Okay, I apologize for the bad pun, but it does seem like the Fiber Optic market is finally trending upward. I attended the OFC/NFOEC Conference in Anaheim in March and although a bit late, I’m glad that April came and I can describe some of the developments. I was impressed with many of the technology, product and market developments on display.

At the top level, this market segment has floundered, directionless for the past several years. After good growth in the middle part of the 2000’s, the overall optical market ran into trouble in 2009 as the global economy faltered. The result was a drop in revenue of about 15%. With the exception of a short-lived spike in 2011, the market has been relatively flat. This behavior is understandable, because upgrading, expanding or initially deploying an optical transport network is a capital-intensive exercise and the uncertain direction of many regional economies only adds to the challenge. The wildcard in this scenario however, is the seemingly insatiable desire to consume data.

We tend to focus on growth in the mobile data consumption that is enabled by the vast array of wireless devices we’ve all grown so dependent on, but that’s not the whole story. As I am fond of pointing out, even with mobile data roughly doubling every year from 2009 to 2016, it will only account for roughly 10% of the total in 2016. The other portion of data consumption comes from Internet, high-speed broadband, CATV and enterprise data applications. Even with the backdrop of a still uncertain economy, it is becoming clear that transport network upgrades are essential to ensure future data increases are feasible.

It appears operators are finally committing the capital resources and this looks likely to set up the overall optical market for steady future growth. At the component level, another interesting trend I observed is the rapid conversion to higher capacity networks. It appears 10Gbps systems are the workhorse of the network, with lower capacity systems all but disappearing. Another thing that seemed clear was that while 40Gbps systems will grow, they won’t represent as big an opportunity as originally thought. There are currently four modulation schemes used for these networks: optical duo binary, DPSK, differential quadrature phase-shift keying (DQPSK) and dual-polarization QPSK or DP-QPSK. While this lack of standardization allows suppliers to differentiate their designs, it does not allow for economies of scale and the cost reduction standardization usually entails. At the same time, the cost of 10Gbps systems has been dropping quickly. These factors seem to be leading operators to consider jumping directly from 10Gbps to 100Gbps networks, skipping 40Gbps in the process. It appears from the Marketing presentations and the products I saw, that 100Gbps system will see the fastest growth, by far! For more information on growth rates, segmentation, quantities and market values for optical transceivers, please look at Capacity Requirements Driving Fiber Optic Market.

The other big topic at the show was silicon photonics. This idea seems to divide the audience into two distinct and passionate camps. One says, “we’ve been hearing this now for years, but where are the production products?” The other camp is more than ready to discuss the benefits of silicon CMOS processes for cost and power reduction. One thing that appears to be different from the past is the dramatic increase in enterprise applications and “big data”. As server farms grow, so does the need for fast, cheap, low power, short-reach connections. This need seems very well suited to the capabilities of silicon photonics. While the technology doesn’t appear to meet the needs of every application, there is certainly a lot of development effort and it will be interesting to see how quickly silicon photonic circuits penetrate short-reach enterprise applications. Stay tuned!

-Eric

As we get set to close the book on 2012, I thought I’d share some observations about the trends and results for the compound semiconductor industry. First and foremost, it hasn’t been a banner year, but the GaAs device market looks like it will eke out a small gain. Through three quarters, revenue in the device industry is showing a very small gain. On a positive note, many of the large GaAs device manufacturers have stated they are optimistic about their calendar fourth quarter prospects. This makes me optimistic the GaAs device industry will come close to the 2% growth I forecast at the beginning of the year. In addition, the GaAs revenue “pressure curve” (a concept I introduced in the “At the Halfway Point of 2012: GaAs Device Industry Shows Small Gain “ blog) has shown an upward trend with a value greater than 1 the past two quarters. Essentially, the pressure curve is a rolling average, so a value greater than 1 indicates growth and with companies optimistic about Q4, it wouldn’t be surprising to see another upward tick in the indicator.

