Telecommunications and navigation equipment - Industry Overview

Alexis Kemper

The telecommunications equipment industry is composed of telephone and telegraph apparatus (SIC 3661) and radio and television broadcasting and communications equipment (SIC 3663). Telephone and telegraph apparatus includes both network equipment such as switching and transmission equipment, as well as customer premises equipment such as telephones and facsimile machines. Radio and television broadcasting and communications equipment encompasses fixed and mobile radio systems; cellular radio telephones; radio transmitters, transceivers and receivers (except household and automotive receivers); fiber optics equipment; satellite communications systems (space and ground segments); closed-circuit and cable television equipment; and studio (audio and video) equipment.

Navigation equipment refers to SIC 3812, search, detection, navigation, guidance, aeronautical, and nautical systems, instruments and equipment. It includes radar and sonar systems, light reconnaissance and surveillance equipment, and electronic warfare equipment.

Before reading this chapter, please see "Getting the Most Out of Outlook '94" on page 1. It will clarify matters concerning data collection procedures, factors affecting trade data, forecasting methodology, the use of data, sources and references, and the Standard Industrial Classification (SIC) system. For other topics related to the subject of this chapter, see chapters 26 (Computer Equipment), 27 (Computer Software), 28 (Space Commerce), and 29 (Telecommunications Services).

The sluggish performance of the U.S. telecommunications equipment industry in 1993 reflected excess capacity in the wired network coupled with static demand pending commercial development of new services. Shipments were essentially unchanged, at slightly more than $35.5 billion in constant dollars, from 1992 to 1993. Shipments of telephone and telegraph apparatus (SIC 3661) remained steady at about $17.5 billion, while shipments of radio and television broadcasting and communications equipment (SIC 3663) edged up slightly to $18 billion from $17.8 billion in 1992.

Employment in the telecommunications equipment industry remained steady at about 230,000 in 1993, reflecting continuing efforts by manufacturers to control costs. New technology and improved productivity may contribute to employment declines in 1994, as will mergers and consolidations among manufacturers.

[TABULAR DATA OMITTED]

ENVIRONMENTAL PROFILE

Generally speaking, radio communications systems entail less infrastructure and environmentally disruptive construction activies than fiber optic and coaxial cable systems that require underground cabling. Thus, there is less encroachment upon habitats and endangered species' environments. The main environmental objections to radio communications systems have been sporadic incidents of community activism against unsightly (obstructionist) towers and antenna farms. Consumer concerns have prompted the Federal Communications Commission (FCC) to undertake an evaluation of radiation effects at frequencies

around 2 GHz.

INTERNATIONAL COMPETITIVENESS

After stabilizing at about $500 million in 1991 and 1992, the U.S. telecommunications trade deficit was expected to narrow to about $200 million in 1993 (Table 1). U.S. telecommunications imports increased about 6 percent to an estimated $8.8 billion, up from $8.3 billion in 1992. Telecommunications exports increased about 10 percent to an estimated $8.6 billion, up from 47.8 billion in 1992. Although the industry registered a $100 million trade surplus in the first half of 1993, there is historically a deficit in the second half of the year. Figures for telecommunications trade in the first half of 1993 demonstrated a steady rise in import growth and a resurgence in export growth compared with the last several years.

Table 1:U.S. Telecommunications Trade(1)
         (millions of U.S. dollars)

  Item     1990    1991    1992    1993(2)

Exports   6,335   6,674   7,827   8,600
Imports   7,126   7,231   8,323   8,800
Balance    -791    -557    -496    -200

(1) Trade data includes coaxial and fiber optic cable, and SICs
3661 and 3663 (except
for CB radios and low power radio transceivers).
(2) Estimate.
SOURCE: U.S. Department of Commerce:  Bureau of the Census;
International
Trade Administration (ITA). Estimates by ITA.

Canada and Mexico continued to rank closely as the largest export markets for U.S. telecommunications products in 1993, accounting for 16 and 11 percent of the total, respectively. After declining sharply in 1992, telecommunications exports to Japan, the third largest U.S. export market, rose 70 percent in the first half of 1993. About 20 percent of U.S. telecommunications exports are shipped to the European Community.

Telecommunications imports from East Asia comprised 65 percent of the total U.S. telecommunications imports. Imports from new suppliers, particularly China, Malaysia, Thailand, and the Philippines, are experiencing high rates of growth and are supplementing those from traditional suppliers such as Hong Kong, South Korea, Singapore, and Taiwan. In fact, China and Malaysia now rank as the third and fourth largest suppliers of U.S. telecommunications imports, respectively. The European Community accounts for about 7 percent of total imports.

The U.S. continues to have a sizeable trade deficit in customer premises equipment (CPE), about $1.6 billion in the first half of 1993. This was offset to a large extent by trade surpluses in the areas of network/transmission equipment amounting to $800 million, and "other" telecommunications equipment (primarily radio communications, broadcasting, and categories that cannot be distinguished), also $800 million.

In addition, parts represent a significant amount of U.S. telecommunications trade. Parts exports of $1.6 billion accounted for almost 36 percent of the total in the first 6 months of 1993. By comparison, parts imports of $1 billion represented about 24 percent of total imports during the same period.

The leading telecommunications import categories are facsimile machines, line telephones and cordless telephones, accounting for more than $1.4 billion in the first half of 1993. These are followed by radio transceivers, parts for radio equipment, television transmission equipment, and cellular telephones.

On the export side, radio transceivers continued to be the leading product category, accounting for $900 million in January-June 1993. The next largest categories are parts for radio equipment, parts for switching equipment, parts for telephonic apparatus and switching equipment.

Outlook for 1994

Shipments are expected to increase 1 percent, to nearly $36 billion in constant dollars in 1994. An improving economy and the partial release of pent-up demand will drive growth. Product areas leading this growth include network equipment, wireless communications equipment and satellite communications. Shipments of microwave and broadcasting equipment are expected to remain flat.

Long-Term Prospects

The outlook for telecommunications equipment through 1998 is increasingly positive, with shipments forecast to grow an average of 2-4 percent per year. New service offerings and foreign procurements will drive demand for new equipment.

Once these services are authorized, new technologies will generate growth in many sectors of the telecommunications equipment industry. The trend towards deployment of fiber optic cable in the local loop will spark growth in both fiber optic equipment and new network equipment. The development of wireless personal communications services will fuel demand for radio base station equipment and antennas, low earth orbit satellite systems and new wireless customer premises equipment.

In the longer term, future telecommunications networks will be substantially transformed by the demand for customized, interconnected and wireless services. Networks will gradually evolve to new hybrids characterized by transparent interoperability and connectivity between technologies. The massive capital requirements of building unique telecommunications systems will drive service providers to use existing facilities, such as wired, cable, cellular and satellite systems to control costs and create mass markets. New services will demand enhanced intelligence capabilities in switching and transmission facilities. The thrust of the remaining 1990's decade will be to add more intelligence to switching and transmission facilities, enabling full interconnectivity between differing technologies.

The balance of this chapter is organized to discuss major developments in, and the outlook for, various high profile segments of the telecommunications and navigation equipment industries.

NETWORK EQUIPMENT

Network equipment is included in SIC 3661, Telephone and Telegraph Apparatus. It consists of transmission systems and switches which are purchased by public or private network operators. Transmission systems include multiplexing equipment, repeaters, and line conditioning equipment. Switches complete connections between callers and route information from one network user to another. Switches include central office switches, packet switches, mobile telephone switching offices (MTSOs), microwave switches, and data communications switches. Multiplexing equipment allows multiple signals to share the same transmission path. Packet switching equipment provides for the economical transmission of large volumes of data over a wide geographical area.

Product shipments of network equipment were expected to remain relatively stable, at $10.2 billion in 1993. Central office switching equipment accounted for about $4.8 billion in shipments, while transmission and multiplexing equipment accounted for $5.4 billion in 1993.

The lack of growth in the network equipment sector in 1993 was due to a number of factors. Shipments of central office switching equipment declined slightly, as excess capacity and flat demand led to intense competition and lower prices. The local exchange carriers (LECs) appear to be hesitant to invest heavily in new equipment at a time when technology is on the verge of entering a period of significant transition. Many carriers are waiting to see how standards and technology evolve before making expensive capital investments that may soon be rendered obsolete. A number of regulatory issues affecting the LECs are still undecided, and carriers are waiting to see what changes in regulatory policy may emerge in the new Administration.

The network equipment market in the United States is evolving to meet the changing demand for services by users. Most of the embedded base of LEC equipment is designed to handle voice traffic, and operates at a 64-kilobit per second synchronous rate. The fastest growing areas of telecommunications traffic, however, are in high-speed data communications and video traffic, applications which require greater bandwidth and packet switching technologies. A variety of technological approaches have been developed to meet these demands. Three of the most promising are frame relay, switched multimegabit data service (SMDS), and asynchronous transfer mode (ATM). The LECs must determine the most efficient and cost effective methods of providing the services their customers demand if they intend to be competitive in these high growth market sectors.

Each of these technologies offers distinct advantages and disadvantages. ATM technology is generally recognized as the base platform upon which broadband services will ultimately be structured, but it is still too expensive to be cost effective. Widespread deployment of ATM service is projected to be at least 5-10 years away. SMDS is favored by the Bell Operating Companies (BOCs), which funded its development, because it has been designed for better compatibility with the existing network. It, too, however, is relatively expensive. Frame relay is popular among customers because it offers low cost data switching capabilities and ready availability, but it offers less features than SMDS or ATM. It is generally viewed as an interim technology rather than a long-term solution.

Ultimately, most industry observers predict that these three technologies will converge to a point at which the differences between them will blur. Industry groups are working to develop standards that will enable all three of these systems to become interoperable and which will allow worldwide interconnection between the new technologies and the existing telecommunications infrastructure. This will allow users to pick and choose from a variety of applications and features to meet differing requirements at various locations, but to interconnect diem on a single network.

INTERNATIONAL COMPETITIVENESS

U.S. manufacturers maintained a positive trade balance in network equipment in 1993. One of the benefits of the intense competition in the U.S. marketplace has been strong technological and manufacturing innovation in the network equipment sector. This has strengthened the international competitive position of U.S. manufacturers in foreign markets and resulted in positive growth in export sales, despite the numerous market access barriers faced by U.S. telecommunications companies overseas.

U.S. manufacturers continued to aggressively pursue network equipment opportunities overseas in 1993. Both AT&T and Northern Telecom announced major agreements to supply network switching equipment to the People's Republic of China, one of the fastest growing markets in the world. AT&T also reached an agreement with India to supply network equipment, while Northern Telecom won an important central office switching equipment contract in Tunisia. Export sales by U.S. manufacturers have helped to offset the decline in domestic shipments of network equipment.

[TABULAR DATA OMITTED]

Outlook for 1994

Shipments of network equipment are expected to remain flat in 1994. Continued uncertainty over evolving technologies, equipment standards, and pending regulatory actions are likely to continue to restrain spending by the LECs. While many of the larger LECs are subjecting new equipment and technologies to trials, widespread deployment of such equipment is not expected to occur until some sort of consensus is reached on the future direction of network infrastructure development. Local exchange carriers are reluctant to invest in new technologies that have yet to achieve widespread industry acceptance. The outlook for shipments of private network equipment is more positive. Expenditures on private network equipment are closely tied to overall U.S. economic performance. Thus, as economic growth accelerates, shipments of private network equipment should increase accordingly.

Exports of network equipment should continue to increase. The introduction of competition and deregulation in foreign markets will continue, and this will generate increased demand for new technologies and more cost effective equipment. U.S. manufacturers should be well positioned to take advantage of these developing opportunities, particularly if foreign exchange rates remain favorable.

Long-Term Prospects

The outlook for network equipment through 1998 is favorable, and shipments are expected to increase at an average rate of 2 percent per year over this period.

If recent experience is any indication, there will be steady progress toward resolving some of the outstanding regulatory issues affecting the BOCs and other LECs; however, changes in regulatory policy are expected to evolve slowly, and their effects on industry shipments will be gradual.

Industry participants have increasingly come to recognize the importance of standards in promoting buyer confidence in new products and thus stimulating sales. As a result, there appears to be a greater willingness on the part of the industry to cooperate on standards development efforts. As standards for new technologies are adopted and the carriers offer new services, there will be an increase in demand for new equipment.

An increasing number of alliances between telecommunications companies and entertainment companies, such as cable television operators, are likely to develop in the near future. These partnerships may provide the synergy to spur demand for advanced information and entertainment services and the equipment and technology necessary to provide them.

CUSTOMER PREMISES EQUIPMENT

Customer premises equipment (CPE), or terminal equipment, is a generic term that refers to privately owned telecommunications equipment that is attached to the telecommunications network. Shipments of customer premises equipment are measured in SIC 3661, and include a wide range of product groups. The largest CPE product sectors are private branch exchanges (PBXs), telephones, key systems, facsimile products, modems, voice processing equipment, and video communication equipment.

CPE shipments declined 4 percent from their 1992 level of $4.8 billion to $4.6 billion in 1993. Most CPE product sectors are mature markets characterized by intense competition and declining unit prices. Shipment declines were most pronounced in telephones, key systems, and telephone answering machines. PBX shipments fell only slightly and appear to be stabilizing. Voice processing and video communication equipment are the exceptions to the general trend of declines in CPE shipments. Voice processing equipment includes both voice messaging and voice response equipment; video communication equipment includes teleconferencing equipment and videophones. Both equipment groups demonstrated strong growth in 1993. These software-intensive products have been well received in the United States because they improve business productivity by reducing communication and travel expenses.

