Brighter days are forecast as the industry continues its climb out from under the clouds of recession
In the end, 2003 lived up to predictions that it would be a transition year as the industrial laser business returned to health. The outcome was in doubt, right up until the last quarter when mediocre market activity turned more bullish. Most of the year ILS was on the receiving end of mixed economic news, none bright enough to give hope for future growth opportunities.
At the end of the third quarter the dam broke and we were flooded with good news, the kind that rejuvenates the U.S. stock market and gives heart to a President looking ahead to an election year. Business activity was up. In November, according to the closely watched Manufacturing ISM Report on Business, the overall U.S. economy had grown for 24 consecutive months and their PMI was 57 percent, marking four straight months above 50 percent, while production was up for six straight months. This all means the recession was officially over and growth was the order of the day.
The U.S. government joined in with GDP numbers above 3 percent. And while Europe lagged, China remained hot with foreign direct investment up by 30 percent for the equivalent period. Even the Semiconductor Industry Association chimed in with an anticipated 15 percent growth for the year, beating a 10 percent projection.
Confirming the laser industry growth were reports from market leaders. TRUMPF, the largest laser supplier (in terms of revenues), showed a FY 2003 of 2.4 percent growth in an otherwise tough 12-month period for systems sales. Publicly traded Rofin-Sinar bragged about a 16 percent growth in sales and a tripling of profits at the end of its fiscal year, prompting a reporter to call this office looking for reasons why its market had taken off.
The only drag seemed to be reports from the AMT's Laser System Product Group who kept sending out negative news quarterly. Less than exuberant were the U.S. job shops that gave off mixed signals all year, depending on which ones you interviewed and when you did it. However, the reliable Job Shop Index (drawn from returns from 100 companies surveyed) showed about 60 percent reporting growth over 2002 business, 50 percent expecting 2004 to be better, and 75 percent optimistic about the business climate in 2004.
We could go on, but if you are reading this in the U.S. you know that an upbeat climate exists, except in the area of employment. As one observer opined, "we talked ourselves into this recession and now we are talking our way out." True, but if you lived and worked through the past 36 months you know it was more than talk as your employer ran as lean as possible. Those of us with gray hair have been through many recessions, so what's another? If it hadn't been for the impact outside manufacturing, by this we mean Wall Street and the telecoms, we would likely have rated this one as a little tougher than the last.
So how did this affect the industrial laser market? According to industry suppliers and other sources, ILS estimates that unit sales grew by 9 percent while revenues for these units grew by 4 percent. And in the all-important systems market, revenues grew by 4 percent, bringing the market back to the trend line established before the recession.
For the goal minded, total unit sales since 1970 passed the 200,000 mark and laser revenues topped $9 billion. ILS has been tracking system revenues since 1991, which currently stand at more than $25 billion. Since the 1993 recession system sales have averaged a 12 percent per year growth rate, a slightly deceptive number because of a higher-than-normal year in 1995 when built up demand from a recession caused a burst of capital equipment spending. Take that aberration out and system sales have averaged about 8 percent growth per year.
So, 2003 went about as ILS had expected when last year's projections were made. We were off a bit on unit sales, not thinking that 2003 could see the phenomenal growth of low-power CO2 lasers that occurred. We were about right on laser and system revenues however, but we won't take any credit for the strong depression on unit prices brought about by new competition in various market sectors. More about this later.
Let's turn to Tables 1–3, which present a summary of information supplied by the industry and other market sources. Table 1, Industrial Laser Production, represents the total number of units produced globally. The CO2 category includes lasers from tens of watts up to multikilowatt units. This category is dominated (79 percent) by lasers with output power less than 500 watts, which make up the bulk of the 11 percent increase in units sold.
Included in the solid-state unit production, for the first time, are fiber lasers. Although their numbers were small in 2003, they had an impact, especially as a replacement for rod-type solid-state lasers used as the power source in laser marking systems. This category includes both lamp-pumped and diode-pumped lasers. Lamp-pumped units represented about 52 percent of production, but that situation should change as diode costs eventually drop enough to make the two technologies comparable.
