The research, analysis, and consulting firm Telegeography recently created a stir with a press release entitled “The Bandwidth Glut is Over.” Supply equilibrium, price stability, and competitor consolidation have improved overall market health, the release stated. Meanwhile, rising bandwidth demands have depleted capacity inventories on many submarine cables and some terrestrial networks. Telegeography reports that network operators such as VSNL, FLAG Telecom, Asia Netcom, and Telefonica, among others, have had to light additional wavelengths and fiber pairs in response.
While the potential end of the bandwidth glut doesn’t mean the infamous fiber glut is no longer a concern-the release mentions that even with more capacity coming online, major submarine cable operators will have lit approximately 14% of their total potential capacity by the end of this year-we can add Telegeography’s analysis to the growing list of data points that indicate that the optical communications industry been transferred out of the intensive care unit and into rehab. The question for the industry is what happens next? Previously in this space, I urged companies to focus less on restructuring and more on executing new designs and business plans. However, recent conversations with vendors up and down the food chain indicate that while they’d like to execute their business plans, they’re more in a mood to execute their suppliers.
Lead times have more than doubled for certain components, a module vendor has told me. A system developer agreed with this assessment. He added that when components do arrive, they are increasingly not up to spec-“It’s like they’re just throwing them out the door to keep up,” he said. Meanwhile, his IC suppliers have started retiring products that have been in the market for only a few years, which forces him to buy these devices in bulk so that he can meet customer requirements for his existing system designs while his engineers figure out what needs to change to accommodate new chip families.
In other words, it appears that, just like a patient entering rehab after an extended illness, the optical communications industry has a ways to go before everything gets back into working order. An injured athlete’s atrophied muscles need to be retrained; in some instances, companies need to learn all over again the processes they once completed with hardly a thought.
Thinking about it, such a painful transition from stagnation to growth shouldn’t surprise us. Having not just been burned but barbecued by excess capacity investments when the bubble burst (a problem most companies still have), it’s only natural for suppliers to display reluctance to again turn up production lines. The fact that customer purchasing patterns remain “lumpy,” in the words of the systems executive, doesn’t help promote coordinated operations either. When customers can’t give you a clear picture of their upcoming requirements, then demand immediate turnaround when they do place an order, no one in the supply chain can get a fix on how much to invest in production and materials.
At some point, of course, much of this will get ironed out. Demand from end customers will stabilize, which should filter down the supply chain to the component vendors and create an environment that looks more like a healthy marketplace and less like a fire drill.
What goes beyond the bounds of execution will be the temptation some component, module, and subsystem vendors will feel to push their customers off of the product lines they’re happily using now-and that their customers have already qualified-and onto newer, potentially higher-margin replacements, whether they want to go or not. I understand that companies that have seen their margins beaten down over the last several years will want to recoup their R&D investments and improve their bottom lines. Many if not most products eventually become obsolete or no longer pull their weight in terms of customer demand. These are legitimate reasons to discontinue a product; pulling a bait-and-switch to take advantage of market conditions is not.
A module or systems vendor who is finally seeing orders again and scrambling to fill them is in a vulnerable position. Suppliers who would take advantage of this situation by terminating supply of an essential component with the thought that the struggling vendor will have no choice but to buy up the inventory of the old product, then design in the replacement, are hurting not only their customers but the industry in general.
It will be hard enough for companies within the optical communications space, particularly smaller ones, to get back on their feet and begin walking normally. In this period of rehabilitation, the last thing they need is for the partners who should be helping them to trip them up instead.