INTERNATIONAL COMPETITIVENESS

The international competitiveness of the U.S. CPE industry varies by product sector. U.S. manufacturers are world leaders in sophisticated CPE incorporating advanced technologies, especially software-intensive products. These products include PBXs, voice processing equipment, and video communication equipment. This leadership in advanced technologies has resulted in strong export growth for these products. For example, U.S. manufacturers supply almost 90 percent of the world market for video conferencing equipment. Western Europe's video conferencing equipment market increased more than 40 percent in 1993, reaching about $87 million. U.S. manufacturers won the lion's share of this business. Similarly, U.S.-manufactured voice processing equipment demonstrated strong export growth to Asia, Europe, and Latin America in 1993. U.S. leadership in advanced technology CPE products is absent in the markets for commodity-type CPE products, such as telephone sets, telephone answering machines, and facsimile machines. Rather, the United States imports most of these products from Pacific Rim countries. Japan, China, and Malaysia accounted for about 60 percent of U.S. imports of CPE in 1993. U.S. manufacturers are unable to match the low production costs found in these countries. To compete, many U.S. companies have established their own CPE manufacturing operations overseas. The resulting imports further contribute to the U.S. trade deficit in customer premises equipment.

Outlook for 1994

Despite U.S. manufacturers' technological leadership in producing sophisticated CPE, U.S. CPE shipments are expected to fall again in 1994. Shipments in 1994 are expected to total $4.5 billion, a nearly 3 percent decline from 1993 shipments. This decline results from continuing U.S. weakness in producing commodity-type CPE equipment and declining market prices for CPE equipment. However, voice processing and video communication equipment shipments will continue to grow in 1994. Voice processing equipment shipments should increase by 10-15 percent, and video communications equipment shipments will likely expand by at least 25 percent.

Long-Term Prospects

The long term outlook for U.S. shipments of CPE is favorable through 1998. Shipments are expected to increase at an annual rate of about 2 percent, reaching almost $4.9 billion in 1998. Most of this growth will be accounted for by shipments of voice processing equipment that are projected to increase at an annual rate of 15 percent and reach about $3.6 billion by 1998, and video communications equipment that should expand by nearly 30 percent per year to $1.2 billion by 1998. If videophones achieve widespread acceptance by U.S. consumers, shipments of video communications equipment could even exceed these projections. Voice processing and video communications equipment will assume increased importance in the U.S. CPE industry as other products, such as telephone sets and key systems, make up a decreasing proportion of total CPE shipments. PBX equipment will remain an important sector in the CPE industry, although growth will be moderate. PBX shipments will recover as new technologies are introduced that enhance the utility of such systems to users, such as wireless PBXs and PBXs with reduced instruction set computer (RISC) control units. Wireless PBXs will save businesses money by reducing or eliminating wiring changes when moving station sets, while RISC control units will allow higher transmission speeds for voice and data traffic. Nevertheless, due to the mature nature of the PBX market, growth in shipments is not expected to increase by more than 2 percent per year through 1998.

CPE equipment will continue to become more compatible with computing equipment as a result of two open software application interface agreements signed in 1993. AT&T reached agreement with a prominent local area network (LAN) software manufacturer, Novell, to develop a PBX-LAN interface. A similar agreement was reached between Intel, a semiconductor manufacturer, and Microsoft, the computer software giant. The open software interfaces developed through these agreements promise to enable businesses and personal computer users to transfer data, video, image, and voice messages through PBXs more efficiently.

Personal communicators are beginning to emerge as a commercially viable CPE product group. These graphically-driven devices combine voice, data, and facsimile functions and enable users to send, store, and receive information over either wireline or wireless networks. Several manufacturing groups expanded production of these devices in 1993, including U.S. and Japanese consortia. Personal communicator sales are projected to reach 3.1 million units in 1998 (see chapter 26, Computer Equipment, for more detail).

Shipments of commodity-type CPE groups will continue to decline during the next five years. Telephones, facsimile machines, and modem shipments will all decline, although at different rates. Telephone shipments will decline the fastest, while facsimile machines will decline at a more moderate pace. However, unit shipments of facsimile-modem boards for use in personal computers equaled facsimile shipments in 1993 and are expected to continue to increase over the next five years. Modem shipments are also expected to decrease at a moderate pace as businesses replace their modem-based transmission systems with ISDN transmission systems. However, this transition will be a gradual one, since many businesses will continue using modems until broadband network services are more widely available. U.S. exports of modems will remain strong and should moderate the decline in domestic shipments.

CELLULAR RADIOTELEPHONE SYSTEMS

As the U.S. cellular industry marked its tenth anniversary in October 1993, its impressive growth trend continued unabated, despite highly publicized, unsubstantiated allegations of harmful radiation from handheld cellular telephones. The commercial availability of digital cellular equipment in 1993 spurred the transition from analog to digital technology, although continued industry divisiveness over digital standards has dampened momentum. Numerous technological advances enhancing the features and capacity of analog systems may further delay more aggressive digital deployment.

The Cellular Telecommunications Industry Association (CTIA) reported more than 13 million U.S. cellular subscribers by mid-1993. With a growth rate amounting to more than 300,000 new subscribers per month, the number of cellular users in the United States was expected to be nearly 15 million by the end of 1993, up 36 percent over 1992. Cumulative capital investment grew by $3.5 billion from mid-92 to mid-93, or 38 percent, to $12.8 billion. This increase stems from the network investment required to enhance analog systems as well as add digital channels.

Beginning with their 1992 survey, the Bureau of the Census collected data on cellular equipment shipments. Shipments of cellular radio equipment (base stations as well as subscriber units) were $3.2 billion in 1992, up from $2.9 billion in 1991. Shipments of cellular switching equipment were not reported. The total size of the cellular equipment market for 1993 is extrapolated from the expected increase in the number of subscribers during the year. Using this base, the market reached an estimated $3.7 billion in 1993, up about 23 percent from $3 billion in 1992.

As of June 1993, there were 1,523 cellular systems in operation, up from 1,506 at the end of 1992. The number of cell sites reached 11,551, up from 10,307 at the end of 1992. Statistics collected by the FCC indicate more than 17,000 cells installed. The discrepancy is due to a high degree of sectorization of cell sites into three cells to improve call quality.

Annual service revenues in 1993 approached $10 billion, up more than 30 percent over 1992. Roaming (using cellular outside of one's home service area) accounted for about 12 percent of total revenue. The average cost of local cellular service declined 2 percent in 1993 to about $67.30 per month, and the average cellular call lasted nearly 2.4 minutes.

U.S. Market Trends

The U.S. cellular market moved further toward its goal of a seamless national network with the selection of Independent Telecommunications Network, Inc. (ITN) to establish a Signalling System 7 backbone network to transport cellular calls between system operators. This development positively affects the entire cellular industry by facilitating nationwide automatic call delivery, thereby broadening user appeal.

Commercial deployment of digital cellular technology in the U.S. market began in 1993. As of September 1993, at least two carriers were providing digital service to an estimated 20,000 subscribers: McCaw and Southwestern Bell. Both companies planned to further expand digital coverage in their markets by the end of 1993.

These first digital systems use time division multiple access (TDMA), one of two competing U.S. digital cellular standards. Many carriers have also been testing the rival standard, code division multiple access (CDMA), and several plan deployment of the latter in late 1994, including US West New Vector Group, Bell Atlantic, and Pacific Telesis. BellSouth's test of extended-TDMA (E-TDMA), a technology developed and produced by Hughes Network Systems, achieved an elevenfold capacity increase.

In contrast, Ameritech has decided to delay its digital deployment indefinitely. Their decision was based on field tests of TDMA in which customers felt that the digital service could not meet the quality standards of the analog system. Many other carriers remain undecided as to which standard to use. As a result, the transition to digital cellular in the United States is proceeding more slowly than expected.

The major U.S. handset and infrastructure equipment manufacturers will sell products based on both standards. Many dual-mode (analog/digital) TDMA phones are already on the market, produced by Motorola, Ericsson-GE Mobile Communications and others. The first dual-mode phone for CDMA was introduced by Qualcomm in early 1993. The company has received FCC type-acceptance for the phone and at least one large order from US West NewVector Group. Motorola introduced a prototype dual-mode CDMA base station in early 1993. Although TDMA is the first digital system to be commercially available, deployment has been been slower than initially forecast. CDMA will not be ready for commercial deployment until mid-1994 or later. Meanwhile, a number of carriers, especially those in smaller markets, seem willing to take advantage of sectorized antennas, cell enhancers, microcells and narrowband-AMPS (N-AMPS) and to wait and make their digital technology choice based on merit rather than speed. Dataquest Inc. predicts that in 1997, dual-mode TDMA will be in use in 24 percent of U.S. markets, dual-mode CDMA in 19 percent, while AMPS or N-AMPS analog systems will continue in 57 percent. The Department of Commerce estimates only 300,000 TDMA subscribers by the end of 1994.

The uncertainty over digital standards has created an unanticipated market for products to support multiple interfaces. For example, Motorola unveiled its next generation base station system that supports analog and TDMA or CDMA digital interfaces, giving operators flexibility in their technology choices and customers a smooth transition to digital. Steinbrecher Corp.'s MiniCell generic base station transceiver handles multiple calls using all modulation standards, including U.S. and foreign analog and digital standards, and data, transmission, simultaneously. Several versions are available for use with a variety of wireless networks, including paging and PCS.

About 5 million cellular telephones were sold in the United States in 1993, up 13 percent over 1992, according to Herschel Shosteck Associates. Phone sales tend to exceed the number of new subscribers by about 20 percent due to purchases of replacement and multiple phones by subscribers. The average wholesale price of cellular phones decreased to about $280 in 1993, although the decline was at a slower pace than in previous years. The continuing downward trend in wholesale phone prices, combined with deep carrier discounts on handsets, has helped spur the entrance of consumer users into a market traditionally dominated by business users. The entrance of dual-mode phones into the market during the longer term may push up average phone prices, though this will depend on the growth of digital subscribership.

Another important trend in the cellular telephone market is the availability of new features made possible by advances in electronic circuitry and the increasing intelligence built into the cellular network. These features include voice dialing and alphanumeric display for short messaging, among others.

In many cases cellular phones are crossing the lines that formerly defined distinct communications areas. For example, Telular introduced two products that allow consumers to switch between landline and cellular service: PCS One transforms a portable cellular phone into a landline telephone, and PhoneCell allows landline phones, faxes or modems to operate on a cellular system. Novatel also developed a cellular phone that converts to a landline phone while retaining its cellular calling features. Another growing area is the transmission of data over the cellular network. It is estimated that portable faxes and modems are being used by about 500,000 U.S. cellular subscribers. Several new products were introduced in 1993: Technophone launched a portable cellular phone with an optional cellular datafax interface; Motorola, ZyXel and others have cellular modems on the market; ORA Electronics developed a data link to allow portable computers to communicate through cellular phones.

Cellular data got a boost in 1993 with the publication of the cellular digital packet data (CDPD) protocol, a technology originally developed by IBM for the transmission of data over analog cellular systems (see chapter 29). The CDPD consortium's long-term goal is a nationwide overlay network for data transmission. Products meeting the CDPD specification started coming to market in mid-1993. AT&T announced a mobile data base station and mobile data intermediary system to work with AMPS equipment. Steinbrecher Inc., Pacific Communication Sciences, Inc., and Cellular Data, Inc. are supplying mobile data base stations for McCaw's new Wireless Data Division.

Another wireless data innovation is the personal computer memory card international association (PCMCIA), a format to ensure interoperability of data transmission hardware and software products for both cellular and noncellular data networks. Nokia (Finland) and AT&T developed the first PCMCIA cellular modem in early 1993, and Motorola introduced its line of four credit-card sized modems to plug into PCMCIA standard ports.

In another development, firms sought to tap the emerging rental market with the introduction of new products such as cellular vending machines and sophisticated interactive software. These products enable consumers to rent cellular phones at locations without technical representatives. Greater availability of rental units should stimulate sales to the rental companies and also expose prospective subscribers to the technology.

Technical Developments

In July 1993, TIA published a second voluntary industry standard for digital cellular telephone systems. The new standard, known as IS-95, was developed by TIA from a submission made by Qualcomm, the leading proponent of CDMA technology. The standard was published on an interim basis to allow more rapid updating as necessitated by practical experience. The development and approval of the CDMA standard has been clouded by Interdigital's claim that it holds patents infringed upon by equipment conforming to the standard. InterDigital is not willing to grant either royalty-free or royalty-bearing nondiscriminatory licenses as contemplated by TIA's patent policy.

Qualcomm to date has licensing or support agreements with 11 companies to produce CDMA subscriber equipment, and with 6 companies for infrastructure equipment.

In August 1993, Motorola submitted a proposal to TIA to develop an open standard for communications between cellular base stations and cellular switches. The so-called A+ interface would replace heretofore proprietary protocols and intensify competition among network equipment vendors.

Two law suits alleging that portable cellular phone use caused cancer were filed in late 1992 and 1993, causing a flurry of media attention. Both cases were dismissed by local courts, and numerous experts have asserted that there is no link between cellular phones and increased health risks. Surveys show that the majority of cellular users did not believe the allegations, and subscriber numbers showed little if any dip in the first half of 1993. Even so, the cellular industry, led by CTIA, immediately embarked on an aggressive public information effort and a $3-5 million, multi-year program of scientific study designed to reassure the public about radiation effects. It seems evident that the "cancer scare" will have little long-term effect on the industry.

Regulatory Developments

The Federal Communications Commission (FCC) will decide whether to hold lotteries or auctions for cellular licenses for unserved areas in early 1994. These areas are portions of previously licensed Metropolitan Statistical Areas (MSAs) in which the licensee has not provided cellular coverage during the first five years of network installation. More than 10,000 applications have been received for just 83 markets.

In addition, the FCC is likely to approve 29 pending requests for renewal of the industry's first cellular licenses granted 10 years ago.