This indicator fits well with our latest forecasts. The inescapable conclusion is growth in the handset market is still the single largest driver for the overall GaAs device market. This “growth” isn’t just unit growth, it also relies heavily on smartphone penetration since these devices contain more GaAs content than lower tier devices. After a flat year in 2012, our latest forecasts show much healthier growth in handsets and power amplifiers in 2013. The unit growth will be important because as smartphones become more prevalent, the rate of growth is slowing. Return to healthy growth for handset PAs, which make up more than 50% of the overall GaAs device market, bodes well for growth in 2013.

Most of the growth in the GaAs device market in the last 18 months can be attributed to handsets, as the network side of the market has been flat. While a tentative global economy probably is not helping, the time for increasing network investment would seem to be nearing. Data consumption continues to increase dramatically and this is placing a burden on all the networks, whether they are wireless or wired. In the upcoming year, I plan to update research on the wired CATV/broadband and fiber transport networks, along with developments in the wireless backhaul, infrastructure and VSAT networks to get a better understanding of the trends and drivers in these areas, so stay tuned for those updates.

As a final thought, I’d be remiss if I didn’t mention GaN. This technology continues to attract a significant amount of interest in the compound semiconductor industry. It finally appears that we are getting commercial adoption of GaN-based devices and we can see the point of inflection for volume. CATV amplifiers continue to lead this commercial adoption, but we are hearing about more activity for GaN in wireless infrastructure, VSAT, high power electronics and even point-to-point radio applications. The tricky part is determining exactly where we are in relation to the point of inflection. I’m not completely sold on the hype (again), just yet, but I am willing to concede there is much more activity than a year ago. This is another topic that I will be diving into early in 2013 to get a better sense of the market.

As I sharpen my pencil for 2013, I’d like to wish everyone a very safe and happy holiday season and a prosperous New Year!

-Eric

I hope everyone had a chance to attend the GaAs Market Trends & Results webinar I hosted last week. If not and you are interested, please click on the link to view the replay. The RF GaAs supply chain remains very dynamic, with some interesting trends driving the substrate and device portions of the market.

As I’ve mentioned in previous blogs and presentations, the top-level driver for GaAs devices continues to be the increase in data consumption. Some of the latest estimates have mobile data consumption growing at rates approaching 100%, which means IP data consumption will double every year from 2009 – 2016! Even with this impressive growth, these estimates claim mobile data will still be less than 10% of total IP data in 2016. This is important, because while wireless applications continue to drive the GaAs industry, the wired broadband, CATV and transport networks and enterprise applications are also growing and represent opportunities for GaAs devices.

One of the advantages of GaAs is the performance makes the technology useful for a wide variety of commercial and defense applications. So, while the entire industry must continually pay homage to the handset portion, the diversity of applications does help buffer some of the market instabilities. The result for 2011 was another year of revenue growth in the GaAs market. This roughly 6% growth raised GaAs device revenues to about $5.2 billion. Neglecting an essentially flat year in 2009, GaAs device revenues have grown since a decline in 2004, so things have been good in the GaAs supply chain.

There are some storm clouds on the horizon, however. Handset opportunities represent more than 50% of all GaAs device revenue and the broader handset market does not grow explosively. The GaAs market has been helped by the shift toward feature phones and smartphones that have much higher GaAs content and the introduction of more and different frequency bands of operation. Many of the large handset device OEMs have converted from GaAs to SoI for handset switches, turning the handset GaAs opportunity increasingly into a power amplifier opportunity. Since handset switches are very inexpensive, this conversion has not had much effect on GaAs revenue, but the quantity reduction has had a definite impact on the bulk and epitaxial wafer manufacturers. We’ve seen reductions in demand and an upswing in MOCVD production at the expense of MBE devices.

In addition, we’ve all gotten used to larger smartphones that accommodate bigger screens, but you’ve probably noticed a trend toward thinner phones. To meet the demands of more frequencies and form factors, the device OEMs are releasing multi-mode, multi-band amplifiers that allow a single device to replace multiple existing PAs. Given the price and volume pressures from the handset market, it is unlikely that the multi-mode amplifiers will be larger or more expensive than the amplifiers they will replace, so this looms as a potential issue for the substrate and device markets.

