David A. Belforte
As the industrial laser market recovers from a very difficult year, ILS identifies growth opportunities ahead
In last January’s issue of Industrial Laser Solutions we summarized our rather negative forecast for 2009 by saying the economic downturn was serious and the timing of a recovery was not clear. Looking back it seems we were half right; the recession in the industrial laser markets was much deeper than we thought and the timing of the recovery is still not clear.
In the United States, The National Bureau for Economic Research (NBER) Business Cycle Dating Committee decides on the official beginnings and ends of recession, and they decided that the recession started in December of 2008. Unofficially, in the global manufacturing sector it started several months before as companies began to lean down in response to perceived softness in the economy.
At ILS we had an uncomfortable month that December as word was received about canceled and delayed orders resulting from two of the industry’s largest trade shows, EuroBlech and Fabtech. ILS had attended both shows and returned to report that positive activity boded well for the beginning of 2009. As we learned more about this dramatic change in the economy we were nonplussed as we had already gone to press with the Annual Economic Review and Forecast in which we stated that the 2009 market numbers were “only a few percent lower” than the initial market estimates.
As the year progressed it became abundantly clear that the depth of the recession, as far as industrial lasers was concerned, was going to be deeper than expected. So the industry report presented at the June biennial Laser Marketplace meeting in Munich reflected this by further downward modifications to our numbers. The revenues being reported by stockholder-owned companies told the story with increasingly redder numbers showing quarter by quarter. Anecdotal industry news on reductions in employment tracked the increasingly depressing national employment numbers in the U.S and eventually in Europe and Japan. And the gloomy news was international in scope through the first half of 2009, only changing slightly as the Chinese market sector improved because of quick and decisive action by the central government.
For the second time in the 24 years of ILS reporting annual sales (see FIGURE 1) the numbers went negative. And to our dismay they exceeded the 1991–1992 numbers. Even in the infamous dot-com recession of early 2000 revenue numbers had stayed positive because of the regional nature of the downturn, mainly felt in North America. The recession of 2008–2009 was truly global as far as manufacturing and industrial lasers were concerned.
As can be seen in Table 1, the recession did not spare any industrial laser category. The biggest hit was felt by the suppliers of high-power CO2 lasers where revenues were down 39% from 2008 numbers, mainly due to a devastated global fabricated metal products industry, which experienced severe decline. Low-power CO2 lasers experienced a 17% decline more in line with other laser categories. Marking/engraving applications, which have had a number of record growth years, felt a downturn for the first time effecting CO2, solid-state, and fiber laser sales.
Overall revenues for all types of industrial lasers decreased 30% from 2008, a record year for this industry sector, even after we revised that year’s total to reflect a small decline in fourth quarter sales. Revenue declines were experienced by 34 of the 36 major laser suppliers ILS tracks in every quarter of their fiscal years; declines ranged from a low of 1% to a high of 60%. Companies supplying high-power lasers and high-power laser sheet metal cutters showed the highest losses. Tracking revenues from this market sampling requires some adjustments as a significant number of them have fiscal years that do not match the calendar years, so we adjusted their numbers accordingly. Nevertheless, the trend lines for all companies, save two, showed declines for the 12-month period of their reporting. On average the losing companies reported a 27% decline.
We account for laser category numbers by extrapolating from comments made in the companies’ quarterly and annual reports, where possible, and from general market data published throughout the year.
The CAGR for industrial laser revenues over the past 15 years (the years of strongest growth) is 12.8%. If we use this number for future year revenues, it will be 2012 before the industry returns to the 2008 level.
ILS practice for ascertaining industrial laser systems sales (see FIGURE 2) has been in place since we started reporting. We caution that system revenues are an extrapolated number. We take laser units and multiply each laser type by an average system selling price. We adjust the multipliers for significant changes such as the decrease in the selling prices for low-power sealed-off CO2 lasers, which are experiencing strong competitive pressures even in normal years. Because we have not deviated from this procedure it is acceptable to use this data in Table 2 for trend line analysis. Note that ILS does not record revenues for systems used in photolithography (an added $2 billion dollars in a good year), while we do count the lasers.
As shown in Table 2 the decreased revenue resulting from the severe downturn in the fabricated metal products sector that uses highly priced laser cutting systems is the chief contributor to the 20% decline experienced.
FIGURE 2 points up the importance of metal processing with 74% of all laser revenues attributable to this application sector. The majority of metal processing applications, such as cutting, welding, drilling, and surface treatment require a laser with higher power output than do most of the other processes. Consequently more power means higher selling prices. Therefore, using an average selling price for a metal cutting system, the loss of a thousand unit sales means a revenue loss of more than $750 million in system sales. It’s no wonder that companies supplying laser sheet metal cutters experienced the largest revenue decreases in 2009 as did the suppliers of lasers for this application.