INTERNATIONAL COMPETITIVENESS

Due to the lack of official trade data for cellular infrastructure equipment, the U.S. trade balance on these products cannot be quantified. To date, available information suggests that the United States enjoys a considerable market presence in this area (Figure 30-1).

There are no official export statistics for cellular telephones, although a number of U.S. manufacturers sell abroad. Statistics indicate that about 40 percent of phones purchased in the United States are imported. Imports topped 2 million units, valued at more than $400 million in 1993. While the number of units imported was up 41 percent over 1992, the value of those units increased only 19 percent, indicating a decrease in the average price of imported phones. Japan, Hong Kong, and China had the highest shares of the import market, at 40, 21 and 17 percent of total volume, and 45, 16 and 16 percent of total value, respectively. imports from China were up 75 percent over 1992. Imports from Finland jumped nearly 600 percent to more than 25,000 phones, while imports from the United Kingdom in 1993 fell by 87 percent from the 1992 figure.

Although portables are an estimated 50 percent of U.S. cellular phone sales, they accounted for only 21 percent of imports (26 percent of total value) in 1993. Vehicular units accounted for 57 percent (53 percent of value) and transportables 22 percent (21 percent of value).

The number of cellular subscribers worldwide neared 27 million in mid-1993, an increase of about 18 percent over 1992 figures. Nearly 110 countries now offer cellular service; an estimated 30 new systems started operation in 1993 (in some cases these are competing with existing systems). The United States continues have almost half of all worldwide subscribers. Japan is the second largest market, with more than 2 million subscribers by mid-1993. Other leading markets include the United Kingdom, Germany, Canada, Italy, Sweden, and Australia. One notable trend: subscriber numbers in Mexico and several Southeast Asian countries have equalled or surpassed those of Norway and Finland, although the Scandinavian countries still have among the highest penetration rates in the world.

As of September 1993, there were 17 global system for mobile communications (GSM) digital cellular systems in operation in 10 European countries, with 13 more planned for the near future. Dataquest Inc. forecast 1 million GSM subscribers in western Europe by the end of 1993, about half of those in Germany. In addition to being the only digital standard in Europe, GSM has also been chosen by many countries outside of Europe, partly as a result of aggressive campaigns by European equipment manufacturers and governments, and partly because it was the first digital standard on the market. Many countries in the Asia-Pacific region (except Japan), Eastern Europe, Africa and the Middle East have committed to building GSM systems. In 1993, GSM licenses were awarded or pending in Hungary, India, Russia, Turkey, and South Africa.

By 1994 U.S. manufacturers will supply GSM equipment to carriers in at least nine countries, among them Pakistan, Spain, Sweden, and the U.K. AT&T won three GSM contracts, including one in the United Arab Emirates. Compatibility has been established between Motorola's GSM base station and switches produced by Ericsson, Alcatel, and Siemens. Motorola has cross-licensed patents with Ericsson and Nokia, and the company recently completed an expansion of a plant in the U.K. to produce GSM products. Motorola has had considerable success with its lightweight, inexpensive GSM handset.

GSM has experienced some deployment problems. In addition to extended delays in its introduction because of the complexity of the technology and lack of test equipment, its operation in Australia and Europe has caused interference at certain frequencies with analog cellular phones, hearing aids, car alarms and other radio spectrum users.

In Japan, new digital licensees awarded major contracts to Ericsson and Motorola for infrastructure equipment. Handset manufacturers are readying for the planned deregulation of cellular phone sales from the current lease-only market structure. Japan has authorized customer ownership of phones, effective in April 1994. Networks of retail outlets are forming to prepare for the anticipated exponential increase in demand.

Major equipment contracts for U.S. cellular firms in 1993 included Motorola's contract to expand the cellular network in the Shanghai region of China; Hughes Network Systems' selection to provide a fixed and mobile digital cellular system in Chengdu, China; and AT&T's sale of network equipment to Poland, Ghana, and South Korea. Qualcomm signed two agreements: with South Korean companies for the manufacture of CDMA equipment for South Korea's proposed digital system, and with the Russian Telecommunications Ministry for allocation of spectrum and implementation of a CDMA network. Qualcomm will also supply CDMA equipment to the Australian telephone company for technical trials.

In the international cellular infrastructure market, Ericsson of Sweden is the dominant supplier, with 33 percent of the market in 1990. Future sales opportunities will be affected by producers' willingness to make equipment for multiple standards. Ericsson, Motorola, and Northern Telecom are committed to produce equipment for all major digital standards, although Ericsson is the only one with proficiency in both cell sites and switches. As open system architecture becomes more prevalent, the specializations of Motorola in cell sites and Northern Telecom in switches may be a long-term advantage.

According to the U.S. International Trade Commission (ITC), Motorola has the largest segment of the global cellular telephone market, and likely will remain dominant because of its experience in radio electronics and its broad product line encompassing most standards (Table 2).

    Table 2: U.S. Market Share
  by Cellular Phone Provider, 1992

                            Percent of
  Cellular Phone Provider   U.S. Sales

Motorola                          37.1
Nokia(*)                          15.2
Audiovox (Toshiba)                14.1
Uniden                             8.4
OKI                                4.7
Novatel                            3.7
Other                             16.8
 Total:                          100.0

(*) Includes Technophone.
SOURCE: Herschel Shosteck Associates.

In June 1993 the ITC concluded in a study that U.S. cellular companies are among the most competitive in the world. It also suggested that U.S. industry's inability to adopt a common digital standard has adversely affected U.S. foreign sales of cellular network equipment.

Outlook for 1994

Enhanced capacity, seamless networking, and new service offerings such as CDPD and personal 800 service should push the number of U.S. cellular subscribers to nearly 20 million in 1994. Revenues from the provision of cellular service should approach $12-14 billion, compared with about $10 billion in 1993. Cumulative capital investment is expected to be nearly $14 billion. Equipment sales will continue their upward spiral of recent years as most operators continue to add to their analog capacity and some begin the transition to digital.

Long-Term Prospects

By the late 1990's, the U.S. market is expected to grow to 30-35 million cellular subscribers. The size of the equipment market should slowly level out as digital technology lowers the incremental cost of adding new subscribers to the network. However, the market schism over digital technology is unlikely to be resolved for the next several years, until after CDMA is commercially deployed. In the meantime, domestic sales of analog equipment are expected to remain healthy as many carriers continue to expand their AMPS and N-AMPS networks.

Foreign equipment sales are likely to suffer as additional countries choose the more universally accepted GSM digital standard, a market that European vendors currently dominate. Average phone prices will be pushed up by the increasing penetration of more expensive dual-mode systems.

Advances in digital and microcellular technologies, as well as competition from personal communications services (PCS), will stimulate new equipment purchases by cellular carriers and customers over the five-year forecast period. Despite earlier concerns that PCS would capture some of cellular's future market, U.S. experience suggests that new communications technologies often enhance rather than supplant their predecessors. Competition from PCS is therefore likely to spark continued innovation and growth in the cellular industry.

WIRELESS PERSONAL

COMMUNICATIONS SYSTEMS

A series of important legislative and regulatory decisions announced in mid-1993 served to define more fully the emerging personal communications services (PCS) market in the United States. These actions are fueling optimism about development of this potentially major new market during the next decade.

The August 1993 congressional mandate for the FCC to begin issuing PCS licenses in May 1994 (see chapter 29), followed by the September 1993 FCC announcement of a market structure for PCS in the 2 GHz band, suggest that PCS service could begin to develop on a limited basis as early as 1995.

The auctioning of spectrum for PCS will usher in a new generation of wireless services (see chapter 29) that are expected to foster new product development. On the network side, PCS will stimulate demand for small radio transceivers for indoor and outdoor use that will provide wireless access to the network. For consumers, the market will consist of handheld phones as well as radio interfaces for a wide array of wireless portable devices (e.g. wireless PBXS and personal digital assistants). Next-generation handsets will be feature-rich and will be capable of automatic registration, power level adjustment and other functions. PCS base stations will have a high degree of functionality as network control becomes increasingly decentralized. The FCC has developed a set of preliminary cost projections for PCS implementation. The average expected cost per subscriber is about $700, comprised of switch processing upgrades ($125), wireline transport ($235), cell sites ($180) and handsets ($160).

Although PCS is most often associated with voice applications, perhaps its most significant potential will be the utilization of its broadband, digital, high-speed qualities to transmit massive amounts of data and information. The high frequencies being used (1.8-2.2 GHz), coupled with the cost effectiveness and computing efficiency of digital signal processors, have made it possible to space "picocells" about 100 meters apart. At these close distances, frequency reuse and capacity expand exponentially, opening the door for a myriad of high-speed data applications. This capability, in turn, will stimulate demand for handheld keypads, integrated devices for voice and data, and handheld units that link a number of smart, portable, digital products, such as personal digital assistants that link cellular, wireless fax, and E-mail.

Smaller cell sizes also mean less costly, lighter weight handsets with batteries that can last for days because less power is required to transmit or receive signals over such short distances. The demand for mass market, wireless voice applications is expected to result in more rapid PCS deployment that will drive handset costs down and stimulate product innovations. Although the strong market penetration of cordless telephones (nearly 50 percent of U.S. households) suggests a large potential customer base for PCS, residential customers are also highly price-sensitive.

Technical Issues

In its September 23 ruling last year, the FCC did not mandate nationwide compatibility for PCS, as it did in the case of cellular. However, the Commission encouraged industry to continue its efforts to develop standards that will promote interoperability, roaming and enhanced emergency call capability for PCS. Although the plethora of PCS technologies under development indicate that multiple standards are likely to coexist for the next several years, the U.S. market can likely support multiple standards.

Despite the lack of consensus on PCS standards, the Telecommunications Industry Association (TIA) is working aggressively to develop such standards, based on input provided by trade associations (Telocator, CTIA) and its own T-1 Committee. The top priority is a common air interface (CAI), that TIA hopes to release in mid-1994.

Technical trials utilizing existing infrastructures of local telephone companies, cable television and cellular companies, have demonstrated promising synergies that could significantly lower the initial costs of PCS deployment. For example, Cablevision predicts that the cost of PCS construction can be reduced by at least 50 percent by employing the existing cable network as opposed to building a conventional system with dedicated fiber links to each base station. The cable-based PCS architecture would use repeaters at a cost of $1,000 each rather than base stations priced around $15,000. Cablevision is trying to create a cable-plant architecture that has the ability to support many PCS providers. Several other proposals envision integrating satellite networks with ground-based PCS as a cost-effective means of providing nationwide coverage.

For unlicensed PCS devices in the 1890-1930 MHz band, the WINForum submitted a spectrum etiquette plan to the FCC in September 1993. This proposal, which is a voluntary effort by 40 companies to develop techniques to avoid cross-interference, was adopted in large part in the Commission's PCS rulemaking. The unlicensed PCS ad hoc committee for 2 GHz microwave transition and management, called UTAM, was conditionally designated as coordinator for use of unlicensed PCS devices. All manufacturers of unlicensed PCS equipment are required to participate in UTAM. Unlicensed devices are expected to pace the introduction of PCS.

FCC type-acceptance of P-Comm's digital millimeter wave radio products used to interconnect PCS microcells also should accelerate PCS deployment.

INTERNATIONAL COMPETITIVENESS

In September 1993, the first commercial PCS system in Europe began offering service in the United Kingdom. Mercury One-2-One, a joint venture between Cable & Wireless (U.K.) and U S West, utilizes Ericsson (Sweden) equipment. The venture reportedly will invest $450 million by 1995, ultimately reaching a total of $2.5 billion. PCS handsets, supplied by Motorola, Siemens, and NEC, sold for $375 and were available at more than 400 outlets in the greater London area in 1993. PCS service is priced at $30 per month for business users and $19 per month for non-business consumers. To attract customers, Mercury One-2-One announced free off-peak local calls.

In February 1993, a PCS license was awarded in Germany to the E-Plus consortium, in which BellSouth is a major shareholder. E-Plus plans to invest $1.2 billion during the next 5 years in the buildout of its network that is based on the European DCS-1800 standard.

In Japan, the personal handy phone (PHP) system operating at 1.9 GHz began one-year trials in late 1993. Preliminary analyses suggest that 20,000-30,000 cells will be required in Tokyo alone. In one technical trial, companies set up 1,600 radio stations in Sapporo to provide experimental service to 2,900 participants. The digital handsets support transmission of images as well as sound. If the trials are successful, four firms plan to commercialize PHP in late 1994.

The launch of Britain's PCS comes as second-generation cordless telephone (CT-2) systems in the U.K. struggle for survival. CT-2 is considered a relatively low functionality form of PCS. Its capabilities are limited to call origination in the vicinity of discrete locations with restricted user mobility. Full PCS, in contrast, will be feature-rich and allow virtually unlimited mobility. Hutchison's Rabbit system, which went into service in May 1992, is estimated to have 12,000 base stations. CT-2 handsets are supplied by GPT (U.K.), Motorola, Northern Telecom, and Japan's Panasonic and Sony. The CAI developed in the U.K. has become a worldwide CT-2 standard.

Outside of the U.K., CT-2 has been comparatively more successful with more than 100,000 subscribers worldwide. Eleven CT-2 systems are operational in Asia (Hong Kong, Singapore, Malaysia, China, and Thailand), Europe (U.K., Holland, France, Germany, Finland), and Brazil. Hong Kong's Tien Dey Seen system reports more than 40,000 users. In Canada, although the four companies licensed to offer CT-2 Plus service have opted to build shared infrastructures, the relatively small market has caused skepticism over its eventual success. Motorola is a major supplier.

Outlook for 1994

Because PCS probably will not be in commercial operation until 1996, equipment shipments in 1994 will be limited to experimental trials and unlicensed devices. Start-up contracts are not likely until at least mid-1994, followed by an additional 2-3 years to construct PCS network facilities.

