Let's face it, 2001–2002 have not been the best of years, and this period may well rank right up there with 1991–1992, the last time the industrial laser community experienced a major downturn. Is the ten-year cycle just an anomaly? The unsettling difference is that now the downturn is global and then it was limited to North America, when the United States was the dominant market.
By now you have heard just about every reason why the world's regional economies are under performing. So rather than put you through this agony again we'll present the facts and explain them as best we can, with an emphasis on the bright spots that we expect will lead recovery, expected to solidify later this year.
But first we can't resist an historical note. In the 1991–1993 recession, the depths were reached in 1992. By 1994, annual sales had finally exceeded those of 1991. In the current industrial laser market, the end of 2001 and the first part of 2002 apparently represent the nadir for laser sales, and by the end of 2003 the market should be well on the way to healthier growth. For readers who think their business is out of phase with this analysis, let me offer a remark from economist Robert J. Samuelson, "Even the declaration of a recovery usually isn't reassuring because, in its early stages, the recovery doesn't differ much from the preceding recession." In other words, coming out looks a lot like going in.
For the curious who went immediately to the unit sales in Table 1, and who are now scratching their heads, wondering why the numbers (16 percent increase) belie the above statement, here is the answer, in one word—China. For the first time ILS has included market estimates from China, courtesy of Professor Xiaoyan Zeng, whose review of the industrial laser market in China starts on page 14 of this issue. We learned from this report that more than 1000 industrial lasers were installed in China in 2001 and about the same number in 2002. ILS has never accounted for domestic sales in China, for obvious reasons.
This information, coupled with recently acquired market data for industrial lasers in India and the usual end-of-year annual report revisions, caused us to adjust the 2001 numbers upward by about 1800 units, turning what was a nominally a very low growth year into what looks like substantial growth.
We are always perplexed when after-the-fact changes cause the established trend lines to experience a blip. How to account for them? How far back should we go to revise data with input such as that received from China? We decided to stop at 2001. The facts are that the period 2001–2002 was indeed a down year for most of the industry's equipment suppliers. This becomes clear when the data in Tables 2 and 3 are analyzed. All those lasers installed in China and India don't amount to significant revenue increases (assume $18–25 million), and if factored out, possibly reduces revenues to little or no growth.
So stated, we offer the following for your consideration. Sales in 2002 weren't all that bad for certain sectors of the industrial laser market, certainly the suppliers of low-power, sealed-off CO2 lasers aren't complaining. Thanks to excellent business with their OEMs, record annual sales were achieved. And these OEMs tell us that sales of systems for cutting non-metals and marking and engraving have been very good. The same holds for sales of solid-state (lamp-pumped and diode-pumped) units for marking applications. Other than the continued slowdown in the semiconductor sector, marking system sales led by product identification, traceability requirements and continued strength in the consumer markets led to strong sales. About 2700 units were installed in 2002, many of which were built and sold in China.
However, these relatively lower-priced lasers do not have sufficient value to offset declines in the sales of the higher-priced units (see Table 2). Further, the uncertainties of in-house transfers such as the case of major suppliers in Japan, and the unknown dollar value of all those markers installed in China, prevents us from verifying market numbers. As a consequence, we think laser sales for 2002 showed a 4 percent gain. And these lasers, when integrated into systems, with modest selling prices, are not strong enough to counter declines in markets such as automotive and fabricated metal products. So 2002 systems revenues show only a 4 percent gain.
What impacted the market most was a decline in sales of high-power lasers, both solid-state and CO2. These high-selling-price units, when integrated into systems, have a major impact on total sales. The demand for quantities of high-power CW Nd:YAG lasers in auto applications such as hydroformed tubing cutting was limited to a few orders for body-in-white welding, concentrated in Europe. And a slowdown in the major markets for laser sheet metal cutters proved to be a serious hurdle to overcome as this laser application usually represents about one-third of the total systems market (see Table 3). In the North American sector alone, a drop of 300 units from the average meant that sales were down by about $135 million.
At ILS we track major industrial sectors that account for 85 percent of the laser systems market. This generally works, but it neglects smaller niche markets, too numerous to track, that taken together make up about $450 million of system sales. In the current market these niche sectors, such as non-metal cutting, are supplying the glue that holds the total market in a positive mode.
This year ILS has made a change in reporting practices by consolidating data from Japan with that from other Asian nations under the general heading of Asia. This decision was made to bring ILS reporting into conformance with generally accepted practice today. By so doing we recognize the importance of activity in Korea, Taiwan, India and China in addition to perennial regional powerhouse Japan. It's a little like Germany, which represents about one-third of the European market.
Figure 1 represents the world shares for the production of industrial lasers, reported because we do not have access to reliable export destination numbers. Under the new regional divisions, North America, because of it's dominance in the low-power CO2 sector, holds a 46-percent share of the global market, with Europe at 33 percent and Asia—thanks to the Chinese contribution—now at 21 percent. The picture changes when looking at revenues, with Europe at 45 percent, North America at 28 percent and Asia at 27 percent. About 70 percent of European revenues are attributable to one country, Germany. In fact, Germany alone accounts for about 30 percent of the total world market for industrial lasers surpassing North America and Asia.
