Startup taps into optical manufacturing services market
By MEGHAN FULLER
The common wisdom is that the optical communications industry is much like the semiconductor industry of a few years ago. On the basis of this wisdom, automated manufacturing companies are attempting to migrate their technology to optical-component manufacturers. Similarly, Bangkok-based Fabrinet Co. Ltd., headed by Tom Mitchell, former president and chief operating officer of disk-drive manufacturer Seagate Technologies, plans to tap into the infant optical manufacturing services (OMS) market.
In January 2000, Fabrinet took over a 200,000-sq-ft facility from Seagate, the very facility Mitchell helped build when he was with the company in the 1980s. Along with the facility came 1,600 employees-100 of whom are engineers-all with a strong background in the disk-drive industry. The folks at Fabrinet also negotiated a contract with Seagate to produce the non-core subassemblies found in Seagate's desktop disk drives.
"When we took over the facility and signed the supply agreement, we were sort of up and running, unlike your traditional emerging company," claims Mark Schwartz, senior vice president of strategy and corporate affairs at Fabrinet. "We had revenue our first month and we were profitable our first month and quarter of operations-and we have been profitable every quarter of operations."
Though Seagate has since contracted a second source, Fabrinet remains the main supplier of the subassembly. It has no plans to manufacture the part for other mass storage companies, however, opting instead to focus on the manufacture of optical components.
The field of electronic manufacturing services (EMS) has been a viable market for some time, but manufacturing services for optical components is new-so new that Fabrinet is among the first players in the space.
The company has introduced a new operating model for contract manufacturing, in which it acts as an extension to its customers' own process engineering and manufacturing efforts. "They are going to the major players in the optical space and transplanting their manufacturing lines intact over to [Fabrinet's] Thailand facility," explains Tim Urekew, senior analyst at market researcher Tech Search International (Austin, TX). "[Fabrinet's] model is to keep the client's technology strictly confidential and really let the client sort out the design."
Confidentiality, says Schwartz, is a key component of Fabrinet's contract with its customers. Each OEM is allotted a certain walled-off space within the facility that is even protected by a live guard. "We have one facility and three different optical OEMs who compete against each other and allow us to manufacture their products in the same building," says Schwartz. "We're serious about protecting our customers' intellectual property."
EMS companies, on the other hand, typically employ an operating model that does not rely on its customers' proprietary manufacturing processes; they acquire the technology first, then seek out customers. "Flextronics, for example, just bought WaveOptics last year," says Urekew. "That provided a particular fiber-attach technology with a silicon V-groove process that WaveOptics developed. Flextronics can now turn around and offer that design, guidance, and manufacturability to other component manufacturers."
In the long run, as standards for optical packaging and interconnects evolve, the OMS model will begin to look more like the EMS model, predicts Urekew. Today, component designers keep their manufacturing processes proprietary as a competitive advantage, but in the future, when processes become standardized, there will be less proprietary technology housed in the component designers' facilities, he contends.
Several EMS companies, including Flextronics, Selectron, and Celestica Inc., have made acquisitions in optics, says Schwartz, but he maintains that their core competencies are still at the board level, not the optomechanical assembly level.
Fabrinet does share one attribute with several key EMS providers: They are western-managed companies operating almost exclusively in Asia. When asked if this is the beginning of a trend, Urekew cites several optical vendors that have also recently moved operations there, including JDS Uniphase, Avanex, and New Focus. He admits that there are very compelling advantages to setting up shop in Asia.
The cost advantage is certainly one reason for this migration, he contends. "You can get factory workers there for about $100 a month, plus room and board to keep them on your site. And you can get highly skilled labor," he adds. "A significant population of the world's optoelectronic engineers are trained in China, so it's a tremendous place for [Western-based] companies to go get low-cost manufacturing done."
Urekew also cites the flexibility and scalability enabled by a large labor pool as another key advantage. "One of the ways the disk-drive companies like Seagate and SAE Magnetic have handled the rapid change in technology to the disk drive is by maintaining a significant manual component to their business," he contends. "That lends itself very well to the current state of production for optical components, where we have a rapidly changing state of technology and very few standards. The way to maintain that flexibility is by being able to do it manually and have a scalable manual solution."
Despite the relative infancy of OMS, Urekew is confident that, in the long term, it will develop into a sizable market. In the near term, it is beginning to catch the attention of the industry in general. At press time, Urekew was headed to China to gather information for his upcoming report on optical manufacturing services in Asia.
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