European photonics companies go to become more competitive in the global market? They can look to the European Commission and national governments, of course, to their customers, and to themselves. The issue of competitiveness and the broader question of how to make money in broadband optical components were both raised in a workshop held in Stockholm in June 2006, co-sponsored by the European Photonics Industry Consortium (EPIC) and SPIE. Strategies Unlimited, which participated in that workshop, published a report on the conclusions last fall. Another workshop, colocated with ECOC in Cannes in September, continued the discussion.
The Stockholm workshop produced five recommendations, summarized here. Three are directed at government policymakers, one at the customers, and one at the suppliers themselves.
R&D priorities. At the top of the list are priorities for funding R&D of broadband components. Funding is, after all, one of the things that the European Commission does, and it seeks guidance from industry for directions it should pursue. The workshop highlighted low-cost integration and packaging platforms, very high speed devices, and all-optical networking as R&D priorities for optical communications.
New R&D funding models. Workshop participants also pointed out that European regional and national funding agencies could adopt more innovative funding models. The existing solicitation process is very time-consuming and expensive for applicants, especially for small businesses. A less bureaucratic process could help the applicants, but in so doing, also could help to keep Europe more competitive. Examples of alternative models are the Defense Advanced Research Projects Agency (DARPA), Small Business Innovation Research (SBIR), Small Business Technology Transfer (STTR), and Advanced Technology Program (ATP) initiatives in the United States.
Streamlining European patents. Several participants also expressed frustration over the expensive and slow process of obtaining patents for countries within the European Union (EU). Patent systems change at a glacial pace, but continued pressure on the EU and the European Patent Organization is important to help streamline the patent process.
Relaxing system requirements. Workshop participants made a plea to customers of broadband components manufacturers to relax the reliability requirements of devices used in customer premises equipment. This would reduce the qualification time and cost and speed time-to-market for suppliers and customers. The customers are famously recalcitrant, using Telcordia standards because they can, not necessarily because they really need to. But if the cost of components is to come down, the specifications must be considered.
Foundries. Another suggestion that came out of the workshop was appointing an assembly foundry to share the costs of assembly and keep assembly in Europe. A shared facility could use some of the innovations coming out of European labs that address volume assembly. To be worked out are the details about how the facility would be managed. Would companies bid to operate it? Would a university center act as a host?
The Cannes workshop took this further and explored the effectiveness of using chip foundries or a network of foundries to keep chip fabrication in Europe. There was agreement that foundries could be profitable, but there are some sticky questions. Who would get to own or operate such foundries? What platforms or design rules would they use? And most problematic of all, everyone wants their fab to be the central foundry, so who is willing to give up their foundries and become fabless?
As interesting as the discussion over the recommendations was a deeper anxiety about the whole problem of sending jobs offshore and European competitiveness. There is certainly deep nostalgia for the days-only a few years ago-when everything was done locally, from chips to systems. And with this nostalgia perhaps comes a tendency to prolong a failing strategy rather than to adapt to the global situation.
The marketplace is much more complicated today than just a few years ago. Gone are the days when the system vendor or even the carrier made everything down to the optical components. A European carrier may be buying a system designed in Japan from a company that procures its components from a supplier in North America, which may be buying subcomponents or doing its assembly in China. In some cases, all of the component manufacturing may still be done close to the end user. But it is not competitive to do it in every case.
It’s not even clear what it means to be a “European” or a “North American” company anymore. For example, carriers like Telefónica, Cable & Wireless, and Verizon have operations or investments overseas from their headquarters. Likewise, Alcatel is even more international now that it has merged with Lucent. Bookham has a fab and headquarters in the UK, but its stock is listed in the U.S. market; it also has assembly operations in Asia. Avago has its headquarters in the US but important component operations in Europe and Asia. Avanex and other familiar names are similarly complicated.
Thus, the carriers and their suppliers are operating in a global market today. If a company cannot compete in this global market, it will not be able to compete at home.
There is still a misconception that regional or local manufacture of optical components will somehow benefit from regional or local investment in the telecom infrastructure. For example, investment in FTTH in Europe or North America only has meaning for the vendors that win those specific contracts and their subcontractors. And those companies are already thinking globally.
Any effort to increase demand by pressuring government policymakers, or the carriers, to increase investment in telecom infrastructure is quixotic. Policy decision-making requires a long time to build consensus. Elaborate procedures must be followed. And the decisions are often challenged for years after they are in place. The carriers follow their own timetables, based on results from early trials and their perceived returns on investment. The opinions expressed by those in the optical components industry-which is only few billion dollars out of a trillion-dollar global telecom industry-will have little, if any, impact on carriers’ decisions.
Just as Dag Wagner of Schefenacker pointed out at the Cannes workshop that the automotive industry wants components that are commodities, Bookham and Avanex are suggesting that they want to stay at the higher-value side of telecom products and avoid the commodity business.
This is a reflection of the fact that Asian manufacturers are here to stay and will be strong in low-cost and higher-volume commodities. Companies in Europe, North America, and Japan have their strengths, too. They are good in R&D, specialty manufacturing, and working closely with customers to improve design or to move up the supply chain.
But the most poignant observation of all may be from Martin Schell of the Heinrich Hertz Institute, formerly of Infineon. He said that most of the current business models simply don’t work. Instead, Infinera has gotten to its current state so far by buying and operating its own fab to support a systems business, contrary to the popular wisdom of the post-bubble era. And JDSU reacted to the downturn by using its massive cash reserve to diversify into test equipment and nontelecom markets.
The most important observation from the workshops may be that Europe doesn’t need new fabs or foundries to become profitable, but new business models.
Tom Hausken is director, components practice, at Strategies Unlimited (www.strategies-u.com). His specialties are optical and electronic components, including actives and passives for optical networks, industrial lasers, and image sensors.