Figure 2 shows that North America (basically the United States) has increased its share of CO2 lasers produced to about 59 percent, essentially all low-power sealed-off units. Asia, thanks to Chinese sales, is at 15 percent and Europe at 26 percent. For solid-state lasers Europe at 40 percent is the leader with North America (32 percent) and Asia (28 percent) dividing up the remainder.
The picture changes in Figure 3 when revenues are considered, with Europe holding a dominant position in high-power CO2 at 62 percent, North America at 21 percent and Asia at 17 percent—pointing up the disproportionate impact of the cost of low-power CO2 lasers built in North America. The picture is similar for solid-state laser revenues with Europe at 52 percent, North America at 31 percent and Asia at 17 percent.
Information on where lasers are installed is mostly anecdotal and difficult to corroborate. Import/export data does exist, but its value is questionable because equipment descriptions on shipping documents tend to be ambiguous, for customs purposes. A good example, in the U.S., is the import of laser sheet metal cutters, where Government-generated data never matches reality.
Regardless, relying on industry sources and user-generated information, an approximation of market shares can be shown in Figure 4. The three major laser-using regions each share about the same portion of the total of all lasers installed. By incorporating the Japanese numbers into Asian, that region shows a miniscule edge on North America and Europe. This year's ROW (rest of world) percentage is almost double, as increased sales into India are counted this year.
The breakdown of applications in Figure 5, by units installed, takes into account all applications processed by all types of lasers. This year desktop manufacturing, those applications utilizing low-power CO2 lasers, has its own category, which changes applications segmentation dramatically from last year's analysis. Marking is now tied with cutting as the top industrial laser applications with an estimated 24 percent of the market. This year cutting has dropped to 24 percent, because of the expected decline given the economic conditions in the fabricated metal products sector. Welding and microprocessing share the third position at 14 percent each. The latter is still feeling the effects of a recessionary situation in semiconductor processing. Desktop manufacturing, essentially engraving, is still a strong performer representing about 12 percent of the market. Drilling/perforating has increased a bit to 3 percent thanks to action in the paper converting industry.
The single largest market sector in terms of systems selling price is the high-power CO2 laser cutting industry, basically in the fabricated metal products or job shop sector. Sales are down worldwide as the major markets in the United Stares and Japan are just now beginning recovery from a downturn and the European market is just beginning to feel the effects of a slowdown in Germany. This applications sector is important because, on a dollar basis, it represents about one-third of the total world's system market. So ILS monitors this market closely as it's movement has a dramatic impact on annual sales. Figure 6 shows that Europe still leads with 39 percent of the flat sheet cutters sold, while Asia (thanks to the addition of Japan) is now second at 32 percent. A very slow recovery in the U.S. places North America at 20 percent and ROW at 9 percent.
For the past 11 years ILS has conducted the annual Job Shop Index (JSI), a random survey of North American companies that offer laser-processing services. Survey results are usually a good indicator of the health of the economy, having been right-on for the past 10 years.
This year 90 percent of respondents said they had not met their 2002 business plan. However, of these 36 percent exceeded plan. Looking ahead to the first half of 2003, 71 percent of respondents expected to match or exceed 2002 performance. And 69 percent of the job shops surveyed expressed optimism for overall business conditions the entire year.
Combining the JSI results with comments from dozens of leading industrial laser and laser systems suppliers, collected at several major international trade shows, produces an optimistic outlook for business prospects in 2003. The general opinion is that at least three-quarters of 2003 will be a repeat of 2002—in other words, modest recovery from the market that bottomed out in early 2002.
As shown in Tables 1–3, ILS expects a growth in the 3–5 percent range as capital spending begins to increase in the U.S. and the slowdown in Germany reaches bottom and begins a turnaround. Already the effect of technology changes in the semiconductor industry are being
felt in terms of major equipment purchases, which will spur growth in the microprocessing sector. Long delayed projects in the auto industry are expected to revitalize this moribund market sector. The medical device market remains strong, driving the demand for low-power CO2 and solid-state lasers. Marking should continue its strong showing as more demand arises for product traceability. And a market of undetermined size in the defense industry, using lasers to produce armaments and security systems, will benefit some suppliers.
On the downside, slow growth in the market for flat sheet cutters is expected. This sector, representing about one-third of system sales, is projected to grow only slightly this year. However the lasers used in these systems are increasing in power so that the average selling price will increase, causing the dollar value of sales to be more active.
So, in the words of several suppliers, there is still some pain out there, but on balance, given stability in regional economies, this year should end up on the positive side. We expect the order books to improve dramatically in the fourth quarter, signaling a return to modest growth in the nominal 5-percent range for a few years.