Long-Term Prospects

As the long-awaited deployment of PCS came closer to realization, several well-respected market research firms issued exceedingly optimistic forecasts. Under its moderate scenario, BIS Strategic Decisions expects nearly 15 million PCS users in the United States by the end of the decade. Frost & Sullivan Market Intelligence has estimated that PCS revenues for equipment and services will approach $14 billion in 1999. Telocator, the PCS industry trade association, released its revised PCS forecast in September 1993 of 8.5 million users by 1998, increasing to an estimated 31 million in 2003, or 10 percent penetration. High penetrations are based on estimates that 75 percent of professionals spend at least 20 percent of their work day away from their offices. Applying FCC cost estimates to these subscriber forecasts suggests that the PCS equipment market could well exceed $10 billion by the end of the decade.

As a result of the extensive number of PCS trials, market research, and the introduction of PCS-like services by cellular carriers, the concept of increased mobility and connectivity has attracted strong customer interest in potential PCS applications. If the industry can deliver on its promise of low-cost, networked products and services, then it may well realize or even exceed these market projections and become the communications medium of choice by the end of the decade.

MICROWAVE RADIO SYSTEMS

Although both satellite and terrestrial based networks operating above 1 GHz can technically be classified as microwave transmission systems, this section

focuses on terrestrial systems that use microwave frequencies for the transmission of voice, data and video. Satellite communications systems and microwave radio equipment applied to search and navigation operations are covered in other sections of this chapter.

Even though microwave radio communications is a relatively mature technology, innovative short-haul applications are spurring steady growth of equipment sales and increased product research and development. Shipments of complete terrestrial-based microwave systems, which include transmitters, receivers and antennas, edged up I percent from 1992 to about $1 billion in 1993. Microwave component sales increased by 3.6 percent to nearly $1.3 billion in the same period. This figure encompasses individual component sales not used in terrestrial-based microwave systems. Sales of microwave tubes fell about 15 percent, reflecting a slump in demand for this older technology.

U.S. Market Trends

Sales of terrestrial based microwave systems were buffeted in 1993 by two forces: an overall demand shift from long-haul to short-haul applications, and a shift from once lucrative defense contracts. Such fundamental changes in the industry precipitated mergers and acquisitions, as well as bankruptcies. Demonstrating flexibility in times of change, the microwave communications industry remained robust as entrepreneurs took advantage of newly emerging customer demands, new technological developments and regulatory changes. Companies unable to respond to the winds of change in customer priorities dissolved or were sold to foreign and domestic bidders. Of particular note, California Microwave Inc. signed a letter of intent to acquire 81 percent of TeleSciences Transmission Systems Inc., a subsidiary of San Francisco based TeleSciences Inc. The $32 million deal is part of California Microwave's wireless strategy and follows its 1992 acquisition of digital radio manufacturer Microwave Radio Corporation. The most significant foreign acquisition occurring in 1993 was the purchase by South Korea's Samsung Electronics of Harris Microwave Semiconductor. The agreement gives Samsung an $8 billion company (share value) that manufactures GaAs (gallium arsenide) integrated circuits and discrete FETs (field effect transistors).

Several factors have converged to increase the growth rate of sales for short-haul microwave radio equipment: spectrum availability, technological advances, and demand for narrow-band voice and data transmission. Industry sources estimate that as the overall market for terrestrial microwave communications equipment grows at a nominal rate, the short-haul portion will increase from 27 to 33 percent of the market by 1997. Conversely, equipment sales for traditional, long-haul applications over distances greater than five miles remained steady in 1993 as conventional users periodically upgraded their networks to digital systems or rural operators extended plain old telephone service (POTS) to previously unserved customers.

Short-haul microwave systems engineers increasingly took advantage of higher frequencies, such as the 23-24 GHz band, because of overcrowding in lower frequencies. The typical user of the 2, 6, 10 GHz bands - operators of long-haul transmission systems - had been unwilling to risk signal loss at higher frequencies. Technological advances in microwave components, sub-assemblies, and systems increased transmission capabilities at higher frequencies while reducing susceptibility to atmospheric interference, such as rain or fog. Customer demands for emerging applications in these frequencies (described in more detail below) fueled sales of advanced microwave components and short-haul systems.

Companies that traditionally catered to defense procurement have been forced to become more commercially oriented as funding declines for Department of Defense programs. To assist defense conversion efforts, the Advanced Research Projects Agency (ARPA) will award matching grants totaling $472 million during the Federal fiscal year starting Oct. 1, 1993 through its technology reinvestment program (TRP). The microwave industry is expected to benefit from this program as part of a larger effort to develop dual-use (military/civilian) mobile communications technologies. Successful conversion from defense to commercial markets should enhance the industry's competitiveness by shortening procurement cycles and reducing paperwork requirements.

Applications

Traditional microwave system customers with transmission requirements over distances greater than five miles include common carriers, oil companies, electric utilities, broadcast and cable television (CATV) operators, pipeline industries, and government agencies. Short-haul microwave communications equipment is used by universities, corporations, hotel chains, hospitals, CATV service providers, local area networks (LANs), cellular phone networks, and city and county governments. Technological advances have both reduced costs and precipitated an increased emphasis on short-haul, rather than long-haul, applications.

Common carriers are choosing between state-of-the-art digital microwave systems or fiber optics in their replacement of older analog systems. During 1993, the FCC received about 7,500 applications from common carriers for new microwave systems, a 14 percent increase over 1992. The growth can be attributed to expansion of cellular systems, need for back-up in the event of fiber optic transmission equipment failures, and installations in terrains where laying fiber optic cable is not economically feasible.

Microwave radio systems provide a relatively inexpensive alternative to other transmission technologies in areas that are underserved by common carriers. The Rural Electrification Administration (REA), a credit agency of the U.S. Department of Agriculture, is responsible for financially assisting rural telephone utilities to reach more customers. In 1993, the REA financed several point-to-point transmission systems in California and Washington worth a total of $1.8 million. Since system requirements and implementation schedules vary, yearly data are not indicative of trends: the REA financed only $80,000 in 1992, but more than $2.5 million in 1991.

Nearly 90 percent of the 1,516 public and private television stations, and most of the 8,434 public and private radio broadcast stations in the United States rely upon microwave equipment for signal transmission. Microwave equipment manufacturers may benefit from a 1993 decision by the FCC permitting ownership of up to four radio stations in one market. This decision could precipitate studio consolidation that will enable new owners to capitalize on economies of scale by investing in digital microwave equipment. In addition, the FCC in 1993 released an additional 100 kHz of spectrum that will accommodate as many as 250 new AM radio stations. As of August 1993, the FCC had already received 900 expressions of interest from eligible, current owners of existing stations.

The FCC reports that 36,528 private microwave networks were licensed through September 1993, a 1 percent increase over 1992. The largest users (70 percent) continue to be industrial entities, such as the pipeline, railroad, and oil sectors. Public services, which include state and local governments, fire departments, highway maintenance divisions, forestry conservators, police, and special emergency users, held 22 percent of the private microwave network licenses. The remaining 8 percent belonged to land transportation organizations. Applications for multiple address systems, which are employed by each of the users listed above for point-to-multipoint applications, continued their upward trend.

Wireless cable - television programming delivered directly to the home via microwave networks - is undergoing strong growth. In its current form, this multichannel, multipoint distribution service (MMDS) uses omnidirectional microwave facilities and 8-10 meter dish antennas to transmit more than 30 television stations. If line-of-sight is available, wireless cable is cost-competitive with traditional wireline cable systems. MMDS is used not only for its entertainment value, but also for its ability to link remote school districts, increase interactive learning, and offer community education programs. Recognizing that MMDS requires lower microwave frequencies to maximize broadcast coverage, the FCC opened the 2-12 GHz range to wireless cable operators in 1992.

Between February 1990 and March 1992, the FCC received about 1,000 applications per month from potential MMDS operators. To respond to the backlog, the FCC froze applications in April 1992, and expects to accept new applications in early 1994. As of August 1993, the FCC had authorized 600 stations. Of these, 95 were operational, serving about 450,000 subscribers.

Another type of wireless cable system, local multipoint distribution service (LMDS), exists in the 27.5-28.5 GHz range. Cellularvision, a small New York company, currently is the only company licensed to use that frequency and broadcasts its signals through local antennas with approximate ranges of 6 miles and carrying capacity equal to 400,000 telephone fines. Recognizing that LMDS will eventually be able to provide up to 100 television channels as well as interactive video services, the Bell Atlantic Corp. acquired a stake in Cellularvision in August 1993. Pending regulatory approval, the systems could be provided nationwide and compete directly with MMDS and regular cable operators.

Cable system operators also use microwave transmission systems to link cable networks and transport signals from point to point within a system, but not to the home. These cable antenna relay services (CARS) have faced steadily declining usage as cable operators have deployed more fiber optics in their transmission systems. The FCC reported a 30 percent decline in CARS applications in 1993 from previous years' averages due to reduced demand and uncertainty surrounding the effects of the 1992 Cable Act.

Corporations are making greater use of microwave radio in three applications: wireless local area networks (WLANs), wireless PBXs, and bypass systems. Advances in microwave engineering have increased data transmission capacity, making WLANs more attractive to corporate telecommunications managers. Wireless PBXs and bypass systems provide corporations that have scattered operations centers with an economic alternative to common carrier tolls.

Technical Developments

Many of the technological advances for next-generation digital microwave have been achieved in R&D facilities throughout the United States; however, commercial applications that will require production quantities have not been realized. Systems integrators and microwave component manufacturers have historically reinvested 5-10 percent of their sales revenues in R&D and this will begin to pay off with wider acceptance of new applications. The focus of R&D activity has been in three areas: solid state devices, antennas, and connectors. Interoperability between technologies will be crucial to achieving sufficient demand levels.

Regulatory Developments

Recent FCC decisions will boost microwave equipment sales in the near term by allowing the movement of fixed microwave users to higher frequencies, and by releasing Government-occupied spectrum to the private sector.

As expected, the FCC decided in July 1993 to reallocate 220 MHz of spectrum between 1.85 and 2.20 GHz that currently is occupied by fixed microwave users for future communications services involving emerging technologies. These technologies, generally referred to as personal communications services (PCS), are covered in a preceding section of this chapter. Although the FCC has not yet licensed this spectrum to service providers, emerging technologies are likely to use new digital microwave equipment in their systems, as are fixed microwave users who must move to different frequencies. In a separate proceeding, the FCC reallocated five bands above 3 GHz to private operational and common carrier fixed microwave services, and prescribed new channelization plans to facilitate their use.

Microwave equipment manufacturers will also have an opportunity to sell new equipment as the Federal Government surrenders 200 MHz of spectrum to the private sector during the next few years. Title VI of the Omnibus Budget Reconciliation Act of 1993 mandates the transfer of 100 MHz of spectrum between 3 and 5 GHz with the remaining 100 MHz coming from below 3 GHz.

INTERNATIONAL COMPETITIVENESS

Although comprehensive trade data for complete microwave systems, antennas, tubes and components do not exist, the United States is a known market leader in these areas. Available Census trade data for certain types of microwave systems shows that the United States enjoyed a trade surplus in 1993 of $74 million, about the same as in 1992. Exports of high-frequency receivers grew by more than 20 percent between 1992 and 1993, while imports declined 3 percent in the same period. Reflecting a worldwide drop in demand for microwave tubes, both exports and imports fell in 1993 by 4 and 3 percent, respectively.

Demonstrating its reputation for quality products and a strong commitment to exports, the microwave industry sells about 70 percent of its product shipments overseas. Canada, China, Taiwan, the United Kingdom, South Korea, and Japan were the largest export recipients in 1993, while Japan, Israel, Canada, and Sweden were the largest sources of imports.

Trade data does not capture two phenomena in the microwave radio industry: reselling of existing microwave systems to overseas markets with less-developed telecommunications systems, and incorporation of microwave radio systems and components in major telecommunications projects worldwide. Several long-haul systems in the United States have been dismantled, refitted and sold to government telecommunications administrations and private network operators abroad as primary or backup transmission systems. The microwave portions of these projects, as well as the sale of used equipment, are often lumped into differing export classification codes and therefore are not accounted for in the statistics listed above.

While the United States currently has technical superiority in microwave technology, it faces a possible threat from Japanese development of milliwave technology (frequencies above 30 GHz). In 1993, Japan's Ministry of Posts and Telecommunications (MPT) and its Ministry of International Trade and Industry (MITI) contributed a total of $30 million to the newly-formed Advanced Milliwave Technology Co. NEC and Fujitsu invested $12 million and will cooperate in the development of a receiver integrating all circuits on one chip at 60 GHz.

Outlook for 1994

Capitalizing on new applications for microwave radio technology, technical advances and providential regulatory decisions, the microwave radio industry should enjoy 2-3 percent growth and continue to widen its trade surplus in 1994. Cellular service providers expanding network conversions from analog to digital will also spur sales of microwave transmission systems, antennas, and components. Beneficiaries of ARPA's TRP grants will pursue development of dual-use technologies, as formerly defense-oriented microwave equipment manufacturers shift their marketing strategies to the commercial sector. Those companies unable to meet the competitive challenge of the commercial market will be purchased and the trend toward industry consolidation will continue.

Long-Term Prospects

Equipment sales for short-haul applications will continue to outpace the growth rate for long-haul equipment sales. As new applications such as MMDS, WLANs, and interactive learning systems become more widespread, demand for microwave radio equipment operating in higher frequencies will rise. Moving fixed microwave users out of spectrum taken over by emerging technologies such as PCS will spur demand for new microwave systems. R&D funds as well as ARPA's TRP grants will facilitate commercial adaptations of dual-use technologies.

