Sweetness and light: how the Web has opened up opportunities in optical components
By Phil Harvey
Redherring.com, May 25, 2000
SOME ASSEMBLY REQUIRED
The soup thickens when you consider the challenges inherent in manufacturing such fragile items. The technologies involved in components manufacturing are so new that ways of automating the process, in many cases, haven't been invented yet. So components makers are automating things such as testing, packaging, and even the training of assembly workers, but product assembly is still largely done by hand.
Additionally, because networking equipment makers can't wait to get their products to market, the trend now is to buy modules -- bundled components -- instead of single items. Suddenly the manufacturing problem is compounded when the number of each of several products required for the modules needs to be the same so as to allow entire modules to be assembled. This explains why Lucent (NYSE: LU) and Nortel (NYSE: NT), two systems makers that produce their own components, are also the two largest customers of JDS Uniphase (Nasdaq: JDSU).
The fun continues when you ponder that each time a technological advancement is made, the ability to produce components in volume gets more difficult. In the PC business, companies could achieve higher product performance using the same ingredients, so long as the components, such as the microprocessor, were faster. In optics, each successive performance hurdle requires both higher performance components and more of them. "Compared to an 8-channel optical system, a 16-channel system not only needs filters with half the channel spacing -- 200 GHz instead of 400 GHz -- but instead of 7 filters you need 15 of them," Mr. Schuetz of Thomas Weisel Partners says.
Therefore, it is no wonder there's a nearly universal supply problem in the components business. "Depending on the component, there might not even be three companies I can buy it from," laments Joe Bass, general manager of Cisco's (Nasdaq: CSCO) wavelength routing business unit.
Smaller companies face additional challenges. "If you're not a major company with a volume purchase agreement, lead times on components orders are around 12 to 16 weeks," says Jay Liebowitz, director of RHK's Optical Components service.
THE FIRST INNING OF A DOUBLE-HEADER
What does all of this mean? For one thing, the consolidations will continue. As JDS Uniphase and others have shown, manufacturing complexities begin to thin out when enough bodies -- including talented engineers -- are thrown at a problem. And producing all or most of the components that make up a module theoretically gives companies a better price-to-performance ratio.
But after so many companies are rolled into one, worry lines appear on analysts' foreheads. The trend for many industries is that companies will outsource as many parts of their business as they can in order to concentrate on their core competency. In the optical components business, however, firms tend to want to do everything themselves just so they'll be assured access to enough raw materials. "If things slow down, we'll have a glut, and some companies will have too much internal [manufacturing] capacity," warns Mr. Liebowitz.
That said, analysts expect that several kinds of companies will come on the scene in the next few years to take a whack at the optical components market. As in the case of Corning and OCLI, existing businesses may retool their technologies to pursue this space. Industrial chemical companies may try to make optical coatings; military laser manufacturers may try to make telecom lasers; and liquid crystal display vendors might decide to try their hand at making optical switches.
Of course, any venture capitalists seeing this article will read the words "supply problem" as "startup opportunity." There is, indeed, much room for startups. By one estimate, JDS Uniphase, E-Tek (Nasdaq: ETEK), Corning, and SDL (Nasdaq: SDLI) combined only represent about 30 percent of a rapidly expanding market. Single-product companies that differentiate themselves can flourish here, even in the face of such rapid consolidation. "If startups can develop an expertise in a narrowly focused area, they stand a good chance at becoming accepted in the marketplace," Mr. Scifres of SDL says.
Additionally, networking equipment vendors want to secure multiple suppliers for each component -- not only to keep pricing honest, but also to make sure they don't run out of products. "The more options I have, the better I sleep at night," says Cisco's Mr. Bass. |