Even though marking/engraving is the largest laser application in terms of units manufactured it is only the second largest in terms of laser revenues. This market sector is the closest to a consumer product. Consequently the market sets the selling price, and suppliers of lasers for marking and engraving have been under strong pressure to reduce selling prices. Also contributing to this is the large number of companies offering these products, making this a buyers’ market price-wise. Generally speaking, even before the recession the laser industry was under pressure to reduce unit selling prices, although most of this was handled by discrete discounting.
This year in lieu of other overall market data reported in past years we will now provide a more detailed analysis of the four major application sectors shown in FIGURE 2.
Table 3 shows a comparison of laser revenues for metal processing for the past two years with a change percentage for each laser type. The data in this table and that used for the accompanying FIGURE 3 point out the major role CO2 lasers play in the industrial laser market, and the impact a market disruption such as the 2008–09 recession can have on the total revenue numbers.
Sheet metal cutting is the dominant application for CO2 lasers employing more than 80% of all units sold, although that position will be challenged to a certain extent by market penetration from fiber lasers now making their way onto cutting systems (in 2009 more than 70 high-power lasers were integrated into sheet metal cutters) from several major suppliers. Solid-state and fiber lasers are used in a variety of metal processing applications ranging from welding (a major market for solid-state lasers) to turbine blade drilling, with fiber lasers gaining importance in all sectors.
The metal processing sector took the hardest hit in the recession because it includes fabricated metal products, automotive, agricultural, and off-road equipment manufacturers, all industries that felt the worst of the economic decline. And the prospect for a quick recovery in these industries is questionable.
The category semiconductor and microprocessing is important for solid-state, fiber, excimer, and direct diode lasers, the latter two identified as “other” in Table 4 and FIGURE 4. Separating them, prospects in the semiconductor sector improved in 2009 as the long-awaited positive book-to-bill ratio, signaling growth, started four months ago (in the Fall). New laser products for next-generation chip fabricating utilizing solid-state and excimer lasers saw a pickup. The Semiconductor Industry Association cited a lessening in the decline of chip sales and projected (in November) sales to grow in 2010. The reasons given were stronger sales of personal computers and cell phones, two products whose manufacturers are heavy users of industrial lasers.
Microprocessing is a category that encompasses all those applications that are performed on a micron scale. Chief among these are applications in medical, dental, and surgical devices and a raft of applications in microelectronics, photolithography, and solar power equipment manufacturing, an industry that has been an active user of CO2, solid-state, and excimer lasers. ILS has taken the position that growth in the microprocessing sector will drive industrial laser sales growth now and in future years. Although the photovoltaic sector, a strong market for industrial lasers, has currently slowed it is only because of a temporary overcapacity situation that will be solved in the current year with a return of the sector as a significant market for lasers.
The largest market for industrial lasers in terms of units shipped is marking/engraving; with 49% of the total industrial laser shipments. As shown in Table 5 and FIGURE 5 this sector turned negative in 2009 following a decline that began in late 2008. Before that marking/engraving had enjoyed several years of double-digit growth. There is only one reason behind the negative numbers and that is the global economic recession. We say that in recognition that prevailing government and industry regulations regarding the coding and marking of products led by automotive (for liability concerns) and military (for traceability reasons) set a baseline for growth in an industry in which saturation is not even on the horizon.
At the last major trade show involving industrial laser (Fabtech) ILS spoke with a number of marking and engraving system suppliers who generally acknowledged that the worst of their recession was over. Our assessment of what was heard at this and other earlier shows is that this sector should lead the return to positive numbers in the industrial laser market.
The last major category, the ubiquitous “Other,” includes lasers used in a broad range of industrial materials processing operations, including for example; desktop manufacturing, rapid prototyping and manufacturing (now known as laser assisted manufacturing), and surface treatment operations such as heat treating, cladding, melting, and component rebuilding. As shown in Table 6 and FIGURE 6 this is the smallest of the categories, representing only 6% of laser revenues. However it agglomerates a number of applications that show promise to expand faster than the industry itself grows, among which are laser assisted manufacturing where solid-state, CO2, and fiber lasers are used to manufacture limited quantities of metal and nonmetal parts, many of which are used as replacements for components on obsolete equipment in the field. The manufacturing industry change to lean manufacturing will be a driver for consideration of this application where build-to-order rather than inventory are key to a company’s profitability.