However, even with the storm clouds, the GaAs device market has proven to be very resilient. As long as the performance requirements for the various applications keep increasing, GaAs has historically proven to be up to the challenge. Even with smartphone growth slowing (still strong, but slowing), the avalanche of data consumption is driving things like new Wi-Fi standards, higher frequencies for wireless backhaul, “small cells” in wireless infrastructure and higher data rates in transport networks. All these developments should give a boost to the GaAs supply chain.

Since we are almost through 2012, I should add a thought or two about where the market appears to be headed. It looks like we will see some growth in 2012, but at a much lower rate than the historical average of 6%. On a positive note, in a previous blog (At the Halfway Point of 2012: GaAs Device Industry Shows Small Gain ), I introduced the idea of “pressure curves”. While the results are not complete yet for calendar Q3, initial indications show the GaAs market is growing. This, coupled with positive guidance from some of the larger GaAs device OEMs for calendar Q4, may mean we are in for a bit of a rebound, so stay tuned.

-Eric

I just posted theGaAs Five Year Forecast: 2011- 2016on the website and I am happy to report that the GaAs device industry continues to be very resilient. Despite an uncertain direction in the global economy, our research shows the GaAs device market closed 2011 with nearly 6% growth and record revenues of slightly more than $5.2 billion. In fact, our analysis shows the GaAs device market has not declined since 2004 when it stood a shade below $2.4 billion. I’m taking a bit of artistic license with that statement, because we have reported that the market in 2009 “declined” by less than 0.5%, but given the economic meltdown in the US at the time and the nature of the forecasting business: I’ll put that year on the good side of the ledger.

So why is the GaAs market so resilient and less sensitive to economic cycles than other semiconductor technologies (and I’m talking about you silicon)? I think the answer lies in the performance dimension of GaAs technology. We’ve all probably heard the saying “if silicon can do something, it will”. I believe that statement and we’ve certainly seen examples where if silicon-based technologies catch up to the performance of GaAs, the cost advantages make it an easy decision to eliminate GaAs. Keep in mind, among the first applications for GaAs technology were “high-speed” digital logic and where has that market gone? We are seeing SiGe devices in LNA applications and high-frequency transceivers and we are even starting to see CMOS used for handset PAs. The common thread in the application where GaAs is being displaced is a relatively stagnant technology environment. This may be the result of long design cycles, slow upgrade of standards, specifications that remain “good enough” for a long time or a number of other reasons. Where GaAs has proven resilient and risen to the challenge is where the requirements are moving “up and to the right” quickly. As handsets have become more sophisticated with the number of frequency bands increasing quickly, GaAs is still the most capable technology. As Wi-Fi standards evolve to incorporate millimeter wave frequency and multi-gigabit speeds, the displacement of GaAs in this segment does not look quite so certain.

So, why have I gone off on a bit of a tangent? It’s because we are in a period where GaAs will have to show its resiliency once again. We may be looking at a prolonged period of global economic uncertainty that will not help the business models for network capex or consumer spending. For the last couple of years, tremendous growth in smartphone sales have really helped pull the GaAs market along, but saturation is somewhere ahead and growth rates are slowing. In addition, GaAs is still seeing stiff and growing competition from GaN, SiGe, LDMOS and CMOS.

I remain optimistic that the GaAs device market will continue to grow and the report details the effect the trends I’ve mentioned will have on the GaAs bulk and epitaxial substrate market at the very front-end of the GaAs supply chain. The underlying drivers for GaAs growth; data consumption, more GaAs content in handsets, the need for higher capacity wired and wireless networks are still in place. However, I think that the economy is the wildcard. If it doesn’t improve, the growth we see in the next few years may be below historical averages. Now, I’m not a betting man, but despite the apparent gloom, I’m not so sure anyone should bet against the GaAs industry, given the track record of resiliency!