Intelligent vehicle highway systems (IVHS) is an emerging application for microwave radio equipment. IVHS will incorporate a range of microwave technologies designed to improve the safety, mobility and efficiency of the nation's highway systems. Microwave radio equipment is ideal for vehicle to roadside communications (VRC), automatic vehicle identification (AVI), electronic toll collection (ETC) and advanced traffic management systems (ATMS) because of its support for high data rates, small size, and low cost. Some IVHS components already have been tested in trials at various sites throughout the nation. However, it is anticipated that a complete IVHS network will not be fully operational in the United States for another 20-30 years.

International sales will continue to figure prominently in the growth of microwave radio production and refitting. Developed countries will be ideal markets for many of the new applications in the higher frequencies. New democracies in Eastern Europe and the Newly Independent States of the former Soviet Union will take advantage of microwave radio equipment for primary and backup transmission systems, while China and other rapidly industrializing countries in Asia will deploy additional microwave radio equipment in their cellular networks. Developing countries will continue to purchase refitted analog equipment or new digital equipment for mountainous terrains where fiber optic cable systems are not cost competitive.

U.S. manufacturers will retain their technological edge through 1998 but may be challenged by Japanese advances in milliwave technology. Advances in antenna design combined with community sensitivity to unsightly towers will lead to an increased emphasis on compact designs. Demand for simultaneous voice, data, and video transmission through MMDS and PCS will further fuel product development. As consumers worldwide learn of and begin to clamor for IVHS and options made possible through PCS and MMDS, the microwave industry will realize production economies of scale, reduce their prices and further increase sales.

FIBER OPTICS

The U.S. fiber optics industry continued to grow in 1993. Shipments were expected to grow by about 11 percent to $3.1 billion, reflecting increased deployment of fiber optic equipment in both developing and industrialized countries. U.S. shipments of fiber optic equipment have experienced an average annual increase of about 13 percent since 1989 (Table 3). The Bureau of the Census began reporting shipments of fiber optic equipment based on Synchronous Optical Network (SONET) transmission speeds (OC-1 through OC-9 and greater), beginning with its 1992 survey.

[TABULAR DATA OMITTED]

Telecommunications remained the predominant application for fiber optic systems and components. Strong export growth and increased deployment of fiber in domestic cable television and local loop systems contributed heartily to the growth of the U.S. fiber optics market. The industry is expected to enjoy continued growth throughout the 1990's, gaining momentum as fiber is installed closer to the home. The impetus for further market growth will also be strengthened by improved market economies, solidification of standards, and eventual resolution of regulatory and legislative issues.

U.S. Market Trends

In 1993, about 14.8 million fiber kilometers (fiber km) had been deployed in the United States by the long distance interexchange carriers (IXCs), the Regional Bell Companies, and independent telephone companies, cable television (CATV) industry, and the competitive access providers (CAPs). Currently, more than 90 percent of long distance telephone traffic in the United States is carried over optical fiber. Many of the nation's IXCs are in the process of upgrading their long distance networks with Asynchronous Transfer Mode (ATM) equipment as well as transmission equipment based on the SONET standard (SONET is discussed in more detail below). In April 1993, Sprint announced a $500 million plan to install SONET equipment in its network during the next 10 years. Requests for proposals were issued to five major SONET vendors: AT&T, NEC, Alcatel Network Systems, Northern Telecom, Ltd., and Fujitsu America, Inc. The proposed project will offer Sprint customers transmission speeds of up to 622 megabits per second (mbps), more than 13 times faster than the current network speed of 45 mbps. ATM's ability to accommodate the demands of transmitting data requiring high bandwidth makes it the ideal multiplexing medium for an optical communications network. The aggressive installation of ATM equipment by both long distance and local telephone companies is reflective of the increased deployment of fiber optics.

Also in July 1993, MCI Communications Corporation (MCI) became the first network operator in the United States to deploy an optical switch in its network. The switch, developed by Porta Systems Corporation (U.S.), is designed to enhance route protection and restoration capabilities within the network. When the switch detects a loss of laser light, it will redirect the signal to an alternate route within the MCI network in less than 20 milliseconds.

The primary deployers of regional fiber optic networks in the United States are the seven regional Bell companies, GTE, the CATV multiple system operators (MSOs), and the CAPS. Both the MSOs and the regional telephone companies have begun to deploy increasing amounts of fiber in their networks and have begun to restructure their network architectures to provide fiber optic-based broadband services to their subscribers. Although the telephone companies have the most fiber deployed in their networks, the MSOs are currently the most aggressive deployers of fiber among the service providers in terms of annual percentage growth.

The regional Bells, several independent telephone companies, MSOs, and the CAPs are all pursuing some variation of Fiber-in-the-Loop (FITL) deployment within their networks. Although the cost of fiber installation is dropping rapidly, FITL deployment is still somewhat costly relative to copper the closer it comes to the home. There is some concern among network operators that even if they deploy an all-fiber network, there may not be sufficient demand for the broadband services being offered to justify the cost. Therefore, service providers that opt to deploy fiber within a particular service area may enjoy an advantage in the competition for subscribers willing to pay for broadband services.

At the end of 1993, all of the regional Bells and most of the independent telephone companies had deployed at least some SONET-based equipment. According to Fujitsu Network Transmission Systems, Inc., US West is the largest consumer of SONET equipment in the United States, followed by Bell Atlantic, Ameritech, Southwestern Bell, BellSouth, NYNEX and Pacific Telesis. There are some 40 products available on the market today based on SONET standards, and most major telecommunications equipment providers manufacture SONET products, including AT&T Network Systems, Alcatel Network Systems, DSC Communications Corp., Fujitsu, Northern Telecom, Ltd., and Reliance Comm/Tec.

U.S. manufacturers of fiber optic equipment remain fiercely competitive, but there have been some signs of movement towards greater cooperation among the major players in the industry. This movement toward increased collaboration may be due in part to firms entering into pre-competitive R&D alliances or similar agreements. These temporary alliances, such as the Opto-Electronics Technology Consortium and the Optical Networks Technology Consortium, have been formed because of the huge capital expenditures that are usually required when developing next-generation optical transmission components.

The fiber optics industry may also be experiencing a move toward greater integration in recent years. One example is the successful implementation of various technical standards that have evolved over the past decade within the telecommunications and fiber optics industries. Although standards have been slow to develop in the industry, due mostly to the constantly changing and evolving nature of the business, standards such as SONET for telecommunications networks and Fiber Distributed Data Interface (FDDI) for local area networks (LANs), have gained universal acceptance among deployers of fiber optics equipment. These standards have created a more uniform environment that allows competing manufacturers to create compatible products for deployment in telecommunications networks, contributing to further market growth.

AT&T Network Cable Systems and Coming, Inc. remain the largest U.S. manufacturers of optical fiber, and Siecor, a joint U.S.-German company, remains the largest manufacturer of fiber optic cable in the world. Significant inroads have been made into the U.S. fiber optic market during the last five years by European and Japanese firms.

Regulatory Issues

A number of regulatory hurdles need to be cleared before service providers can feel fully confident about installing fiber to the neighborhood and beyond. The Modified Final Judgement (MFJ) or Consent Decree of 1984, which finalized the breakup of the AT&T monopoly, also barred the newly-formed Bell operating companies from certain activities, including manufacturing telecom equipment and providing long distance services and information services (a provision which has since been modified). Also, the Cable Communications Policy Act of 1984 prohibits any local telephone company from providing video programming to subscribers within its service area, either directly, or through an affiliate, such as a CATV affiliate in which the company owns more than 5 percent.

Although current U.S. regulatory restrictions prohibit the regional Bells from owning a cable television company within their service region, they are allowed to purchase an MSO outside of their own service area. In addition, there are currently no legal barriers preventing a phone company (or a CATV company) from owning an MSO and a cellular system within the same market area. As a result of these regulatory loopholes, several regional Bells have purchased MSOs within markets that have existing cellular networks in preparation for the expected exponential growth in the personal communications services (PCS) market. Using a combination of both fiber optic technology and wireless networks, it is anticipated that in the future PCS technology will allow individuals to carry pocket-sized wireless phones that will enable them to be reached anywhere, anytime (see the PCS section of this chapter for further discussion).

In August 1993, a Federal District Judge in Virginia declared unconstitutional the provision of the Cable Communications Act that prevented Bell Atlantic from selling video programming to subscribers in its own service region. If the decision is upheld on appeal, the ruling may provide an economic incentive for the Bells to deploy more optical fiber in their networks.

Submarine Systems

More than 280 fiber optic undersea cable systems are planned or in place around the globe. By the end of 1993, it is expected there will be more than I million fiber kilometers (620,000 fiber miles) of fiber optic cable installed undersea worldwide, at a total installed cost of $10.4 billion. One research firm has predicted that more than 1.6 million fiber kilometers (995,000 fiber miles) of undersea fiber optic cable will be in service by 1997, valued at $16.6 billion. It is expected that the international market for undersea fiber optic cable systems will reach its saturation point by the middle of this decade.

The increase in the number of undersea fiber optic systems brings greater transmission capacity around the globe. The October 1992 formation of the Global Network Project (GNP) among six of the world's major telecommunications carriers meant agreement on sharing their undersea fiber optic capacity in an effort to improve the flow of their customers' international multimedia communications by the end of 1993. Participation in the GNP may expand in the future to include other international carriers whose networks would extend the global reach of the shared facilities network. The agreement may cause a slight decline in demand for undersea fiber optic systems due to the carriers sharing existing networks.

Eight transatlantic and four major transpacific fiber optic cable systems are planned or in place. Several major undersea fiber optic systems announced during late 1992-early 1993 are described briefly here.

The Fiberoptic Link Around the Globe (FLAG) project is a privately-financed venture with four investors: NYNEX Network Systems, the Dallah Al Baraka Group (Saudi Arabia), Gulf Associates (U.S.) and Marubeni Corporation (Japan). The cable is intended to provide a high capacity undersea fiber optic cable that will link Japan to the United Kingdom (U.K.) via the Indian Ocean. At 29,000 kilometers, FLAG will be the longest undersea cable in the world and is expected to cost $1.2 billion upon completion. In addition to Japan and the U.K., FLAG will have landing points in 11 other countries: the South Korea, Hong Kong, Indonesia, Malaysia, Thailand, India, the United Arab Emirates (UAE), Saudi Arabia, Egypt, Italy, and Gibraltar. The cable will consist of two optical fiber pairs operating at 5 gigabits per second (gbps). One pair will provide local transmission, carrying traffic between the landing point countries. The other pair will function as an express lane, quickly transmitting traffic along several of the busiest routes. The system is expected to be operational by December 1996.

In June 1993, Northern Telecom's STC Submarine Systems Division announced its participation in the Rioja Cable. The 1,800 kilometer cable will be the first European link to use undersea optical amplifiers together with the longest unrepeatered system in the world. The contract was awarded by Telefonica (Spain), DBP Telekom (Germany), Belgacom (Belgium), PTT Telecom (Netherlands), British Telecom and Mercury Communications (U.K.), and Telecom Denmark. Rioja will use synchronous digital hierarchy (SDH) transmission standards to link Spain, the U.K., Belgium and the Netherlands. The cable, which will be operational in 1994, will eventually have a capacity of 5 gbps, equivalent to 120,000 voice circuits.

In July 1993, telecommunications carriers from nine Asia-Pacific nations signed an accord to build an 11,000 kilometer regional undersea fiber optic cable called the Asia-Pacific Cable Network (APCN). The APCN project would link Indonesia, Singapore, Malaysia, Thailand, the Philippines, Hong Kong, Taiwan, South Korea, and Japan at a cost of $610 million; The cable will consist of eleven fiber pairs, each with 5 gbps capacity, creating a total capacity of 660,000 simultaneous phone calls-almost 8 times more than any existing undersea fiber optic network in the region. APCN will be based on the SDH standard and should be completed by late 1996 or early 1997. Like several other undersea cables operating in the region, APCN is expected to be part of a network among members of ASEAN (Association of Southeast Asian Nations).

INTERNATIONAL COMPETITIVENESS

The 1993 world market for fiber optic equipment - defined as optical fiber and cable, transmitters, receivers and connectors - was estimated at just under $5 billion, an increase of roughly 11 percent over the previous year. World market growth was fueled by emerging markets in Latin America and Eastern Europe, coupled with the increased deployment of FITL within most industrialized nations. The market is expected to exceed $10 billion by the end of the century. U.S. trade in fiber optic cable continued to show a surplus, although 1993 imports increased by more than 15 percent from 1992, while exports declined by almost 4 percent during the same period. Total U.S. imports for fiber optic cable and optical fiber came to an estimated $99 million for 1993, while exports totalled about $280 million for the year. Accurate data for U.S. trade in active fiber optic components (transmitters, receivers, repeaters and multiplexing equipment) was not available.

The main reason for the dramatic growth in demand for fiber optic equipment worldwide is the low cost of deploying optical fiber. It is estimated that the cost of installing a fiber optic system is only 5-10 percent more than deploying traditional copper coaxial cable. When factoring in fiber's enormous bandwidth potential and ability to adapt to future broadband applications, the choice of fiber over copper becomes very appealing to most of the world's network operators. Also, many of the countries in Eastern Europe and Latin America have telecommunications networks that pre-date World War II. Fiber optics is increasingly deployed to replace these aging networks. And within industrialized nations, fiber is moving from the long-haul networks to the local loop. Increased, fierce competition among the telephone companies, CATV firms, and CAPS in the industrialized nations has moved many companies to improve their networks by deploying more fiber. Another factor driving the fiber market is the stated intention of several industrialized countries to initiate plans in the very near future to complete fiber-based nationwide information networks by the first quarter of the 21st century. The governments of Germany, Japan, and the United States all have committed to some variant of such a plan.

