Active-component manufacturing not so active in China
China will soon be the dominant source of passive-component manufacturing worldwide, if not already. Most component companies agree that lowering production costs may mean survival in today's low-volume, over-crowded optical-component market. But a cash-strapped carrier environment that is more receptive to line-card upgrades than the new system builds populated with DWDM modules, isolators, couplers, and filters may have created what Strategies Unlimited China market analyst Eric Bergles calls "a wasteland of over-investment."
During the boom years of 1999 through early 2001, optical-component companies sprang up in mainland China predominantly in high-tech areas such as Shenzhen, Wuhan, Shanghai, and Beijing. Joint ventures between foreign and domestic companies, state-funded enterprises, and foreign component powerhouses all began to manufacture passive and, to a much lesser extent, active components in China. In 2001, China's revenues alone for some of these companies ranged from zero to $20 million, according to Strategies Unlimited (Mountain View, CA). The optical component market in China reached $293 million in 2001, of which 42% was supplied by Chinese companies and 58% by multinationals, including those with manufacturing operations in China. Domestic manufacturers derived 60% of their revenues from the China market and 40% from exports.
Today, as much as 60-70% of all passive components are being manufactured in China, according to Bergles, who notes that it is the dominant source worldwide of multiplexers/demultiplexers, isolators, couplers, and gain-flattening filters.
Market researcher RHK (South San Francisco) holds a more conservative view, expecting China to serve as the dominant manufacturing source of passive optical components within three years. The manufacturing shift has been seen in less complex or "commoditized" passive devices such as thin-film filters and not for others such as arrayed-waveguide-grating-based filters. "During the boom years, the key differentiators in optical components were performance and how quickly vendors could deliver significant volumes of leading edge technology," says John Lively, RHK director of the components research practice. "When that's the market imperative, you want to have your manufacturing close to your R&D. Now, optical-component demand has fallen by 70% last year alone, and it's not about leading edge technologies and pushing the boundaries in performance anymore—it is about offering the same products at lower cost. The downturn has really accelerated that and made it more logical to build your products in China."
The telecommunications bubble in 1999 and 2000 launched heavy investments by China's state-owned enterprises in passive-component manufacturers making low-end com-
ponents such as couplers, and many of these companies have suffered or become dormant in the current market environment. "One of the drawbacks of working in China is that there is a lack of visibility into the North American and European markets, so there is about a six-month communication lag between market realities and the local establishment, which makes it hard to respond to the market," says Bergles, author of Strategies Unlimited's October 2002 report on the China optical communications market and vice president of sales and marketing at component maker BaySpec (Fremont, CA).
Meanwhile, the manufacturing activity in the active-component arena is just the opposite, observes Bergles, who estimates that less than 10% of the world's active devices are produced in China. "There is very little active-device manufacturing in China, but that is changing," he says. The dominant producer of optoelectronic components is Japan, home to electronics powerhouses such as Fujitsu, Hitachi, Mitsubishi, and Sumitomo.
One major producer in China is Wuhan Telecommunication Device Co. (WTD—Wuhan, Hubei) which manufactures such components as 10-Gbit/sec transponder modules, 2.5-Gbit/sec optical transmitters, and 980-nm laser pump modules, primarily for the domestic market, using 11,000 sq ft of manufacturing space in Wuhan's high-tech development zone. WTD also has a joint venture with Lasertron.
Despite its cheap manufacturing base, China' research, development, and design expertise may fall short in some component areas, according to an August 2002 report, "China's role in optical components: overrated?," by RHK analysts. "Traditionally, cost reduction of active devices has been addressed through automation by companies. Nortel and Agere, two of the market leaders in telecom lasers, recently sold their businesses to Bookham and TriQuint Semiconductor," notes RHK's Lively. "So far, there's been no indication that they are considering moving production for these businesses to China."
How does China's promise of cheaper skilled labor, infrastructure, and a domestic optical-networking market that today represents 30% of the market worldwide stand to benefit manufacturers of more complex optical components? Opinions differ widely, but many companies are taking a hard look at global consolidation of their manufacturing operations, a myriad of issues related to the high cost of automation versus cheap manual labor and assembly, and the trend promoted by systems manufacturers toward increased component integration.
Taiwanese- and Japanese-based semiconductor manufacturers are investing in facilities in mainland China, and several component companies are beginning to migrate some active-device manufacturing to the region. Two of the largest passive-component players, JDS Uniphase (JDSU—Ottawa, Ontario, and San Jose, CA) and Oplink Communications (San Jose), are considering active-device manufacturing in China.
Oplink is moving all of its manufacturing (switching and signal-routing products, multiplexers/demultiplexers, fused fiber-optic couplers, circulators, couplers, filters, and modules) to a new 500,000-sq-ft facility in the Zhuhai free-trade zone, according to Charles Ingebretsen, chief quality officer. This move will consolidate former operations in Shanghai, where a manufacturing facility was shut down in June, and a larger facility down the road in Zhuhai, where the company has had operations since April 1999.
In November, Oplink announced it is expanding into optical contract manufacturing services, in effect, taking on the contract manufacturers. "What we provide is the optical expertise," says Teresa Novak, a company spokeswoman. This new strategy follows a year of turmoil, in which shareholders blocked a proposed merger with passive-component company Avanex, and company president and chief executive Fred Fromm, along with some other senior managers, resigned. Company founder Joe Liu is again at the helm.
JDS Uniphase has manufactured DWDM modules, couplers, and isolators in Shenzhen, China, since 2000, when it acquired passive-component maker E-TEK Dynamics, along with its 150,000-sq-ft manufacturing facility. The company is in the process of transferring the manufacturing of some of its photodiode products to Shenzhen. The products are in qualification, according to Fred Leonberger, senior vice president and chief technology officer at JDSU. Currently, many of the products that are developed in Asia are shipped back to North America and put into modules and systems, then shipped back to Asia for sale into that market.
Active devices typically involve a two-stage process of chip manufacturing and packaging. "It is quite possible to imagine transferring the packaging without transferring the fab or any combination," says Leonberger. "Obviously, for the high-performance products, it is really important to have the engineering and the manufacturing closely coupled."
Integration of discrete components is another hotly debated manufacturing topic among component suppliers trying to reduce production costs and meet systems suppliers' needs. "If the integration is primarily a hardware manufacturing issue, 'Can I put two components in a TO can? Can I avoid some fiber splicing by using some fiber-optic assemblies?,' then I think that you are talking about integration technologies that could very well end up being done in China," says Leonberger. "If the integration gets into higher-level products like smart amplifiers, where there is intelligence, and firmware interfacing, then I think at least for the foreseeable future that kind of work will certainly remain wherever the engineering team is located."
As China's role in low-cost component manufacturing continues to evolve, no one is disagreeing about the need for every component supplier to align its products with system providers serving China, which today represents more than 30% of the total optical-networking market worldwide. A local presence may even be required to get design wins with foreign systems suppliers serving that market, believes Strategies Unlimited's Bergles. "Another factor that may be a little less primary right now is that there are some system companies in China which are gaining market share," says RHK's Lively, "and Huawei is one of them."
"I think it is important to have a significant presence in China," agrees JDSU's Leonberger. "There is no doubt that the China market is growing in terms of the number of wirelines and systems that they are going to install, although the market for optical equipment in China dropped drastically the first half of last year—over 30%. Nevertheless, from a sale-of-units point of view, it is going to be an enormous market—where the revenue gets to is obviously a pricing pressure question."