Eric

I recently posted the results and forecasts for the GaAs epitaxial substrate market. The Excel data model is entitled "GaAs Epitaxial Substrates 2011-2016" and the accompanying Forecast and Outlook report is "Markets for Semi-Insulating GaAs Epitaxial Substrates: 2011 - 2016". Our survey results indicate GaAs epitaxial production saw a small (between 2-3%) gain in 2011. This small gain was the result of opposite trends in the two major epitaxial processing techniques, however. As I have been reporting, the demand for pHEMT devices dropped significantly, decreasing by nearly 7% in 2011. The primary reason for this appears to be several large GaAs device manufacturers converting from GaAs to silicon-on-insulator for handset switches. An increase of about 9% in MOCVD processed wafer demand was able to offset the decline in MBE wafer epi and the overall market rose slightly. MOCVD wafers are closely associated with HBT devices used for handset PAs and this underscores the important role these types of devices play in the overall GaAs device market.

Despite the small increase in epitaxial wafer demand, the market revenue grew by almost 20% to nudge jsut past $600 million. The supply chain disruption that spiked pricing in the GaAs bulk substrate market also seemed to have had the same effect on the epitaxial wafers. This price increase is likely a one-time event and epi wafer pricing will return to a more typical price reduction curve starting this year. This, coupled with the slow growth period the entire GaAs market will be in for the next several years will lead to a declining market value through 2016.

The good news is there will be slow growth in device, epi and substrate demand, fueled primarily by handset growth in general and the continued penetration of smartphones. Driven by handset growth, it is not surprising that we believe MOCVD wafer production will increase through the forecast period. What may be surprising is I expect MBE wafer demand to also increase, albeit at a much slower rate than the MOCVD production. I think most of the transition from GaAs to silicon-on-insulator has already taken place and it is unlikely that excess MBE process capacity will remain idle. I think it is far more likely that this MBE and pHEMT capacity will be re-tasked to other high performance markets and this will create the opportunity for some growth.

-Eric

In the course of the last month or so, I have had the opportunity to attend CS MANTECH, CTIA Wireless and The Cable Show. Even though these conferences address different industries and different points on the supply chain, it was very interesting to see similar threads running through all three. The conclusion is inescapable: data consumption is the engine that is driving consumer and enterprise devices and networks. These networks, whether wired or wireless, are also becoming increasingly intertwined.

The onslaught of data consumption is not new, Strategy Analytics has been following the dramatic increase for years and most top-level market presentations include some reference to this trend. I think the most succinct explanation of this trend came during a panel session at The Cable Show. Actor, director and writer Edward Burns characterized the current landscape (and I am paraphrasing here) as one of access not ownership. This was fascinating to me because Mr. Burns is not in the wireless or wired broadband industry, but he realizes the importance of the network and how consumers access his craft. It also goes a long way toward explaining the demise of “big-box” electronics and audio stores and the growth of audio and video streaming services. It also bodes well for the continued growth of the broadband industry since the high-speed broadband networks enable access.

On the convergence front, one of the big announcements at The Cable Show was that US MSOs Comcast, Time Warner Cable, Cablevision Systems, Bright House Networks and Cox Communications will allow their broadband subscribers to connect to the Wi-Fi networks of any of the companies in this agreement. This combined network will total more than 50,000 hot spots and is again interesting from several fronts. First, it shows the commitment cable companies have made toward having a wireless component to their networks. This is being done with an eye toward maintaining the “broadband experience” for customers who are nomadic outside of their homes. It also shows the concern about wireless broadband capturing share of the total broadband market.

There were presentations from CEOs of major wireless, cable and device companies that were upbeat about the trends in their respective industries. Universally, the drivers for this optimism were increasing data consumption and the advances in the networks and devices to support this consumption. Most, however, also sounded a cautionary note about spectrum availability for the wireless industry and the most efficient way to increase spectrum for the wired industry. Addressing these issues will provide both opportunities and challenges for device, equipment and network manufacturers and will likely determine the trajectory of future growth.

It has been a very lively past few weeks. It is clear the growth engine in the compound semiconductor industry is still firing on all cylinders and convergence is occurring in all segments of the electronics industry. Please keep an eye out for more detailed summaries of the individual conferences in the coming weeks.