The European market for fiber optic equipment has undergone dramatic changes during the last five years. Although European telecom authorities have been moving toward greater liberalization, the general economic slowdown in Europe, coupled with uncertainty over greater economic integration among EC member states, has affected the fiber optics industry. The market continues to grow, but the annual growth rate has actually declined from about 20 percent in 1989 to slightly more than 11 percent for 1993. Nevertheless, Western Europe is home to several of the world's largest telecommunications equipment manufacturers, and the region remains a significant and very competitive market for U.S. manufacturers of fiber optic equipment. The total Western European fiber optics market for 1993 has been valued between $900-$975 million, and is expected to rise to more than $2 billion by year 2000. The U.K., which was the largest European market for fiber optic equipment in 1992, was overtaken by Germany in 1993, due in part to Germany's commitment to rewiring its eastern provinces with optical fiber. France, Germany, Italy, and the U.K. account for 70 percent of the total EC market for fiber optic equipment.

One of the most significant changes in international fiber optic markets has been the opening of Eastern Europe and the Newly Independent States (NIS) of the former Soviet Union as viable telecommunications markets. The governments of Eastern European countries are well aware that a modern telecommunications infrastructure is essential to their economic success. In almost all cases, the telecommunications networks of these eastern states are woefully inadequate and out-of-date. Most of the telecom authorities have chosen to build entirely new networks using fiber optic technology. As a result of this massive infrastructure overhaul, the market for fiber optic components in Eastern Europe will experience the most rapid growth of any region worldwide. The market for fiber optic equipment is expected to reach nearly $1 billion by the end of this decade, compared with $42 million in 1991.

Asia-Pacific countries are one of the fastest growing markets for fiber optic equipment. In spite of the general slowdown of the Japanese economy, the region's market for fiber optics experienced an impressive 14 percent increase in annual growth in 1993. Revenue from sales of fiber optic equipment in the region exceeded $1 billion in 1993; that figure is expected to double before the end of the decade.

There are several factors that account for the explosive growth of the fiber market in the region. Collectively, Asia-Pacific countries contain more than two-thirds of the world's population. As living standards in these countries has improved, the region has experienced considerable growth in the construction of new telecommunications facilities and in telephone usage during the past several years, with increases in international traffic averaging 25 percent annually. This increase in demand has lead to significant growth in the undersea cable market; several major undersea projects are under construction. Furthermore, Japan, and South Korea are actively pursuing nationwide fiber plans. Finally, the developing countries located in the region (Malaysia, Indonesia) are in the process of upgrading their long distance terrestrial networks to include at least some fiber. It is anticipated that the developing countries will continue to concentrate on installing fiber in the long-haul markets until the mid-1990's, when their focus is expected to shift to the local loop.

Not surprisingly, the Japanese market for fiber optic equipment is the largest of the Asia-Pacific countries and the second largest in the world (following the United States). Nippon Telegraph and Telephone (NTT), the world's largest network operator, had deployed nearly 72,000 route kilometers (route km) throughout Japan by the end of 1992. Japan produced a total of 2.4 million route km of fiber optic cable during 1992, a 19 percent increase over 1991 production totals.

The Japanese Ministry of Posts and Telecommunications (MPT) has long been a strong advocate of installing a broadband national network in the country by 2015. The entire project is expected to cost nearly $400 billion, and the general economic downturn experienced by Japan in the early 1990's caused doubts about achieving that ambitious goal within the specified time frame. But the latest proclamation (March 1993) from NTT indicates that the company has renewed its commitment to install a fiber-to-the-curb (FFTC) system throughout Japan by 2015.

Although the overall market for fiber optic equipment in Latin America is expected to experience strong growth throughout the 1990's, growth for individual countries is mixed. Although almost all of the major countries in the region have expressed a strong desire to upgrade their networks to fiber optics, only a few have had the political and financial strength to actually implement the upgrades. Generally speaking, countries that have liberalized their telecommunications markets have had greater success in upgrading their networks than countries that are still debating the merits of liberalization.

Although installation of terrestrial fiber optic systems in Latin America may be experiencing delays, several undersea cables are being deployed along the coastlines of several countries. The Columbus II, Americas-1, and UNISUR undersea cables will be used to facilitate telecommunications between Latin American countries, as well between Latin America and other parts of the world.

Outlook for 1994

U.S. shipments of fiber optics equipment should approach $3.5 billion in 1994, up about 13 percent over the previous year. Domestically, regulatory barriers that once impeded the increased deployment of fiber optic systems are also being removed. The likely continued removal of MFJ restrictions, for example, should prompt the regional Bells to deploy advanced network technologies sooner than anticipated. These technologies, such as interactive video and distance learning, will best be served by a fiber optic infrastructure in order to be employed to their fullest potential, thus providing the Bells with an incentive to deploy more fiber in their networks.

In spite of the uncertain economic and regulatory climate, U.S. producers and consumers of fiber optic equipment appear to be increasingly optimistic about the potential demand for the expanded service offerings possible through fiber optic technology.

Within other industrialized countries, the fiber optics industry will continue to focus on regional networks as fiber is driven closer and closer to the home. Technological developments and accompanying cost reductions should open new communications applications for fiber optics. Advancements such as surface emitting lasers, erbium-doped amplifiers, low loss connectors and soliton technology will also expand applications for fiber optics. Fiber's recent use in ship and airplane applications, for example, as well as certain medical equipment, indicates the growing maturity and diverse uses of the technology.

Long-Term Prospects

It generally is expected that network operators will first offer fiber optic-based broadband services to their business subscribers toward the mid to late 1990's. Due to relatively high equipment costs, mid- to large-sized businesses will at first be the only customers able to justify subscribing to these services.

Although most U.S. regional service providers are concentrating on deploying fiber-to-the-curb (predominantly for business subscribers), installing fiber-to-the-home (FTTH) may soon become economically viable. Due to the continuously declining costs of the necessary optoelectronic components since the late 1980s, as well as the inherent advantages of running fiber all the way to the subscriber's residence, Bellcore has recently re-examined the feasibility of FTTH deployment. If FTTH proves to be economically justified, demand for optical fiber in the United States should expand tremendously before the end of the decade.

SATELLITE COMMUNICATIONS SYSTEMS

The U.S. commercial satellite industry held steady with revenues of $2.7 billion in 1993 from the production of complete space communications satellite systems. A drop in communications satellite deliveries contributed to the industry's overall flat growth. Satellite communications systems consist of a space segment - the communications satellite (comsat) that both receives and transmits signals - and a ground segment that includes earth stations for both transmitting and receiving signals, and equipment for tracking, telemetry and control (TT&C).

Space

Three companies generate the bulk of revenues for the U.S. commercial communications satellite manufacturing industry: Hughes Aircraft's Space and Communications Group, a division of General Motors; Space Systems Loral (SSL); and Martin Marietta Astro Space. Hughes commands about one third of the world's market for comsats. SSL, a subsidiary of Loral, is 49 percent owned by Alenia (Italy), Alcatel and Aerospatiale (France), and Deutsche Aerospace (Germany). Martin Marietta purchased General Electric's Astro Space Division for $3 billion in 1993, creating one of the world's largest aerospace companies, and announced an interest in purchasing General Dynamics satellite launch services division. The Martin Marietta buyout of GE is expected to intensify competition for Hughes' current supremacy of the world satellite market. While new entrants to the U.S. manufacturing industry for large, commercial communications satellites are not expected in the near term, several other U.S. manufacturers such as TRW, Lockheed, Rockwell, Orbital Sciences, and Defense Systems International, have increased their activities in the commercial comsat manufacturing field, focusing primarily on smaller, non-geostationary satellite applications.

U.S. satellite manufacturers delivered 10 comsats for launch in 1993, compared with 14 satellites delivered the previous year. Annual industry revenues reached $1.1 billion, a 15 percent dip below 1992 revenues of $1.3 billion, but showed stronger than anticipated performance due to accelerated satellite delivery schedules.

U.S. satellite operators represent the largest market for commercial comsats in the world, collectively operating 34 satellites in 1993, according to the National Aeronautics and Space Administration (NASA). Orders to replace and upgrade this domestic satellite capacity have been a mainstay of the U.S. satellite manufacturing business in the past three years; however, in 1993, many ongoing replacement programs neared their completion. Five of the U.S.-manufactured comsats delivered in 1993 were sold to domestic satellite operators, one less than in 1992. Only three comsats are scheduled for delivery to domestic customers in 1994. However, by the mid-1990's, this waning domestic demand may be bolstered by new orders for satellites dedicated to domestic direct broadcast satellite (DBS), or high-powered, multi-channel satellite television beamed directly to the home. The first such DBS satellite is the Hughes-built DirecTV satellite, scheduled to be launched in December 1993. A total of 15 additional DBS satellites are expected to be delivered within the next four years, including one for launch in 1994 and four more in 1995. However, actual satellite construction and delivery throughout the 1990's will be determined by the ability of DBS ventures to secure financial backing and to lure subscribers away from terrestrial cable television and home satellite television applications.

Throughout the 1990's, geostationary comsats will face aggressive competition with expanding terrestrial and fiber optic networks for point-to-point transmission of domestic, regional and international communications services. Advances in satellite manufacturing technology and wider use of digital compression techniques by the late 1990's will extend the operational lifetimes and enhance the spectrum efficiency of individual satellites, translating into fewer, but more powerful and sophisticated, satellites needed to meet services demand. Nonetheless, projections by Teal Group analysts foresee a sustained activity in communications payloads with nearly 350 comsats now scheduled for launch between 1997 and 2002.

Proposed mobile satellite applications may completely change the makeup of the commercial communications satellite industry satellite constellations of smaller satellites (smallsats) in low- or medium-earth orbits (LEO or MEO) to provide worldwide personal, portable and mobile telephony. Six companies, known as the big LEO applicants, have applications pending with the FCC to provide mobile voice and data services using smallsat constellations. These include Motorola's Iridium, TRW's Odyssey, Loral's GlobalStar, Mobile Communications Holding's Ellipsat, Constellation Communications, Corp. and Celsat. In 1993, Calling Communications announced but has not yet filed its plans for a big LEO constellation of more than 800 smallsats. An additional three companies, the little LEOs, plan to offer non-voice data, positioning and messaging services. They are Orbital Sciences' Orbcomm, STARSYS Global Positioning, Inc., and Volunteers in Technical Assistance (VITA). Combined, the 9 U.S. LEO applicants propose to launch constellations of more than 200 smallsats, with total project investments well in excess of $6 billion. How many of the applicants actually purchase and launch satellites will hinge upon which companies are licensed to operate in the linchpin U.S. market, as well as upon securing financial backing, partners, licenses overseas, and resolution of engineering and design questions. The FCC could issue licenses for big LEO projects as early as February 1994, based on rules issued in 1993.

The sheer number of satellites envisioned for these projects has already enticed several traditionally non-commercial U.S. space manufacturers to consider the commercial production of smallsats. Manufacturing revenues from the little LEO applicants may begin to flow as early as 1995, as some companies move closer to launching developmental satellites and initiating tests. However, the larger, big LEO applicants do not expect to begin launches until two to three years after receiving licenses, delaying the advent of substantial commercial smallsat revenues until the late 1990's.

Contracts from foreign customers and international organizations continued to represent a mainstay of U.S. satellite business in 1993. Half of the U.S.-made comsats delivered in 1993 were for foreign customers in Mexico, Thailand, and Luxembourg, including the first of the new INTELSAT 7 generation of satellites for the International Telecommunications Satellite Organization (INTELSAT). Successful U.S. bids for overseas satellite procurements are largely responsible for the optimism in future U.S. satellite revenues through the mid-decade. U.S. companies are contracted to deliver 12 satellites overseas in 1994 and a record 18 in 1995, including customers in Japan, Mexico, Hong Kong, Luxembourg, Malaysia and South Korea.

U.S. manufacturing revenues also will be sustained through the late 1990's by large orders for expensive new and replacement satellites from international organizations and private international satellite systems, such as Pan American Satellite (PanAmSat). Within the 1994-96 time frame, Martin Marietta Astro Space will provide the International Maritime Satellite Organization (INMARSAT) with four, third-generation satellites, and has contracts for at least three INTELSAT 8 comsats; Space Systems Loral will build five more INTELSAT 7s and four INTELSAT 7As; and Hughes will supply three new PanAmSat satellites. In 1994, U.S. manufacturers are scheduled to deliver four satellites for INTELSAT, one for INMARSAT and two for PanAmSat. An additional 18 U.S.-made satellites will be delivered overseas in 1995, including 6 for INTELSAT and 2 for INMARSAT, 7 U.S.-made INTELSAT satellites are scheduled for delivery in 1996.

Foreign customers for U.S. satellites will continue to be an important marketing focus for U.S. satellite manufacturers in the longer term. Overseas contracts for at least 13 satellites have yet to be awarded, including procurements in Japan, Hong Kong, Luxembourg, Germany, Turkey, and Pakistan. Demand for comsats for broadcasting via satellite continues to expand, particularly in the Pacific Rim, with 14 U.S.-made satellites scheduled for launch between 1994 and 1997 for Asian customers. This strong demand for geostationary comsats covering Asia created several contentions over rights to orbital slots in 1993, raising the possibility of an eventual de facto limit on sales of satellites in the region. Another longer-term mitigating factor in U.S. satellite business in Asia may be export sanctions on missile-related technology trade with China, prohibiting certain U.S. satellite sales to China and the launch of U.S-made satellites on China's Long March launch vehicle.