The category ILS calls "Other" includes both direct diode and excimer lasers. The drop in the reported total number is a result of lower sales by the leader in excimer lasers. High-power diode lasers experienced an increase for the first time as sales of units for welding and surface treatment picked up.
For 2004, ILS expects CO2 and solid-state laser production will experience modest low single-digit growth as the industry climbs back to stronger health. We expect order bookings to show double-digit increases in the second half of the year with higher shipments in the last quarter and into the first quarter of 2005.
Table 2, Industrial Laser Revenues, shows the total dollars spent for the Table 1 lasers in 2003. In 2003 industry began, for the first time, to feel the pressures of international competition, especially in the low-power, sealed-off CO2 laser sector. Thus revenues for these lasers increased 4 percent compared to the 11 percent unit growth. The same picture presents itself in the low-power solid-state laser revenues where the lower selling price of diode-pumped units, used in marking systems, along with increased international competition caused average unit prices of solid-state lasers to reduce somewhat, leading to a 4 percent growth in revenues compared to an 8 percent unit growth.
Other laser revenues declined as a result of the softness in the microlithography market for excimer lasers, which was only offset slightly by increased revenues in the high-power diode sector.
For 2004, ILS expects low single-digit growth in sales revenues as the effects of strong international competition increases.
System sales in 2003 finally cracked the elusive $3-billion barrier that ILS had projected in 2000 before the recession struck. Table 3, Industrial Laser System Revenues, is the least confirmable ILS data, because systems suppliers are reticent to share their sales information. It is compiled using verifiable laser unit data multiplied by factors that¡ ILS establishes for system selling prices. Thus, for example, a $150,000 CO2 laser is about 25 percent of the cost of a flat-sheet cutter, while a $5000 sealed-off CO2 laser may represent only 15 percent of the cost of an engraving system. ILS established these multipliers more than 15 years ago and reviews them periodically. Because we have been consistent in their use, we have confidence in the overall trend lines.
Some system selling prices, especially at the higher power levels, do not reflect the decrease in laser prices. This is thought to be because today's laser systems are performing more functions than before. For example, a flat sheet cutter today may have load/unload and part sort functions as standard, rather than just a cutting function. An exception to this is two systems TRUMPF introduced at last year's Fabtech. One, a flat sheet cutter powered by the company's new diffusion-cooled CO2, laser employs a cantilevered load/unload feature that allows a job shop to operate in a fully automated, lights-out mode at one-third the selling price of a full FMS system. The other, a low-cost five-axes unit, is designed to cut three-dimensional shapes at a reasonable capital investment. Both units offer job shops flexible capability at reasonable prices to meet increasing customer demands.
Laser systems revenues will show a nominal 4 percent increase in 2003. Holding down expected growth was the slow increase in flat sheet cutter sales, which historically has represented one-third of industrial laser sales. Considering that low-power CO2 laser system sales, currently experiencing selling price pressure, represents 45 percent of units sold, it is satisfying to see the small but positive sales growth.
For 2004 we expect to see further declines in unit selling prices, especially as the sellers of costly flat sheet cutters continue to discount heavily as the battle for market sector dominance heats up with a return to health in that market sector.
A closer look at the markets is shown in the following figures. Figure 1 is a breakdown of the output of industrial lasers produced in the world's major supplier regions. In 2003 North American unit production expanded market share by 9 percent over 2002 as a result of record sales by industry leaders Synrad, Coherent Inc., and Universal Laser. Unit shares in Europe and Asia were down slightly, even though production in Japan was up 12 percent as that nation finally turned the corner with a return to growth. European sales felt the effects of a slow German economy.
Figure 1. World shares in production of all industrial lasers in 2003.
Revenues followed the past trend (see Figure 1), with Europe holding the dominant position thanks to the higher selling price of the high-power units produced there. North America and Asia experienced lower revenues as the low-power lasers produced in those regions suffered from heavy competitive pricing pressures.
Narrowing world shares down further, Figure 2 shows the segmentation by major industrial laser type, CO2 and solid-state. ILS does not show diode and excimer laser production because of the small number of producers reporting. Low-power CO2 laser production, centered in North America, makes this region the world leader in this category. Conversely Europe holds the leadership position in solid-state production, however that may change as Asia, led by production in China, may challenge for the lead in the near future.
