China was originally seen as a land of cheap labour; now it is emerging as a supplier of components for the photonics industry and as a market in its own right. Tom Wilkie reports
The evidence is clear even from the printed catalogue of the Laser 2007 exhibition, held in June this year. The listing of Chinese exhibitors stretched for two and a half columns. Only Germany, the USA, and the UK had more column-inches, so China ranked fourth in terms of exhibitor numbers at this international trade fair.
China is now one of the largest exporters of optical and opto-electronic products in the world, and its opto-electronic industry is growing at an annual rate of around 40 per cent. Almost half of the world’s top photonics companies already have offices in China and, unquestionably, more will set up joint ventures over the next couple of years, according to Roger Sherman, who looks after the UK end of both Laser Munich and Laser China. Indeed, a further indicator of Eastern growth is the continued interest being shown in the latter, which is to be held in Shanghai for the third time from 18 to 20 March 2008.
As in many other industrial sectors, the initial attraction for many photonics companies was the availability of cheap but skilled labour, providing a commercial incentive to move manufacturing eastwards and away from the higher labour costs of Europe and North America. This aspect was very important for Bookham, which started transferring all assembly and testing to China a few years ago, according to Adrian Meldrum, the company’s VP sales and marketing.
‘It was very important to change our cost base and be in a manufacturing area that gives us flexibility,’ he said. Bookham has about 2,000 employees in total, of which more than 1,300 are employed in its Shenzhen assembly facility in Guangdong province, located at the border with Hong Kong in southern China. The facility opened in March 2004.
Symposium on laser development and advanced technology of laser applications, at Laser China, Shanghai, 2007
However, China is itself becoming a market for the goods produced or assembled there. In July this year, Bookham received the ‘Best Support Supplier’ award from Huawei, one of the world’s largest telecom equipment vendors, which is based in China. Bookham supplies high-end optical components and modules to Huawei, including 10Gb/s co-packaged laser-modulators, receivers, directly modulated lasers, and optical 980nm pumps, all of which are assembled in Bookham’s facility in Shenzhen.
‘Asia is an important market for Bookham and this award from Huawei illustrates how much we value and support our customers,’ Meldrum says. Bookham has significant other customers in China but, he pointed out, Huawei is itself a global company (it has more than 40,000 employees, and 58 per cent of its 2005 sales of $8.2bn were from international markets), so ‘it is difficult to split companies by geography – we deal with them in many areas.
‘Being local gives you strong relationships with local manufacturers, and relationships are important. In addition to Huawei, we have significant other customers in China.’
It was to sell into the Chinese market that Avantes started operations in China this year, according to Benno Oderkerk, the company’s technical director. ‘China has been our fastest growing market over the past few years,’ he says. ‘There is a lot of business in China.’ Their chosen location is a high-tech park close to the Olympic Village in Beijing, where the government offers tax reductions and other incentives to innovative companies. But the company is planning two more offices: one in the south near Hong Kong; and one in Shanghai.
According to Emrys Jones, business development director for the GSI Group in Rugby, UK, the company entered China as a result of a review in 2004 that led to the setting up of a network of sales and service centres in Beijing, Shenzhen, and Shanghai, early the next year. Those were followed, in November 2005, by a small manufacturing facility, initially for small CO2 lasers, in Suzhou, some 100km west of Shanghai. The first products were shipped in February 2006.
Jones says: ‘When we were at Laser China in Shanghai, we found we could talk to Chinese customers and engage with them. If we were making lasers locally, there was a different level of interest. It was more than just an intuitive sense of localisation. Our established customers said: “You’re making it locally, and so soon?”’ The company has found that indigenous Chinese manufacturers who are looking for competent local suppliers form an important customer group. ‘By having Chinese manufacture, we can be seen more as a local company,’ he said. ‘We have seen the sophistication of our local customers growing – they need more than just cheap commodity products.’