If tight economic conditions persist through the next three years, some developing countries may be deterred from purchasing geostationary satellites for basic telecommunications or broadcasting services, lowering the number of U.S. satellite orders throughout the decade. Cheaper options, such as leasing existing capacity on international satellites and buying reconditioned satellites, surfaced again in 1993, reducing potential new business for U.S. satellite manufacturers. Several regional satellite groupings, such as Africa's RASCOM project and the Andean CONDOR project in South America, have already foregone their plans to purchase comsats and opted instead to sign long-term leases of existing capacity. In addition, several dormant, existing satellites were re-sold in 1993, auguring a reinvigorated secondary market and cutting into potential new sales. China's government-owned telecommunications company purchased from GTE a Spacenet satellite launched originally in 1984, COMSAT moved its Comstar D4 to service China and Asia as part of its joint venture with Hong Kong's Satellite Communications Asia, Ltd., and DASA announced it will use two Canadian Anik satellites to provide interim services to Argentina until two new satellites can be built.

INTERNATIONAL COMPETITIVENESS

As in previous years, the U.S. satellite industry maintained an overwhelming trade surplus in 1993. Based on company sales and order information, U.S. manufacturers have retained their dominance of the global market for communications satellites, reporting orders totaling 69 percent of worldwide satellite contracts in 1993, compared with 73 percent in 1992, and 62 percent the previous year. Including the 27 satellites on order for domestic operators, U.S. firms currently are the prime contractor for 69 of the 99 satellites on order worldwide.

In addition, U.S. manufacturers contribute technology to virtually all commercial communications satellites manufactured in the world today. U.S. trade statistics indicate a strong increase in exports of U.S.-made parts for communications satellites. Mid-year 1993 parts exports of $105 million almost doubled over exports from yearend 1992, and far outstripped mid-year 1993 parts imports of $49.7 million.

The strongest competition for commercial communications satellite contracts continued to come from European manufacturers. In 1992, 12 percent of world satellite orders were held by Aerospatiale (France) and Matra Marconi (France/U.K.); Italy's Alenia Spazio controlled 5 percent; Spar of Canada 4 percent, British Aerospace (BAe) of the United Kingdom 3 percent, and Germany's Deutsche Aerospace (DASA) 2 percent. A recent study by Euroconsult pegs European revenues from total commercial satellite sales at $920 million in 1991, and projects an overall decline in space industry revenues in 1993.

Several additional countries, such as Japan, Russia, India, China, and Israel, are active in the manufacture of communications satellites for their own domestic use; they also export parts, components or subassemblies to U.S. satellite manufacturers. While these countries do not typically attempt to provide these technologies in international comsat procurements, Russia positioned itself to purvey its considerable military and government satellite manufacturing capabilities in commercial comsat markets in 1993 by advancing SovCanSpar, a partnership between a Russian consortium headed by NPO Prikladnoi Mekhaniki and Canadian companies Com Dev, General Discovery and Spar, to provide three comsats for domestic Russian traffic and two for international communications. In another sale, a Russian-made Gorizont satellite was sold to Rimsat, an Asian satellite operating company led by the Pacific Island of Tonga, to provide regional satellite services.

While European satellite manufacturers frequently bid for satellite projects across the world, often teaming with U.S. manufacturers, they rely heavily on regional and domestic European satellite business. With the exception of contracts won from Turkey and the Arab Satellite Organization, they have had limited success outside the European theater or in the U.S. market. To date, only one U.S. satellite operator plans to buy a foreign-made satellite: BAe will supply a single satellite to Orion, a U.S. international satellite services company in which BAe is a limited partner.

Shrinking expenditures by the 13-member European Space Agency and overall economic contraction have spurred a spate of mergers and business alliances among foreign satellite manufacturers, consolidation of manufacturing capacity and pooling of investments. In addition to their joint minority stake in Space Systems Loral, a team of four European space companies - Aerospatiale, Alenia, Alcatel and Germany's DASA - won a two-satellite project in Argentina in 1993 and two of these four investors, Aerospatiale and DASA, have proposed the creation of a single, more streamlined space corporation with Loral. It is unclear how these plans might be affected by the French Government's announcement in April 1993 that it will divest ownership in both the satellite manufacturing and launch businesses of Aerospatiale, worth just under $3 billion. Negotiations to merge BAe and Matra Marconi were revived in 1993, after faltering in mid-year. The two companies have often partnered in international bidding. Matra Marconi also announced a more formal business cooperation with Spar Aerospace of Canada.

Several studies scrutinized the long-term international competitiveness of U.S. satellite manufacturers in 1993, resulting in conflicting conclusions about the U.S. industry's ability to retain its market dominance. A 1993 Euroconsult study of the world satellite industry concluded that U.S. satellite manufacturers are likely to dominate the global market throughout the decade, but predicts that Japanese manufacturers will emerge as full-fledged competitors by the late 1990's. A controversial study conducted for NASA and the National Science Foundation concluded that the U.S. edge in a wide range of satellite-related technologies has already eroded to Japanese and European counterparts. The study further projected that the relatively low emphasis on research and development projects in the United States and a weaker relationship between private companies and government policies would jeopardize U.S. market supremacy within the next 5 to 15 years.

Ground

The U.S. satellite ground segment industry consists of manufacturers of both fixed satellite earth stations and mobile receivers for the transmission and reception of data, video and voice signals via satellite. There are no official production or revenue statistics for U.S.-made satellite ground equipment, and industry estimates vary widely. Based on industry indicators, the Department of Commerce estimates that U.S. sales of all satellite ground equipment generated 1993 revenues of $1.6 billion, a 14 percent growth over 1992.

A recent Frost & Sullivan market research study of the U.S. industry for satellite earth stations, components and antennas showed 1993 shipments generating revenues of $1.48 billion (excluding sales of satellite dishes for television). Their data indicate that sales of complete satellite earth stations contributed more than 55 percent of this total: 7 percent from sales of antennas and about 37 percent from earth station components. While Frost & Sullivan showed industry revenues expanding by about 9 percent yearly starting in 1989, they predict a slowdown in annual growth to about 3 percent by 1998. They attributed the slowdown in growth to intense price competition among suppliers and stronger demand for smaller, more affordable earth stations.

Video applications created the largest segment of demand for U.S.-made satellite ground equipment in 1993, amounting to sales of about $545 million in 1993. Sales of earth stations for television broadcasting and cable television (CATV) transmission applications represented about $175 million of this total, down from $190 million in 1992. Revenues from these applications continued to taper off due to competition from other transmission technologies, and the effects of cable operators winding down expenditures for network upgrades.

Earth station sales to home viewers (called television receive only dishes or TVROs) revived in 1993, pushing revenues up to near $370 million. According to statistics from the Satellite Broadcasting and Communications Association of America, more than 20 1,000 TVROs had been shipped by August 1993, up nearly 9 percent during the same period in 1992, bringing the installed base of TVROs then to 4.1 million locations. Prices for backyard, C-band TVRO dishes continue to recede below the $1,000 mark, making domestic sales strongest in rural and remote areas where CATV is not readily available. While sustained C-band TVRO business is expected over the near term, smaller, cheaper receivers for emerging DBS applications will provide stiff competition.

Demand for private satellite networks using VSATs remained strong in 1993, buoyed by new international markets. No official statistics exist for VSAT equipment sales; however, industry estimates peg U.S. VSAT contracts in 1993 as being worth about $720 million. An estimated 103,000 VSAT terminals were installed in the U.S. in 1993, up 28 percent from the previous year. U.S. manufacturers supply nearly 90 percent of the domestic VSAT market and about 85 percent of the world market.

Although mobile satellite receivers still contribute a relatively small portion of total U.S. ground segment revenues, they promise explosive growth as mobile satellite service applications develop in the mid- and late-1990's. Overall U.S. revenues from commercial mobile satellite ground equipment are estimated at $225 million in 1993. Mobile satellite receivers for use with INMARSAT contributed most significantly to U.S. revenues in 1993. More than 30,000 INMARSAT terminals were in use for global mobile satellite communications for marine, aviation and land navigation applications, and a tenfold growth is projected by 1995. Maritime applications represent the bulk of INMARSAT's business and are growing by more than 25 percent yearly. However, strong growth is also projected for aeronautical applications; 3,500 aircraft are expected to use INMARSAT terminals by the year 2000.

With new position location and messaging services evolving, U.S. revenues from vehicle-mounted receivers continued to grow in 1993. By August 1993, Qualcomm, the provider of Omnitracs, a satellite-based two-way data communications and positioning service, reported nearly 60,000 units installed in trucks, fishing boats, helicopters and other vehicles in the United States and Canada. In addition, American Mobile Satellite Corp. (AMSC) served about 25 fleets of mobile and fixed customers in the trucking, rail and maritime industries in the United States, Puerto Rico, the Virgin Islands, and 200 miles of coastal water, using leased capacity on Comsat's Marisat satellite. After the launch of its own satellite in July 1994, AMSC projects as many as one million customers for its SKYCELL mobile voice, facsimile and data services.

Progress in LEO ventures could have a monumental effect on receiver sales. A 1993 study by Leslie Taylor Associates predicts 13 million potential buyers of LEO receivers in the U.S. market alone by 2001, translating into cumulative receiver sales of $21 billion. While it is too early to predict what share of this market U.S. manufacturers will command, their presence is expected to be stronger domestically than overseas, due to strategic manufacturing arrangements with foreign partners.

Despite the military origins of the U.S. Defense Department's Global Positioning Satellite (GPS) system, revenues from commercial applications of mobile receivers eclipsed military uses by a factor of five. GPS, a $10 billion constellation of 24 satellites, provides 24-hour latitude, longitude and altitude information to both commercial and military users. The U.S. GPS Industry Council estimates that total military and civilian receiver sales reached $420 million in 1993, nearly two-thirds of that for marine, automotive, aviation and surveying applications. By 1996, receiver revenues are expected to exceed $5.5 billion. U.S. GPS manufacturers dominate the world market, commanding an 80 percent market share. Colwell Kirtland, an industry watcher, calculates aggregate GPS sales of $1 billion by the end of 1993, and predicts that number will double in 1994. An estimated 350,000 civilians used the GPS system in 1993. Optimism about civilian GPS' future is drawn largely from growing acceptance of GPS technology within the civilian aviation community and from commercial automotive applications, as well as from handheld, surveying and marine navigational uses.

INTERNATIONAL COMPETITIVENESS

U.S. manufacturers dominate world markets for most satellite ground equipment areas, thanks in part to a 10-year edge in technology and experience under a deregulated market. Using estimates generated by Euroconsult, a market research company, the U.S. industry commands about half of the global ground segment market, worth $2.7 billion in 1990 and projected to grow to to $3.8 billion by 1995.

The strongest competition comes from the Asia-Pacific region, particularly from Japanese manufacturers of very large earth stations and Asian manufacturers of lower technology TVROs. However, U.S. manufacturers provide an estimated 85 percent of the world market for mid-sized and smaller satellite earth stations used for private VSAT networks. U.S. suppliers also are considered leaders in mobile earth station technology, but they will likely see strong competition from Asian manufacturers. Despite steep increases in the number of new GPS receiver manufacturers in Asia and Europe, U.S. manufacturers account for more than three-fourths of all production worldwide.

TVROs are one of the few satellite-related equipment areas where U.S. manufacturers regularly post a trade deficit. U.S. overseas sales of TVROs continue to taper off, with 1992 exports of $35.7 million almost 30 percent below the previous year's performance. Imports of TVROs, in contrast, increased nearly 20 percent to $118 million in 1992; more than 70 percent of imports came from Japan, South Korea, and Hong Kong.

Overseas VSAT markets expanded in importance for U.S. manufacturers in 1993 as more foreign regulatory agencies moved to allow the use of VSAT technology for private and intracorporate communications. Foreign markets are growing faster than the mature domestic market, growing to nearly a third of the global VSAT market. In 1993, nearly 120 VSAT networks were installed in more than 35 countries outside the United States. Mexico remained the largest foreign market for VSAT technology, with 27 networks and 787 terminals; Canada followed with 16 networks and 1,002 terminals. Earmarks of promising VSAT markets overseas include countries with liberalized policies for private networks and satellite dish ownership, such as Germany, and developing countries with limited fixed terrestrial networks, such as countries in Latin America and Asia. Industry watchers predict that developing countries may spend more than $3 billion annually on VSAT networks during the next few years.

International acceptance of GPS continued to spread in 1993, particularly in Japan, where a group of three Japanese companies and Magellan, a U.S. GPS manufacturer, joined in 1993 to explore various GPS dashboard navigational applications for Toyota and Nissan automobiles. The Japanese GPS Council reports GPS units installed in about 180,000 new cars, and an additional 60,000 cars equipped with aftermarket GPS units. An additional 20,000 to 25,000 GPS units were in use in Europe in 1993. International markets are expected to become even more important for U.S. GPS receiver sales through the late 1990's, as equipment prices continue to plummet and assurance of GPS signal availability is underscored for overseas civilian customers.

Outlook for 1994

Revenues for the U.S. commercial satellite industry, both space and ground segments, are expected to exceed $3.6 billion in 1994, nearly a 30 percent increase over 1993. Satellite orders for new direct-to-home broadcasting ventures will supplant waning demand by traditional domestic satellite operators, while international demand for satellite systems will remain strong. Orders for 21 comsats will bump 1994 U.S. space segment revenues to near $1.9 billion. Ground equipment sales for emerging direct broadcast DBS applications and expanding mobile equipment business will offset contractions in more traditional earth station applications, bringing 1994 revenues to about $1.85 million, a projected annual growth of 12 percent.

Long-Term Prospects

Continued vibrant international demand, coupled with innovative satellite television and mobile satellite ventures, will sustain U.S. satellite industry revenues throughout the late 1990's. Space segment revenues will soar to nearly $2.3 billion in 1995, with 26 comsats currently on order. Continued orders from direct broadcast and mobile satellite ventures, as well as from INTELSAT and INMARSAT for more sophisticated follow-on generation satellites, will bring annual U.S. space segment revenues to more than $1.7 billion in both 1996 and 1997. U.S. satellite manufacturers are currently contracted to deliver 14 comsats in 1996, including 5 for domestic DBS ventures. All six U.S.-made comsats scheduled for launch in 1997 are for domestic DBS ventures.