Figure 2. World shares in production of industrial laser units by type in 2003.
Figure 3 breaks down revenues of industrial laser types by world shares. Europe, the leader in production and sales of high-power units, continues to hold first place in both the CO2 and solid-state categories. However Asia, mainly China, is increasing share at the expense of both Europe and North America in the low-power sector.
Figure 3. World shares in industrial laser revenues by type in 2003.
No dependable government data exists on industrial laser system installations so ILS must use what little trade organization data is published and anecdotal information to form a pattern of which market areas absorb the output of the producing nations. Much like past years, the major market sectors—North America, Europe, and Asia—equally install laser systems, as seen in Figure 4. If there is a perceptible change it is the small percentage increase in Asia, as Japan enjoyed a double-digit increase in marking systems installations and China continues as a strong market. North America remains a vibrant market for low-power laser systems for marking, engraving, and non-metal processing.
Figure 4. World shares in industrial laser system installations by units in 2003.
Marking is now the largest global application for industrial lasers, as seen in Figure 5. And engraving, a subset of marking, is in the midst of major employment worldwide. Combined, these two identification applications hold a dominant 36 percent of the applications market. This was reflected earlier in the report by the unit sales and revenues of low-power CO2 and solid-state lasers. These two applications seem to offer continued strong growth for the coming years, driven by increasing identification demand by consumer and industrial regulatory practices.
Figure 5. Worldwide applications for all lasers (units) in 2003.
Cutting applications, both metal and non-metal cutting, retain strong market demand. In the metals sector a return to health of the fabricated metal products sectors in Germany and the United States is important because this high-power CO2 application represents about one-third of the total system market and about 60 percent of industrial laser revenues. Welding and microprocessing shares have declined slightly as the former has yet to find a "killer" application and the latter is still lacking industry demand as this market sector struggles out of a multi-year recession.
Finally, we return to metal cutting sales, of which flat sheet cutting is the majority. ILS tracks this market closely because it is a key indicator of how the economy in general is performing and consequently the state of industrial laser sales in particular. In 2003 world share of flat sheet cutter sales changed only slightly from 2002 (see Figure 6) because total sales were down as the world's market for fabricated metal products slipped, except for China, which is increasingly taking a larger share of the outsourcing business.
Figure 6. World installations for flat sheet cutters in 2003.
At Fabtech in November the ILS booth was located next to that of a Chinese company outsourcing die manufacturing services. Booth personnel spent the better part of four days quoting die fabrication, actually downloading drawings and working up estimates on the spot. ILS spoke with some of the company representatives as they left the Chinese booth and learned that many had been sent to this show to find an "Asian" source for metal work. A manufacturing engineer from a major Tier 2 auto supplier told us that his purchasing department plans to outsource one-third of its $8 million die business to China. We heard similar stories about companies outsourcing sheet metal cutting work.
For a year that started inauspiciously, 2003 turned out better than expected thanks to a very active fourth quarter. ILS thinks that 2004 will be, at the least, as good, and, based on the optimism we heard as this is being written, we think 2004 can be even better.
Where will the added sales necessary to sustain this growth come from? We expect the market for sheet metal cutting to grow 7–10 percent. Marking, coding, and engraving applications will continue solid double-digit growth as lower-cost systems increase market share at the expense of non-laser methods. Non-metal cutting, especially in paper converting and plastic cutting applications, will continue a strong single-digit growth rate. Auto applications, body-in-white welding and tailored blank welding, will see a spurt as delayed platform programs are reactivated. Microprocessing, led by a return to positive growth in the semiconductor sector, will see a small but important up tick for diode-pumped lasers. Welding and cutting of medical instruments and devices will continue a solid 10 percent per year growth rate. And other industrial applications such as soldering, brazing, cladding, and surface treatment collectively will add revenue to the totals.
These are market drivers, which, spurred by a recovering economy, will lead to 2004 being a good year for industrial lasers. Z