Market Commentary:Telecom firms navigate through cloudy economic waters

March 23, 2001
Led by the auto industry and followed closely by telecommunication firms, US industry has announced layoffs at an unusually high rate this winter, which some say indicates a general economic downturn.

Led by the auto industry and followed closely by telecommunication firms, US industry has announced layoffs at an unusually high rate this winter, which some say indicates a general economic downturn. The telecomm picture seems a bit more complex, however, as fiberoptic cabling stays strong, components continue to shift emphasis, and the same companies that are laying off workers are simultaneously announcing continued hiring, new acquisitions, and major new contracts. Stepping back from day-to-day events and taking a long-term view, one industry observer has described the primary trend in fiberoptic communications as one of integration and convergence.

According to Reuters, a survey by the international outplacement firm Challenger, Gray & Christmas has counted announcements of 377,652 layoffs by US industry in the three-month period from Dec. 1, 2000, through Feb. 28, 2001. This number is almost a 200% increase over the 130,752 figure for the same period one year ago and the highest the number has climbed in the eight-year history of the survey. For the first two months of 2001, the automotive sector led with 57,656 layoff announcements. The telecommunications tally was 42,879. E-commerce companies announced 21,383 layoffs, and computer companies announced 16,242. The first step in placing all of this in perspective is that these cumulative figures are for announced, as opposed to actual, layoffs. The second is to look at some actual cases in the telecomm industry.

Corning is eliminating 825 (about 15%) of the 5,500 jobs in its photonic technologies business, citing softness in telecom. The firm also has readjusted the expected annual growth rate in photonic technologies from its earlier 75% to 90% estimate down to 50%, based at least partially on reduced demand from Nortel, a key customer. Considering that Corning still intends to boost its work force in the same business later this year by between 500 and 700 jobs (slightly down from an earlier estimate of 700 to 900), and that business remains strong in the company's biggest division (optical fiber and cable), one wonders to what degree the current layoffs are more a reaction to growth rates that remain strongly positive, although falling short of perhaps overly aggressive projections. Since 1999, Corning has spent about $10 billion to get into optical networking and has almost tripled its work force from 16,000 to almost 40,000, including 8,200 employees in the western New York region where the layoffs have been announced. As if to underscore the point, Corning joined Cisco and Intel on March 5 to pump $63 million into fiberoptic component startup company Gemfire (Palo Alto, CA).

In mid-February, a reported projection of 10,000 layoffs at Nortel, which CEO John Roth attributed to the US economic downturn, was followed by a one-third reduction in Nortel's stock price and the announcement by the law firm of Spector, Roseman & Kodroff, P.C. of a class action lawsuit in the United States District Court for the District of New Jersey against Nortel on behalf of purchasers of the stock during the period from Nov. 1, 2000, through Feb. 15, 2001.

But according to Business Week, reason for concern at Nortel over the long term may have less to do with the overall economy than with shifting technology. As an increasingly competitive telecom market looks more and more towards dense wavelength-division multiplexing (DWDM) technology to solve its rapidly growing capacity demands and less to the synchronous optical network (SONET) equipment provided by Nortel and other providers of legacy optical equipment, the cash flow such transactions have provided is likely to diminish significantly, possibly as early as this quarter. So the question may be less a matter of what is the economy doing and more a matter of how the bottom lines of the Nortels and Lucents of the world will be affected as they transition from older to newer technology in a rapidly shifting market. And once again, in the balance Nortel and Lucent have both announced major fiberoptic cabling deals in China early this month.

Similarly, JDS Uniphase (JDSU) announced 3,000 layoffs at the end of February in passive-component manufacturing operations in San Jose, CA, and Ottawa, Ontario, Canada. �The reductions will be confined primarily to manufacturing operations and reflect opportunities for realignment and improved efficiency as a result of the current business environment,� according to a company statement. At the same time JDSU �will continue to hire for key positions in its high-growth product areas, as well as to aggressively support its new product development strategy.� In fact, a week prior to announcing the layoffs, JDSU announced another acquisition. It bought Optical Process Automation (Melbourne, FL), a designer and manufacturer of automated and semiautomated systems for the manufacture of fiberoptic components and modules.

In the case of EXFO Electro-Optical Engineering (Toronto, Ontario, Canada) a fiberoptic testing and monitoring firm, the fact that company stock has tumbled 67% from its 52-week high has not stood in the way of a recent $122 million purchase of EFOS, developer of a process that uses ultraviolet and infrared light to cure photosensitive adhesives in the manufacture of optical components. And the EFOS deal is actually the third purchase for EXFO since the latter went public in June 2000. EXFO bought Burleigh Instruments in November for $275 million and bought Vanguard Technical Solutions, Inc. for an undisclosed amount in February.

In early February, during a fiberoptic industry seminar held in Santa Clara, CA, Jeff Montgomery, chairman of the forecasting firm Electronicast (San Mateo, CA) described the overall trend in the fiberoptic communications market as one of both integration and convergence. �It's all about the Internet and the Internet is not just a big wire, it's actually a whole culture,� he said. Montgomery described the evolving Internet culture as analogous to the culture that has grown up around the telephone system. He added that from an economic perspective the Internet culture is caught on the horns of a dilemma in which usage is growing rapidly, but the revenue has yet to catch up. The companies that have found serious trouble in this scenario are the competitive local exchange carriers (CLECs) who in many cases haven't been able to charge enough for the available bandwidth to keep themselves out of bankruptcy or to pay debts (to debt-laden Lucent for instance) for their equipment.

Much needed revenue growth in telecom is expected to kick in when voice over Internet protocol comes online and when physical fiber connections are completed to business customers, Montgomery said. In this context, integration and convergence have to do with convergence of various communication services within evolving telecommunications technology, convergence and consolidation among service providers, and integration of equipment into dense, multifunctional packages full of buzz words like tunability and wavelength agility. In fact packaging of optoelectronic components has become a central issue among companies that hope to serve a rapidly growing and increasingly cost-competitive telecommunications market. And a key factor in providing cost-competitive components involves the development of approaches to manufacturing that are less personnel-intensive. While widespread development and deployment of automated manufacturing capability for telecom components is still several years away, the pressure of supplying an extremely cost-competitive industry is already here.

So even though the numbers of announced layoffs in the telecom sector may have grown rapidly along with automobiles and other US industrial sectors, the reasons in telecom may have just as much to do with a technology running as fast as it can to catch up with a seemingly endless demand in the midst of a major cultural change, as with any overall economic conditions.

Hassaun Jones-Bey, senior editor, Laser Focus World

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