If regulatory and financial hurdles are cleared, significant new space and ground segment revenue streams will emerge by the late 1990's to supply constellations of small satellites used for cellular-like services and positioning data. Moderate growth in fixed ground segment revenues will be bolstered by strong demand for receivers for direct broadcast satellite television. As new mobile satellite services are phased in, mobile satellite receiver sales will expand much faster than their fixed counterparts, with an emphasis on small, portable handheld and vehicle-mounted receivers.

SEARCH AND NAVIGATION EQUIPMENT

U.S. shipments of search and detection, navigation, guidance, aeronautical, and nautical systems, instruments and equipment (SIC 3812) continued to decline in 1993. Shipments totalled about $30 billion in constant dollars, representing a 5 percent decrease from 1992. After peaking in 1988 at $36 billion, shipments have been decreasing at an average annual rate of 4 percent.

Search and detection, ground navigation, and guidance systems and equipment account for 90 percent of shipments in this industry. The other 10 percent is comprised of aeronautical, nautical and navigation instruments and equipment.

Demand for search and detection equipment is highly dependent upon military applications; aircraft, ships, guided missiles and other weapons systems all incorporate products from this sector. The continued decline in shipments is attributed to the end of the Cold War era, resulting in a diminished need for U.S. weapons production. As the military adjusts to the post-Cold War era, orders for new defense weapons will be drastically lessened and will have an adverse effect on demand for products in this industry.

Excess capacity in this industry has prompted numerous layoffs, and a number of mergers and acquisitions. Total employment dropped to about 222,000 employees in 1993 from a peak of 369,000 in 1987.

The past year has been marked by mergers and consolidations as the industry restructures in the face of shrinking markets. Martin Marietta Corporation has become the largest supplier of radar and satellite technology with its acquisition of General Electric Company's defense electronics operation; Unisys Corporation, in a restructuring effort, has re-absorbed Paramax, its military operations division; and Hughes Aircraft has obtained the Tomahawk missile business from General Dynamics. These are illustrative of the many consolidations taking place in this industry as defense contractors strive to streamline operations and maintain competitiveness.

Defense contractors are adjusting to a new era of lower defense budgets. The emphasis is now on defense conversion and dual-use programs that will integrate leading edge military technologies into the civilian arena. Technology programs that can promote or assist in dual-use efforts are not likely to be among those programs to experience spending cutbacks, but are more likely candidates for funding increases in the Federal fiscal year starting October 1, 1993 (FY '94). For example, one program in the Pentagon that will not be affected by the expected $10 billion reduction in defense spending in FY '94 will be the Advanced Research Project Agency (ARPA). Originally a research and development program for defense technology, ARPA's mission is being re-focused to assist defense contractors transfer some of their products and services to the commercial sector. Another program slated to receive a tremendous funding boost is the Advanced Technology Program (ATP), part of the Commerce Department's Technology Administration. The ATP provides grants to fund the development and commercialization of promising, but high-risk, technologies encompassing a wide range of potential applications. This program is managed by the National Institute of Standards and Technology (NIST). Due to the potential of defense conversion efforts in promoting the competitiveness and economic growth of U.S. industry, ATP's budget is projected to triple in FY '94.

Many defense dependent manufacturers of search and detection equipment have been diversifying their operations to take advantage of emerging commercial applications. Modern radar technology is being applied to a number of applications in the automotive industry, for example. Traffic collision avoidance systems, alarm systems and surveillance in drug interdiction are a few examples of military technology being applied to civilian commercial use.

A major new technology that is expected to have a positive effect on this industry for years to come is the Global Positioning System (GPS). GPS is a satellite-based navigation system that is the basis for the most dramatic change in air traffic control in decades. The technology is also used in marine and surface vehicle navigation. It is expected that these satellite-based navigation systems will eventually displace many of today's ground-based systems. Continental Airlines is one of the first U.S. commercial carriers to test the system in a cooperative program with the Federal Aviation Administration (FAA) intended to assess its effectiveness (see also GPS in previous section, this chapter).

[TABULAR DATA OMITTED]

INTERNATIONAL COMPETITIVENESS

Exports of search and detection equipment totalled about $2.2 billion in 1993, an increase of 3 percent over 1992. A sluggish domestic economy coupled with lower defense procurements has U.S. manufacturers looking internationally for sales. U.S. suppliers were able to maintain an overwhelming trade surplus in this industry in 1993 due to their ability to provide technologically advanced equipment.

Although exports to Japan decreased by almost 20 percent from 1992 to 1993, Japan remained the largest foreign market for U.S.-manufactured search and detection equipment, accounting for 11 percent of total exports. The other major export markets in 1993 were Canada, accounting for 10 percent of total exports; Germany, 8 percent; and the United Kingdom and Taiwan, 7 percent each. Also contributing importantly to increased exports of search and detection equipment were sales of radio navigational aid apparatus and radar equipment to Saudi Arabia, Morocco and Israel.

  U.S Trade Patterns in 1992
Search and Navigation Equipment
        SIC 3812
(in millions of dollars, percent)

             Exports

                       Value    Share
Canada and Mexico        246     11.5
European Community       697     32.7
Japan                    296     13.9
East Asia NICs           300     14.1
South America             21      1.0
Other                    573     26.8
World Total            2,133    100.0

             Imports

                       Value    Share
Canada and Mexico        242     27.5
European Community       339     38.5
Japan                    106     12.1
East Asia NICs           114     12.9
South America              1      0.1
Other                     79      9.0
World Total              881    100.0

            Top Five Countries

                       Value    Share
Japan                    296     13.9
Canada                   193      9.0
France                   167      7.8
United Kingdom           155      7.3
Netherlands              128      6.0

                       Value    Share
Canada                   194     22.1
United Kingdom           139     15.8
France                   122     13.9
Japan                    106     12.1
Mexico                    48      5.4

See "Getting the Most Out of Outlook '94" for definitions of the
country groupings.
SOURCE: U.S Department of Commerce: Bureau of the Census;
International Trade
Administration.

Radar apparatus and parts, accounting for 30 percent of total exports, and instruments and appliances for use in civil aircraft, accounting for 8 percent, were the major items exported. Many countries are looking to modernize their airports with the latest in air traffic control (ATC) and navigational aid equipment. The impetus for some countries to upgrade and install the latest in radar technology stems from overflight charges they can levy on foreign flights through their air space. The amount of income can be maximized when the country's airports are equipped with the most current equipment, especially FAA certified radar that insures better tracking and monitoring.

Another factor leading to increased export sales has been the relaxation of export control regulations to previously restricted countries of the Eastern Bloc and the former Soviet Union. Since late 1991, most radar and navigational equipment for civilian end-use can be exported to Russia without an export license. Even phased array radar, the newest in radar technology, is under consideration for more liberalized export control procedures to these countries.

U.S. imports of search and navigation equipment, after reaching an all-time high of $881 million in 1992, declined by 16 percent to $742 million in 1993. Radar detectors of a kind used in motor vehicles, and instruments and appliances for civil aircraft were the primary products imported. More than 70 percent of the radar detectors for motor vehicle use were imported from the Philippines, whereas France and Canada combined to supply 60 percent of all the instruments and appliances for use in civil aircraft.

In the worldwide competition for ATC equipment, the French group, Thompson-CSF, has been using acquisitions and teaming arrangements to fend off challenges from U.S. competitors. Thompson-CSF, which acquired Wilcox Electric from Northrop in 1988, has reported continued sales increases for its navigational aid equipment since the acquisition. Thompson-CSF has also entered into a number of joint ventures, some with U.S. firms, and recently teamed with Siemens Plessey Systems (West Germany) to participate in the Eurocontrol program, the recently formed, 54-nation European organization attempting to harmonize ATC standards. With 31 different ATC systems and 54 control centers throughout Europe, communications among them is difficult. U.S. ATC equipment manufacturers, such as Raytheon, Hughes and AT&T, are also well-positioned to benefit from these export opportunities.

Procurement of search and detection equipment under the NATO infrastructure program also provided export opportunities for U.S. manufacturers during 1993. NATO funds the construction of military facilities such as air fields and radar installations in member countries for defense purposes. Among the NATO projects solicited during 1993 were digital radiolink equipment for communications to coastal and early warning radars in Norway, the installation of tactical air navigation equipment at 10 airbases in Turkey, the installation of two radomes for the protection of the new 3-D radar system in Greece, and the replacement of an antenna system in Greece. Due to the dismantling of the Soviet Bloc, however, NATO projects have experienced severe budget cuts compared with previous years.

Outlook for 1994

Shipments of search and detection equipment will decline more than 6 percent in 1994 as the domestic market continues to adjust to defense cutbacks and a slow-growing economy.

The bright spot in this industry will be ATC equipment. The Middle East and the Pacific Rim offer the best prospects for sales of U.S. search and detection equipment. Most of the countries in these areas have growing economies and the funds to purchase new equipment.

Long-Term Prospects

During the next 5 years, the search and detection equipment industry will experience declines of 2-3 percent per year. Because defense applications generate the principal demand for search and detection equipment, the defense build-down will have a strong negative effect on this industry sector. The military aircraft, shipbuilding, and aerospace industries are all expected to undergo further contractions as a result of defense cutbacks.

The U.S. search and detection industry will continue to be the world's technological leader in producing leading edge products, but future growth will have to come from the civilian sector, or from export sales. The Defense Department's Bottom-Up Review, the process that has redefined the military's new focus and new strategies, prqjects defense cuts through 1999.

As a result of decreasing demand, the market for search and detection equipment is becoming increasingly more competitive. U.S. manufacturers will have to pursue aggressively international marketing opportunities in an effort to compensate for decreased sales at home. Russia is expected to invest $15 billion during the next 10 years for airway modernization, and India estimates spending more than $100 million to modernize its ATC services and communications during the next few years. Singapore and China are also seeking equipment to upgrade and modernize their airports and infrastructure. U.S. companies specializing in military aircraft upgrades should experience increased opportunities as countries such as South Korea, Canada, Turkey, and India seek to improve their military aircraft with new radar and navigation systems, in lieu of purchasing new aircraft.

Additional References

Communication Equipment, Including Telephone, Telegraph, and other Electronic Systems and Equipment, Current Industrial Report MA36P(92), September 1993, Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Telephone: (301) 763-5434. Fiber Optic Deployment Update - End of Year 1992, Federal Communications Commission, Industry Division, 1919 M St. NW, Washington, DC 20554. Telephone: (202) 452-1422. Global Competitiveness of U.S. Advanced Technology Industries Cellular Communications (Publication 2646), June 1993, U.S. International Trade Commission, Washington, DC 20230. Telephone: (202) 205-1806. International Competitiveness Study of the Fiber Optics Industry, PB89-114698, September 1988, Office of Telecommunications, International Trade Administration, U.S. Department of Commerce, Washington, DC 20230. Telephone: (202) 482-4466. Selected Instruments and Related Products, Current Industrial Report MA38B(91), Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Telephone: (301) 763-5434. Statistics of Common Carriers, Federal Communications Commission, Common Carrier Bureau, 1919 M St. NW, Washington, DC 20554. Telephone: (202) 632-0745. U.S. Telecommunications in a Global Economy: Competitiveness at a Crossroads, U.S. Department of Commerce, available from U.S. Government Printing Office, stock #003-009-00583-3. Telephone: (202) 783-3238. 1990 World's Submarine Telephone Cable Systems, NTIA-CR-91-42, U.S. Department of Commerce, National Telecommunications and Information Administration, Office of International Affairs, Washington, DC 20230. Telephone: (202) 482-1304. Business Communications Review, BCR Enterprises, 950 York Rd., Hinsdale, IL 60521. Telephone: 1-800-227-1234. Cellular Business, Intertec Publishing Corp., P.O. Box 12901, Overland Park, KS 66212. Telephone: (913) 888-4664. Communications Week, CMP Publications, Inc., 600 Community Dr., Manhasset, NY 11030. Telephone: (516) 562-5000. Defense Electronics, Cardiff Publishing Co., Inc., 6300 S. Syracuse Way, Suite 650, Englewood, CO 80111. Telephone: (303) 220-0600. Electronic, Market Data Book, Electronic Industries Association, 2001 Pennsylvania Ave. NW, Washington, DC 20006. Telephone: (202) 457-4955. Fax Trend Report '92, Camarro Research, 580 Commerce Dr., Fairfield, CT 06430. Telephone: (203) 336-4566 Network World, CW Communications/Inc., 375 Cohituate Rd., Box 9171, Framingham, MA 01701-9171. Telephone: (800) 622-1108. RCR, RCR Publications, Inc., 777 East Speer Blvd., Denver, CO 80203. Telephone: (303) 733-2500. Telecom Market Review, North American Telecommunications Association, 2000 M St. NW, Suite 550, Washington, DC 20036. Telephone: (202) 296-9800. Teleconnect Magazine, 12 West 21st St., New York, NY 10010. Telephone: (212) 691-8215. Telephone Engineer and Management, 111 E. Wacker Dr., Chicago, IL 60601. Telephone: (312) 938 2378. Telephone Statistics, United States Telephone Association, Suite 800, 900 19th Street NW, Washington, DC 20006-2102. Telephone: (202) 835-3263. Telephony, Telephony Publishing Corporation, 55 E. Jackson, Chicago, IL 60604. Telephone: (312) 922-2435. U.S. Cellular Marketplace: 1993, EMCI, 1130 Connecticut Ave. NW, Suite 325, Washington DC 20036. Telephone: (202) 835-7800. Wireless Communications Forum, The Cellular Foundation, 1133 21st St. NW, Third Floor, Washington, DC 20036. Telephone: (202) 785-0081.

COPYRIGHT 1994 U.S. Department of Commerce
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