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State of the Economy

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A time of innovation and collaboration

Laura S. Marshall, Features Editor, [email protected] and Melinda A. Rose, Senior Editor, [email protected]

“Innovation” and “collaboration” are some key words that executives are throwing around these days. Although there’s no denying the recession, companies are looking to make the best of the economic situation rather than being dragged down by fear and frustration.

“Warren Buffett said we’d look back on it as a period that led to the greatest innovation of our lifetime,” said Robert Edmund, CEO and board chairman of Barrington, N.J.-based Edmund Optics, at an executive panel held during Photonics West 2009 in San Jose, Calif. “People are talking about innovative new products, new ideas that they’re working on. It’s inspiring.”

Buffett, the head of Berkshire Hathaway Inc. and known as “The Oracle of Omaha,” said in his most recent letter to shareholders that the US economy will be “in shambles throughout 2009 – and probably beyond” but noted that the country has weathered worse troubles in the past and would, in time, overcome the current crisis.

“Though the path has not been smooth, our economic system has worked extraordinarily well over time,” Buffett wrote. “It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.”

It’s vital to look to the future if you want to continue innovating, said Randy Heyler, who was senior director of strategic marketing at Newport in Irvine, Calif., during the trade show but has since left the company. “Be more intentional and strategic – intelligent about what you narrow it to,” he said. “Then open doors to universities and other companies. New collaborations may be coming.”

Stuart Schoenmann, president and CEO of CVI Melles Griot in Albuquerque, N.M., agreed. “The models are going to change,” he said. “If the economy worsens, we’ll have to make adjustments to R&D budgets, become more collaborative with universities and other companies. We need to increase collaborations with institutions that are government-funded, so companies don’t bear the risk of costly research and development alone.”

That is, as long as universities and other government-funded institutions are not hurt too badly by the economic downturn. “I think the government has forgotten universities,” said Ken Kaufmann, vice president of Japan’s Hamamatsu. “They are under stress with budget cutbacks, especially in California, and may lose a lot of really good scientists. It could be a very long-term problem if the government doesn’t act quickly.”

Kaufmann noted, however, that he is encouraged that at least the current administration “recognizes the value of a technical background to our future in funding fundamental research.”

‘More mergers than buyouts’

The executives said they expect to see companies consolidate in the near future. “I suspect we’ll see more mergers than buyouts or sellouts, due to a lack of cash,” Edmund said.

“In the telecommunications business, consolidation is critical,” said Ken Ibbs, executive vice president of San Jose, Calif.-based Bookham. “I would not argue for companies to consolidate for the hell of it, but in the telecommunications business it’s critical.” Because the telecom market is so competitive, he said, there’s less wiggle room on pricing for component suppliers; the only effective place to cut costs is in operations.

“Thirty years ago,” Heyler said, “two laser companies chose to fight each other rather than both make a lot of money. The industry is more of a club, niche-oriented. You can’t make a lot of money when you have 50 competitors – it makes it difficult to be efficient and profitable.”

“Consolidation is needed for us to survive,” said Schoenmann. “Companies are going out of business – it’s not healthy.”

“There are places we need substantial changes,” said Ibbs. “In the diode market, there is gross overcapacity to fabricate diodes.”

But Tim Morris, managing director of Trumpf Inc. of Farmington, Conn., the North American arm of the Stuttgart, Germany-based Trumpf GmbH + Co. KG, said there are still product niches, and Ibbs noted that ongoing innovation creates new niches all the time.

The bright and the dark

Bright spots on the economic horizon include a focus on clean technology, nanotech and medical applications of photonics.

“CVI is in Albuquerque, and Schott building a huge solar facility there is a bright spot,” Schoenmann said. “I see the changing demographic – the aging of the population – increasing demand for medical and biomedical applications. Miniaturization as well – within groups we work with, there is a push to make things more light, more compact, more versatile.”

“Medical is seen as relatively recession-proof from a materials-processing perspective,” Morris said.

That’s not to say everything is bright and cozy in the biomedical world. “Large MRI [and] PET scanners are having problems,” said Kaufmann. “Hospitals are having trouble buying machines because of reimbursement rates, and having a hard time getting financing for the $1 million-plus cost.”

Layout-1-2.jpgIbbs said that semiconductor companies are struggling, too. “Semiconductors is a truly dark spot,” he said. “Semiconductor-related business is in deep, deep trouble.”

In fact, a February report by research firm Gartner predicted that global semiconductor revenue would drop 24 percent in 2009 to hit $194.5 billion. The February prediction marked a steep decline from Gartner’s December prediction, which called for a 16 percent dip in 2009 – but now the firm says the market’s fall in the first quarter alone could total 17 percent.

Outlook for start-ups

The executives were asked whether, considering the current ups and downs in the economy, now is a bad time to start a new company.

“Is there ever ‘the best’ time?” Schoenmann mused. “Today, in some ways, is as good as any. Financing is very difficult, but not impossible. But with private equity groups – no deals last quarter.”

“It depends on what happens in the next six months,” said Marc Sobey, senior vice president of specialty laser systems at Coherent in Santa Clara, Calif. “If the recession is short, companies will survive. If it lasts one to three years, it will be a challenge. But [regarding] maturing product development during the recession: The timing might not be so bad, you have time to develop a product – and bring it to market as the economy is picking up.”

“If you’ve got the money, this is a great time: Resources like attorneys, machine shops, suppliers – all are marked down,” Kaufmann added.

Ibbs predicted an increase in customer-funded developments, due to a lack of initial public offerings and venture capitalist funding.

But, in general, the panelists said, it’s the spirit of innovation and collaboration that will carry photonics companies through the recession.

“In a time of recession, you drive innovation,” said Sobey. “I’ve been struck by the improvements in efficiency and power that I’ve seen here on the [Photonics West] trade show floor: in lasers, in diodes, etc. I’ve seen as much or more innovation than I can remember in the last few years.”

So the unexpected silver lining to the recession, Heyler said, is that “it will force people to be more creative in their approach, to try things they haven’t had to do before.”

Photonics Spectra
Apr 2009

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