Just One Word ... Photonics

Back to Contents of Issue: December 2000

Demand for fiber optics is soaring worldwide, and the wire, glass, and ceramics industries in Japan are gearing up to satisfy it.

by Augie Tam

"I just want to say one word to you, just one word ... plastics." If the 1967 film The Graduate were remade for today, Dustin Hoffman would be advised to invest not in plastics, but in photonics. With no end in sight to the appetite for bandwidth, some investors consider fiber optics-related stocks to be the next sure thing. This enthusiasm has been reflected in the Tokyo markets, too, but so far no Japanese company fitting the fiber optic theme, however loosely, has become a global pioneer in optical networking.

The Japan market for optical fiber accounts for 10 percent of the world's 70 million miles. Demand for fiber remained sluggish in 1998, when investment in basic telecom infrastructure ran its course. But demand is soaring again thanks to aggressive spending on communications networks by cable TV companies and alternative communications carriers. In 1999, domestic shipments of fiber optic cables surged 58.1 percent, to 6.8 million kilometers. A Ministry of Construction poll showed demand for 57,000 kilometers of fiber optic cable conduits in June 2000, a 60 percent rise from six months before.

Under the central government's renewed focus on IT-related public works, various ministries are vying for budgets to lay fiber optic networks within their own spheres of control. However, despite the war cries of the "IT revolution," these government initiatives to blanket the nation with fiber optics are nothing new. Japan's main trunk fiber optics have already been laid, and the nation's fiber optic network backbone already boasts 1 terabit of capacity between Tokyo and Osaka and 80 gigabits on average nationwide.

Linking up the "last mile" remains an industry goal. NTT promises to offer FTTH (fiber to the home) any day now. While FTTH is an honorable goal, what would really benefit the Japanese Net are less expensive communication charges and fewer impediments to ecommerce.

In the Internet age, Japanese wire and cable makers are undergoing reorganization and restructuring to focus on more strategic and profitable products. They have all seen drops in sales of mainstay electric wire and cable products but increasing demand for fiber optic cables and optical equipment.

Japan's share of global fiber optic cable production has fallen from 24.5 percent (7.75 million km) in 1996 to 19.5 percent (13.12 million km) in 1999, although this may change given the rise in demand.

In response to the surge in demand this past year, Japanese fiber optic cable makers are boosting production. Sumitomo Electric (5802) plans to increase output capacity by 70 percent to over 10 million km by autumn 2002. Furukawa Electric (5801 or FUWAY) intends to raise output to over 10 million km in FY2001. Fujikura (5803) is set to double its output capacity from 7.5 million km this FY1999. And Mitsubishi Cable (5804) plans to double its capacity to 2.4 million km by FY2001. Of course, all these production boosts now may mean oversupply later.

Number-two domestic fiber optic cable producer Furukawa Electric in particular has drawn investor interest because of its optical communications-related products and its ties with JDS Uniphase (Nasdaq: JDSU). Furukawa is a core holding for many Japan and Asia-Pacific funds. Earlier this year, Furukawa reduced its equity stake in cross-supplier JDS Uniphase to 13.5 percent, such that it was no longer included in consolidation. Furukawa is using the cash to strengthen its expertise in strategic optical communications-related products. The company is still sitting on unrealized gains on JDSU.

Furukawa will also continue to hold a majority stake in US subsidiary Optical Communication Products, which has filed an application to list with the SEC. Optical Communication makes optical links, which convert light signals to electric current and vice versa. Although electric wire and cable account for over 35 percent of sales, and Japan 80 percent of sales, Furukawa is seeking to become the world's third largest WDM (wavelength division multiplexing) equipment maker. WDM is a technology that raises the capacity of optical networks by allowing a single strand of fiber to carry multiple signals.

Furukawa plans to double 1480-nm laser pulse diode module production by the end of 2000. Furukawa is the leader in this technology with 70 percent worldwide market share. The company also plans to double production of its optical amplifiers based on this technology. In addition, it has successfully developed wideband raman amplifiers (whose low-noise feature improve the quality of data signal transmission), which it will begin to market.

For FY2000 ending March 2001, Furukawa projects over ¥40 billion in consolidated operating profit, up 88 percent from the previous year. The company's forecast is based on soaring demand in North America for WDM components.

Companies in the glass and ceramics industry have also found their share prices getting a lift from the light wave. They are moving away from basic materials towards IT-related components. Companies in this industry are supplying sheet glass for LCD displays and glass for CRT displays. In the optics area, they are producing materials for components primarily aimed at the North American WDM market.

Asahi Glass (5201) manufactures filters and aspheric surface lens. Nippon Sheet Glass (5202) holds a strong global position in WDM micro lenses. Nippon Electric Glass (5214) provides ferrules for WDM. Sumitomo Osaka Cement (5232) is expanding production of lithium modulators for WDM. NGK Insulators (5333) is boosting production of fiber arrays and optic parallel interconnects as well as susceptors for semiconductor manufacturing equipment.

The global shortage of fiber optic capacity is concentrated in North America and Europe rather than Japan. While demand for fiber optic cable and components should stay robust over the short term, there are questions whether the WDM market will continue to expand and whether WDM will be replaced by new technology. There is also concern that infrastructure spending may be put on hold due to the oil price hikes.

The Old Economy companies in Japan's wire/cable and glass/ceramics industries are transforming themselves into high-tech companies. But as Japan lacks true networking companies on the order of Cisco or Lucent, it remains to be seen whether any of these companies can emerge from basic manufacturing to become global players in the optical networking field.

Augie Tam is the founder of Gaijininvestor.com. He can be reached at augietam@gaijininvestor.com.

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