Where were the lasers mentioned above used? FIGURE 7 is an ILS estimate of the global installations. Setting aside the impact of the recession, which was felt everywhere except in China (for about half the year), there has not been a significant shift in the splits as reported by ILS for the past few years. Asia, shown in FIGURE 7 as East Asia and Japan, at 39% has steadily gained share at the expense of North America (20%), while Europe, primed by activity in Eastern Europe and the new EU countries, has held steady at about one-third of the market.
One final note about the current markets; the impact of the decline in sales of laser sheet metal cutting systems on the total sales of industrial lasers cannot be overemphasized. FIGURE 8 points this up by showing 19 years of CO2 laser cutter unit sales compared to the annual revenues of all industrial lasers sold. The significant point is that while revenues for all lasers sold only experienced a decline in 1991–1992, the number of laser sheet metal cutters also experienced a sharp decline due to the 2001–2002 dot-com recession when a large number of “new” used systems installed in shops serving the computer industry came into the market via bankruptcies. At that time the impact on the total market was noticeable but negligibly affected the trend line. The other point to note from FIGURE 8 is the depth of the 2009 drop in laser cutter unit sales.
FIGURE 9 is a snapshot of the past four years of North American sales of laser sheet metal cutters. Because only two years of recession account for part of the trend line decline, other factors—for example a shrinking U.S. manufacturing base—may account for an overall decrease. Industry projections for 2010 have the number increasing 19%.
So where do we go from here. There seems to be general agreement that the recession in the manufacturing sector is over and that the first half of 2010 will see a recovery best described as a bumpy road. There is still concern about unemployment in the U.S, and Europe seems to have recovered somewhat with sales going forward on a gradual but steady pace. Germany, the largest manufacturing sector in Europe, is expressing optimism, helped in part by their stimulus package and better news from the auto industry. Manufacturing in Japan is reacting to improving economic news and with a spark in their Asian export markets may see more positive results. China keeps growing thanks to quick action by the government that has stimulated domestic sales, so that the country is not as tied to the economic fortunes of other Western nations as it was pre-recession.
Like it or not the industrial laser business is tied to the world’s manufacturing industries. Before 2000, laser sales typically lagged changes in the manufacturing industries by six months. They currently seem to be marching in lock step, due partially to the global recession.
ILS has surveyed key sources at the major industrial laser and laser system suppliers, as well as the companies that sell them related products. Consensus seems to be that the beginning of 2010 will be dicey. Marking/engraving is expected to recover first, possibly because units carry a modest selling price that allows buyers to avoid seeking outside financing, which will still be tight for at least six months. The semiconductor industry, already showing signs of making capital investments could possibly come to life in the second quarter. As the housing market works off inventory and remodeling rises there can be some movement from the industries that serve this sector and their suppliers. Aerospace and military hardware industries, including those that retrofit war-weary equipment, will show increased strength. The auto industry, poised to introduce new models late in the year, may return to the market for laser welding and brazing equipment. As consumers return to the stores expect some pickup in packaging and shipping containers. The medical device market, for the past few years a strong user of industrial lasers, is expected to continue unless there is fallout from changes in the health care industry in the U.S. that precipitates some decreases in capital spending.
All in all there are enough neutral or shallow positives to allow ILS to project results for 2010 as shown in Tables 1 and 2. Overall a 6% increase may be attainable, especially considering the drivers in the industries mentioned above. We expect slow recovery in high-power CO2 as the demand for laser cutters will rise slowly. Fiber lasers will continue to further penetrate markets such as metal cutting and microprocessing at the expense of the solid-state suppliers. Makers of direct diode and excimer lasers, prior to 2009 on a good growth curve, will continue. We wish it were possible to foresee a smooth growth curve, but at the time this review was written it appears that each month will be a trial.
We can say with assurance that for 2010 there will be change and we see it as being positive.
Industrial Laser Solutions has been publishing the Annual Economic Review of the industrial laser markets for 24 years. For the past 10 years we have used the annual survey conducted by our sister publication Laser Focus World as a starting point for our market analysis.
With the implementation of tighter U.S. government reporting procedures on publicly traded companies many survey participants chose not to respond. Because some of these companies are industry leaders it caused us to revise the data collecting process by tracking required reporting from 30 publicly owned companies, many of which are industry leaders.
This procedure coupled with direct interviews and published industry news has caused us to modify the data presented this year because we find it increasingly difficult to obtain the same level of information used in the past. Therefore, it was decided that a different approach to compiling this report was necessary, wherein we analyze application sectors in more detail than we have in the past. We hope those who have been using ILS market data for years will understand this change.