With COVID-19 on everyone’s mind, I am often asked how the pandemic has affected the laser world and, specifically, laser markets. This is a great question, but not a simple one to answer. Since the term “laser markets” can be quite broad and encompassing, I’m going to focus this discussion on just materials processing and communications, which together make up the largest parts of the global laser market. This is not to say other segments of the laser market haven’t reacted to the pandemic in interesting ways as well, only that I will save these discussions for another time.
To fully understand where the materials processing and communications markets are today, I need to give some context on where we have been these last few years, since COVID-19 is just a continuation of what has sometimes been a wild ride in these laser markets.
First, let’s look at the communications market, where lasers power the transceiver market that lies at the heart of most communications around the world. It shouldn’t come as a surprise that this market has been growing almost every year, but because of purchase cycles and other economic factors, revenue for transceivers doesn’t always grow as consistently. Laser revenues in this area grew at a slow pace between 2013 and 2015, but grew much faster between 2015 and 2017. In 2018, trade tensions between the U.S. and China, and a pause before full 5G cellular rollouts caused laser transceiver revenue to remain flat. Continued China trade problems caused a near 18% drop in total laser revenue in 2019, compounded by a slowing Chinese economy.
So far in 2020, communications laser revenue has stabilized and there is reason to be quite optimistic. II-VI (Finisar), the largest transceiver supplier, reported in Q2 a 25% sequential growth in its communications revenue. Lumentum (Oclaro), the next largest supplier, saw a 7% drop in its Q2 communications revenue caused by “COVID-19 related supply limitations.” It should be noted that Lumentum includes its 3D sensing revenue in its “communications” segment, and 3D sensing revenue is expected to be down seasonally.
Overall, I believe the COVID-19 pandemic will be a boon to laser communications revenue. The virus has forced the transition of millions of workers from their work offices to their home offices, and for many of these workers, the change will be permanent. Just look at the outdoor retailer REI: it spent four years and hundreds of millions of dollars building a new 8-acre corporate headquarters in Bellevue, WA. In mid-August, the company announced that it would be selling the just-built headquarters before employees have even moved in, claiming that the pandemic has changed the company into a “remote working” company and making a new large headquarters unnecessary.
Telecom companies are already starting the monumental task of enhancing their networks for the new work-at-home topology. Of course, this trend started long before the pandemic, but what was going to take 10 years has now occurred in three months. I believe that this new reality could give a nice bump to communications laser revenue for the next few years, and if the revenue reported by II-VI for Q2 of this year is any indication, this revenue increase is already well underway.
Another world—materials processing
Now let’s move to the laser revenue for materials processing, and again to understand the current situation you have to look back a few years. Starting in 2006, as industrial fiber lasers began to slowly displace CO2 lasers, worldwide materials processing laser revenue grew at rate of approximately 7.5% per year, and would for the next 10 years. Around 2010, the Chinese government realized the importance of industrial lasers and did what it could to foster Chinese industrial laser manufacturers. I started tracking Chinese laser companies in 2013, and between then and 2016, Chinese industrial laser revenue grew by more than 22% per year.
Between 2016 and 2018, both Chinese and non-Chinese laser companies experienced incredible growth, seeing their total laser revenue grow by almost 60% per year. By mid-2018 the bubble burst, triggered in large part by the U.S./China trade war, and by a variety of tariffs on trade to and from the U.S. Chinese laser companies were producing lasers at a record rate, just at a time when laser demand inside and outside of China was sinking. The combination of an oversupply of lasers and the tariffs negatively impacted laser prices. In 2019, kilowatt materials processing laser revenue dropped almost 10%, and micromaterials processing revenue dropped almost 20%. Laser prices dropped steeply as well.
This brings us to 2020 and the pandemic. The good news is that the fundamental demand for materials processing lasers is currently relatively strong. After seeing a very large laser revenue drop in Q1 laser revenue in China due to COVID-19, China’s laser market and its economy have started recovering, and Chinese laser companies are reporting Q2 revenue down in the range of 15–20% from a year ago. We expect Q3 China laser revenue to be down only about 10% or less. Outside of China, where the full effect of COVID-19 occurred about a quarter later than in China, Q2 materials processing laser revenue was down only slightly from year ago.
Overall, current quarter laser revenues are holding up quite well, but future laser revenues may drop some. When all is said and done, I’m optimistic that 2020 overall won’t be as bad as I originally had feared. Depending how the second half of 2020 plays out, some areas like communications could be up strongly, but materials processing may be up only slightly or flat from last year.
Editor’s Note: Allen Nogee will be providing a full update on global laser markets at the Lasers & Photonics Marketplace Seminar, to be held March 8, 2021, during SPIE Photonics West. His report, The Worldwide Market for Lasers: Market Review & Forecast 2020, is available from Strategies Unlimited.