GSI's factory in Suzhou (Jiangsu Province, China), approximated 100km west of Shanghai
Part of the success was that GSI had spent a lot of time training its Chinese workers at HQ in Rugby. Not only did the company seek to duplicate all the techniques and technological processes, it also duplicated European Union health and safety procedures and regulations, and offered generous pay to attract the best staff. ‘We are an upper quartile payer in China and we get our pick of people,’ he continued.
Despite the investment required in training and the above-average pay rates, Jones is sure that ‘it is still worthwhile moving all the kit across and making them there. The quality levels are indistinguishable from making them in the UK. We are now going up our model range and transferring other products’ for manufacturing in China.’
Bookham too has established key quality systems and processes in Shenzhen in line with the company’s best practices and global standards. Meldrum says: ‘We have maintained quality and reliability – we have not seen any change’ following the transfer of manufacturing to China. As a demonstration of the company’s success in maintaining quality, he pointed to the recent announcement that Bookham’s terrestrial pump technology has been selected for deployment in undersea networks.
Production in China still depends very much on foreign suppliers. In 2005, for example, imported components totalled $38bn in volume. But, increasingly, multinational photonics companies with manufacturing centred in China are sourcing components from within the country. This can raise different issues of quality control, and also those of protecting intellectual property.
According to Avantes’ Oderkerk, expertise tends to be geographically distributed in China with, for example, centres of excellence in planar lenses in the south whereas the best cylindrical optics come from the north. ‘You really have to visit the companies to see what their expertise is,’ he says. He has had the experience that samples ‘are always of excellent quality but when you get to production, the quality can go down rapidly and delivery times lengthen’. He discovered that one supplier was not the real manufacturer at all, but a trading company that had contracted out the work and consequently tried to discourage him from visiting the factory. ‘I have visited all supplier companies’ plants, now,’ he says.
GSI’s Jones believes that the company has been successful in sourcing some components locally. The company started by supplying kits from the UK for assembly in China, but now it has moved some supply to local producers. Although Western products still have advantages in specification and quality, he believes that this will change over time: ‘We’ve been making lasers for 30 years and have had time to train vendors. We’ve been trying to do it over 15 months in China.’
Avantes’ Oderkerk also is of the view that ‘Western’ products have an edge in terms of their reputation for quality, in the domestic Chinese market. He too believes that there are still areas where expertise and quality control will take time to develop in China. ‘The Chinese are good at copying mechanical things,’ he says, ‘but they do not spend enough time on product development. They are focused on productivity.’ Because labour is cheap, they will use manual processes – and that introduces an element of non-reproducibility, he warns. ‘So if you are buying in large quantities, then there is a quality issue due to the manual labour. They can be good, but you have to check them one by one.’
However, not everything has been transferred. To protect its intellectual property (IP), GSI has kept some substantial processes in the West because of concerns that, if these were transferred to a local supplier in China, then IP protection would be more difficult.
Bookham especially has kept technology ownership firmly in its own hands. Although the company believes that it is critical to have chip manufacture in Europe, in an area where it can access design skills, Meldrum points out that this was not solely a matter of geography but stemmed from the company’s fundamental policy: ‘Some competitors believe it’s best to outsource manufacturing to a contractor. Bookham believes in vertical integration – keeping hold of manufacturing – in control of the technology and ownership of the chips. Low-cost manufacturing is critical for us as we move towards profitability, but we believe in internal, not outsourced production.’
All the companies, independently of each other, stressed the need for careful thinking and strategy if a move to China was to be successful. ‘We were successful because we planned it carefully and were cautious,’ according to Emrys Jones. ‘Step by step,’ says Benno Oderkerk. Adrian Meldrum: ‘We put a strong management team in place.’
Equally, however, they are convinced that China is not the be-all and end-all. ‘The danger is that people think in binary terms – we must be in China at any cost,’ warns Jones. ‘The West is still taking a significant proportion of laser demand and we need to develop products attractive to these markets.’