Eric

I’ve reported that the GaAs device market growth slowed considerably in the second half of 2011 (2011 GaAs Device Revenue Falters after Strong Start), dropping the overall revenue increase in the GaAs device market to 6%. This was well below 2010’s 35% growth, but is right in line with the historical growth rate of the market. Despite the market returning to historical averages, some companies did significantly better than the market. The Strategy Analytics GaAs and Compound Semiconductor Technologies Service (GaAs) Insight, “Skyworks Remains the Largest GaAs Device Manufacturer,” explores 2011 GaAs device revenue results and growth trends, as well as revenue performance of leading device manufacturers, like RFMD, Skyworks, TriQuint Semiconductor, Avago Technologies, Renesas Electronics, Hittite and WIN Semiconductors.

The two companies in our top ten GaAs device manufacturers that showed the fastest growth in 2011 also illustrated two of the most important trends in the GaAs device industry in 2011: diversification and outsourcing. Skyworks Solutions, the largest GaAs device manufacturer had a stellar year in 2011, reporting revenue increases of 27%. This growth, well in excess of the market appears to be a testimonial to Skyworks’ efforts at diversifying their smartphone customers, products, technology and market applications. Skyworks is widening their lead over rivals TriQuint, RFMD and Avago Technologies.

The second company showing much stronger revenue growth than the GaAs device market in 2011 was WIN Semiconductors. WIN checked in with revenue nearly 37% higher in 2011! The growth at WIN Semiconductors reflects their commitment to expansion and it illustrates an increasing desire by GaAs device manufacturers to outsource their foundry operations. Companies with foundries, as well as start-ups are looking closely at the “fab-less” or “fab-lite” outsourced business model as a method to increase the range of process technologies that can be offered and provide a capacity buffer without the need for large levels of capital investment. WIN has taken advantage of this trend to easily become the GaAs device industry’s largest pure-play GaAs foundry.

Eric

For Current Clients to Read More:

The Strategy Analytics GaAs and Compound Semiconductor Technologies Service (GaAs) viewpoint, “Compound Semiconductor Industry Review October-December 2011: Optoelectronics, Materials and Equipment,” captures product, technology, contract and financial announcements from major material, device and equipment suppliers in the optoelectronics market supply chain, such as AIXTRON, IQE, Kopin, Oclaro, GigOptix, Cree, JDSU, Avago Technologies, Finisar and Osram. These announcements are categorized by material and equipment, laser, LED and compound photovoltaic activity.

Despite recent, highly publicized problems at Evergreen Solar and Solyndra, solar energy continues to play an essential role in political strategy as government and the private sector seeks viable sources for renewable energy. It is easy to get a negative outlook about an entire segment when a couple of the high profile participants run into difficulties. The reality, however, is that solar energy has become a widely deployed form of alternative energy. The product development announcements we captured in Q4 provide a counterpoint to the bankruptcy proceedings at Evergreen Solar and Solyndra and show growth and activity in the compound photovoltaic technologies which underpin the solar market.

The growth starts at the begiining of the supply chain with commitments of $2 billion to increase polysilicon production by 23,000 metric tons per year. Companies like Spire, Avancis, Soitec and First Solar are expanding their photovoltaic module manufacturing plans and TSMC, through its TSMC Solar subsidiary has entered the module manufacturing arena. These announcements, coupled with more companies reporting efficiency records for solar cells points to a vibrant industry with good opportunities for compund semiconductor materials.

The outlook in the LED sector is not quite so upbeat. AIXTRON, one of the leading semiconductor equipment manufacturers reported a steep drop in revenue and orders in 2011. They blame high levels of government funding in China and financing pressures on the Asian LED manufacturers for masking a significant organic slow down in LED demand in China. It appears production in 2012 will continue to grow, but perhaps not enough to offset price erosion. Despite, this, there is still a signficant amount of development activity at companies like Cree, Bridgelux, Epistar and Luminus. These developments aim at increasing efficiency, output and affordability for applications ranging from low power consumer devices to high intensity specialty lighting and streetlights.

Eric

 For clients to read more: