Adroit Market Research - Industry Insights

This case study is designed to address three central questions: First, Are the civilian fiber optics and optoelectronics industries, especially those that are critical to the military, eroding in the United States? Second, do military applications of fiber optics technologies diverge significantly from their dual-use counterparts in the civilian sector of the economy? And third, what are the principal barriers, both technical and institutional, that inhibit military access to civilian fiber optics technology and vice versa? Each of these questions are addressed in a separate section below. The last section concludes with a summary of policy problems specific to fiber optics technology.

Fiber optics has realized exponential growth, not only in production and sales, but also in the potential scope of the technology itself. It has been defined, broadened, and redefined variously over the past several years. A recent study by the National Research Council included fiber optics as a subset of a larger field called photonics. That report described photonics as a “critical, emerging technology has been building a technological armamentarium of proven science and advanced technology throughout the past three decades.” It focused broadly on telecommunications, information processing, optical storage and display, and optical sensors-four “technical areas where the overall worldwide market for equipment approaches $400 billion per year.

Introduction

The first major boost to the fiber market came in the late 1970s when the regional Bell Telephone operating companies ran into problems pulling more copper wire through already established conduits. Because of this congestion, they had to choose between building more ducts and substituting fiber for copper. Thus, interoffice trunking became the first large market for fiber optics in the United States. A second big boost for fiber extended from 1983 through 1986, as long haul fiber trunks were installed across the United States. With deregulation of the telecommunications industry and competition for long distance carriage, demand for fiber increased by 100 percent per year and its cost dropped precipitously. By 1985, U.S. telephone companies had installed more than 2 million kilometers of fiber. Between 1986 and 1988, the price of fiber cable decreased 70 percent. The completion of these large-scale projects caused worldwide sales of fiber optics to stabilize, and has encouraged major fiber makers to look for new markets for their products.

The U.S. market for fiber optics is the largest and most open in the world, accounting for over 50 percent of world consumption in 1984. Over the past four years, however, the relative size of the U.S. market has decreased; it is forecast to drop to between 35 and 40 percent of the world market by 1989. Near-term installation of fiber optic systems in Japan and Western Europe is expected to exceed that of North America. At the same time, overall world consumption of fiber optic systems is expected to increase by a factor of four by the year 2007. The major market for fiber optics has been, and continues to be, the supply of fiber and optoelectronic devices for telecommunications systems. Although flat, this market could expand dramatically if financial and regulatory barriers to bringing fiber to the home are removed. While potentially substantial, military markets are not expected to mature until the middle 1990s—and even then, DoD technology planners and the U.S. Congress would have to designate and support fiber optics as a critical military technology. This scenario is by no means assured, given the imperative to reduce budget deficits and the continued strong competition within the Department of Defense (DoD) for a decreasing pool of funds.

Telecommunications applications now account for as much as 90 percent of the world market for fiber optic components and cables by some estimates. The U.S. consumed about 1.6 million kilometers of fiber in 1987, while the world market reached approximately 3 million kilometers. Europe comprises about a third of the market, with Japan and Korea accounting for about 16 percent. The overall international market for fiber grew about 20 percent in 1987. North America and the Far East are net exporters of optical fiber, while Europe is a net importer. The difference between production and consumption of fiber is not large in any region.

Since the end of the long haul market boom, the worldwide fiber optic industry has been characterized by overcapacity and intense competition, with most Organization for Economic Cooperation and Development (OECD) countries designating fiber optics as an essential national capability. By 1980, a pattern had begun to emerge in the way that OECD member governments and their corresponding industries would respond to the strong growth potential of the fiber optics markets. In the United States, large, vertically integrated firms like ITT and AT&T began to invest heavily in fiber optic R&D. Corning Glass Works, which held many of the important patents in the field, established an early lead in fiber development. Major Cable companies became takeover targets by firms that had not been principally associated with the telecommunications industry, and that now sought to position themselves for future fiber optics business.

Problem solving opportunity

There are some circumstances in which the various barriers, discussed above, are diminished or have been circumvented altogether. The FOG-M missile is an important case of cooperation between government and the civilian sector in the development of military applications for fiber. Fiber optics suppliers developed new techniques for coating fiber to strengthen it. The military provided precision winding that had been developed for the TOW missile, in return receiving the fiber optic data link necessary to target the missile. The key obstacle— both for the companies and for the Army-was the rapidly changing nature of fiber optic technologies. Nevertheless, the missile, which the U.S. Army Missile Command and several fiber optics companies jointly developed, will soon enter production. This path was highly unusual, because an Army laboratory functioned as a kind of prime contractor for the project.